Cabot Stock of the Week Issue: October 3, 2022
Stocks were basically neutral in the last week, with some signs of life bubbling up beneath the surface. In fact, most of our stocks had good weeks – and a couple of them were very good. Still, it remains highly volatile out there, and the selling isn’t necessarily over. And that makes it a good time to add another contrarian play. This week, that means adding our first (ever?) fund, which takes advantage of the fast growth happening outside U.S. borders – and it’s severely undervalued. It’s a recent recommendation from Cabot Explorer chief analyst Carl Delfeld.
Stocks haven’t budged since I last wrote to you. In 2022, that counts as a good week.
Granted, it took a 1.5%-2% bump in the major indexes today to get there, but I’ll take it. Look beneath the surface of the lack of net movement in the indexes, and the picture is even more encouraging—the number of U.S. stocks hitting new 52-week lows has been cut by more than half since September 23, and that was reflected in our portfolio this past week. Most of our stocks are up since our last issue, a couple of them (Centrus Energy (LEU), new addition Xponential Fitness (XPOF)) considerably so. It doesn’t mean there weren’t a few laggards; in fact, we’re selling two more stocks today. But there was certainly more good than bad.
We’ve been fooled before, of course. Today’s 2% market rally could easily be followed by a 3% retreat tomorrow; that’s just the way things have gone this year. But consider the following: We have just (mercifully) exited what is traditionally the worst month on the stock market calendar; sentiment is historically bearish (the AAII survey topped 60% bears for two straight weeks, an extremely rare occurrence), which usually portends a swing in the other direction; and the S&P 500 just had its third-worst performance through the first nine months of the year since World War II. According to Ryan Detrick, Chief Market Strategist of Carson Group, in the two years that were worse through three quarters (1974 and 2002), stocks were up 7.9% in the fourth quarter.
None of it means we’re destined for some great turnaround these next three months. But it does mean it’s a good time to start thinking like a contrarian and make a few buys against the grain. Last week it was small-cap gym franchisor Xpontential Fitness, which is off to a good start. This week it’s a beaten-down fund (not technically a stock, thus running contrary to this advisory’s very name!) that takes advantage of a lot of the great growth that’s happening outside U.S. borders. It was originally recommended by Cabot Explorer chief analyst Carl Delfeld and here are Carl’s latest thoughts.
WisdomTree Emerging Markets High Dividend Fund (DEM)
Stocks have pulled back sharply this year for multiple reasons including interest rates rising, but a key reason is that valuations were stretched a bit far relative to earnings, book value and dividends.
This was not the case for many international markets and the strong U.S. dollar has made them extremely cheap. Sir John Templeton, the dean of international investing, called this sort of market situation a sign of “maximum pessimism,” and a good time to buy.
This brings us to the WisdomTree Emerging Markets High Dividend ETF (DEM), a basket of high-dividend stocks based in Latin America, Eastern Europe, and Asia.
Emerging markets make up about 80% of the countries in the world, representing 77% of the world’s landmass and 85% of its population. These countries now represent roughly 60% of total global GDP while just two decades ago they accounted for only 23%.
Every day, approximately 150,000 people in emerging markets move from the countryside to cities in search of better opportunities. From education to health, infrastructure to financial markets, these nations have made major strides. Companies, domestic and international, are making a lot of money meeting the wants and needs of these 6.6 billion people, as they become an upwardly mobile world middle class.
Yet it seems that most investors have zero or little direct exposure to these dynamic markets while I recommend that you have about 10% of your equity portfolio in emerging markets.
WisdomTree Emerging Markets High Dividend ETF covers 17 different emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries.
This ETF has a clear income and value strategy. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends.
And WisdomTree makes adjustments to the portfolio every year to make sure the companies in the ETF basket are in the top 35% of emerging market companies by dividend yield. Furthermore, this ETF holds some of the cheapest, quality stocks in the world with an average price-to-earnings ratio of 5.5 (vs. 12 for the MSCI Emerging Markets Index and about 20 for the S&P 500).
And its average stock holding trades at only 1.2 times book value and yields 7.7% (versus 1.4% for the S&P 500).
To sum it up, the stocks in this ETF could more than triple in value and they would still be cheaper than the S&P 500.
The fund, while down 22% so far this year, was up 11.7% in 2021 versus negative 2.5% for the MSCI Emerging Markets Index.
It does take a leap of faith to be a contrarian and buy assets like these that are out of favor and largely ignored. But that is how smart investors often earn higher returns with less risk.
Also, keep in mind that blending emerging market stocks with U.S. stocks actually reduces your portfolio’s volatility since the two asset classes don’t move together. Emerging markets beat to their own drummer.
In my opinion, emerging market equities are the world’s most undervalued asset class.
|Stock||Date Bought||Price Bought||Yield||Price on 10/3/22||Profit||Rating|
|Arcos Dorados (ARCO)||9/7/22||7||1.6%||8||Buy|
|Aris Water Solutions (ARIS)||7/6/21||--||--||--||--||Sold|
|Brookfield Infrastructure Partners (BIP)||1/12/21||34||5.8%||37||Hold|
|Centrus Energy Corp. (LEU)||7/26/22||29||0.0%||42||Hold|
|Enphase Energy (ENPH)||6/28/22||198||0.0%||285||Buy|
|Montauk Renewables, Inc. (MNTK)||8/30/22||18||0.0%||18||Buy|
|Nio Inc. (NIO)||6/14/22||18||0.0%||16||Sell|
|ONEOK Inc (OKE)||7/12/21||--||--||--||--||Sold|
|Ormat Technologies, Inc. (ORA)||9/20/22||95||0.5%||88||Buy|
|Ulta Beauty (ULTA)||5/10/22||382||0.0%||405||Buy|
|WisdomTree Emerging Markets High Dividend Fund (DEM)||NEW||--%||33||--%||Buy|
|Xponential Fitness, Inc. (XPOF)||9/27/22||18||0.0%||20||Buy|
Changes Since Last Week’s Update
Nio, Inc. (NIO) Moves from Hold to Sell
Qualcomm (QCOM) Moves from Hold to Sell
Despite the more encouraging week, two more of our stocks – Nio, Inc. (NIO) and Qualcomm (QCOM) – continued to underperform, and thus we’re saying goodbye to them today. Aside from that, we have no other changes, as most of our other stocks (though not all) had good weeks. With the addition of the WisdomTree Emerging Markets Dividend Fund, we are now down to 12 stocks, essentially meaning we’re about 40% in cash since our portfolio’s maximum capacity is 20 stocks. My guess is we’ll be adding to that total in the fourth quarter, but like most of my colleagues, I don’t like to predict where the market winds will blow next. So, for now, 12 feels like the right number.
Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, regained all of its losses (and then some) from the previous week. The stock was up more than 7% this morning on no news. In his latest update, Bruce wrote, “Arcos Dorados, which is Spanish for ‘golden arches,’ is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina and Chile. The shares are depressed as investors worry about the pandemic, political/social unrest, inflation and currency devaluations. However, the company has a solid brand, high recurring demand, impressive leadership (including founder/chairman who owns a 38% stake) and successful experience in navigating local conditions, along with a solid balance sheet and free cash flow.
“Macro issues have a sizeable impact on the shares’ trading. The Brazilian inflation rate eased to 8.73% in August, providing a favorable turn. With the October presidential elections only weeks away, incumbent Jair Bolsonaro trailed challenger and former president, Luiz Inácio Lula de Silva, by as much as 10 points in recent polls. A win by Lula, who is usually described as a leftist, would likely bring more moderate policies to Brazil and appears to be favored by financial markets. Perhaps just as important, a clear Lula victory would reduce/eliminate the chances that Bolsonaro launches a ‘vote steal’ campaign. Arcos shareholders can monitor the iShares MSCI Brazil ETF (EWZ) to assess the market’s sentiment toward the overall Brazilian stock market.
“The Brazilian currency also drives Arcos’ shares. Since early 2020, the currency has generally stabilized in the 1.00 real = $0.20 range. As the company reports in U.S. dollars, any strength in the local currency would help ARCO shares.” BUY
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is down only about 1.7% since I last wrote, helped by a nice bounce this morning. While we are now at a modest loss on this position, the selling seems to have slowed, and the stock now trades at a mere 10 times forward earnings – a very low number considering the chip-making and infrastructure software provider grew EPS by 40% in its latest quarter. Plus, as Tom wrote in his latest update, AVGO tends to “make up for lost time quickly when it turns around.” Let’s keep it at hold and see what happens next. HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, had quite the sharp two-week drop-off in September, falling from 42 to 35 and prompting us to downgrade it to Hold last week. But the stock has bounced nicely the last two trading days, recovering at least some of those losses (approaching 37 as of this writing). In his latest update, Tom wrote, “The performance of this defensive dividend stalwart has been surprisingly crappy in the recent selloff. Its crucial infrastructure assets continue to generate reliable revenues in a recession, but BIP sold down by more than 15% over the past two weeks anyway. There is no company-specific news but the retreat is likely because of the sharp rise in interest rates and fixed rate investments become more competitive and MLPs’ borrowing costs rise. But I expect the stock to get its mojo back as defensive stocks should be in high demand. (This security generates a K-1 form at tax time).” HOLD
Celsius (CELH), originally recommended by Mike Cintolo in Cabot Growth Investor, had a solid week, stabilizing in the 88-89 range after a precipitous decline from 116 in late August. That drop-off was enough to convince Mike to sell the stock, but he has kept it on his watch list, saying, “We’re simply keeping an eye on it with the thought that the recent weakness—which was severe, pulling the stock in 28%—could end up being part of a normal base-building effort that could eventually resolve itself to the upside. It needs work for sure, but we’re keeping an eye on it for now.” Because we didn’t recommend shares of this energy drink upstart until two weeks ago, our losses are much smaller, so we can afford to hang on to it. In fact, I’m keeping at Buy, as CELH’s recent base-building looks encouraging. BUY
Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, is back to its winning ways, up 15% in the last week, including a 7% bounce this morning. Of course, the nuclear energy stock is still well shy of its early-September apex above 54 but is well above its 200-day moving average, and is up roughly 50% since we added it to the portfolio in late July. In his latest update, Carl wrote, “Centrus’ net income margins are above 50% for the year, and revenues have grown by double-digit margins while its stock trades at just 2.2 times forward sales estimates. In addition, the company recently announced that it has secured new nuclear fuel sales contracts and commitments worth an estimated value of $270 million so far this year.
“Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry. Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. Centrus stock is still trading way off its 52-week high and at just over three times earnings.”
Last week we downgraded LEU to Hold as it had just lost a third of its value in two weeks. That looks like a mistake now, but we’ll keep at Hold another week to make sure the recovery is real. HOLD
Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up more than 4% in the past week, with most of the gains coming today. The bounce-back is encouraging, especially considering ENPH didn’t get dinged as hard as most growth stocks. In his latest update, Mike wrote, “Net-net, shares are still hovering in the vicinity of their August lows, which is much stronger than the market and most stocks. There’s little doubt demand for Enphase’s products will remain red hot in the U.S. (thanks to the recent green energy bill) and in Europe (where everyone is desperate to have some control over their energy supply, especially as winter approaches), but as always, the stock is not the company, so we’ll just take it as it comes. So far, ENPH is acting well enough, so we’ll hold our position.” As for us, we’ve kept ENPH at Buy and will continue to do so. BUY
Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, is acting well and seems to have shaken off its late-September weakness. In his update last week, Brendan wrote, “MNTK is holding initial support levels in the 17-18 zone well, suggesting the doji formation that concerned us last week is a sign of indecision rather than a reversal. A close over 18.50 would be bullish. No news.” BUY
Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, fell more than any other stock in the portfolio in the past week, and continues to fall today even as the major indexes were up more than 2%. Last week, I said we’d keep shares of this Chinese electric car maker around as long as they held support above 17; they have since dipped below that four-month support. So, it’s time to Sell NIO while our losses are fairly minimal. MOVE FROM HOLD TO SELL
Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was down about 2.5% in the last week, bouncing back nicely today like most stocks. Ormat Technologies is the only publicly traded U.S. geothermal company. It also is involved in energy storage and has a small solar energy wing. Ormat’s diverse business should serve it well going forward and has no doubt contributed to the stock’s 10% run-up this year. Keeping at Buy, despite the recent weakness. BUY
Qualcomm Inc. (QCOM), originally recommended by Tom Hutchinson in Cabot Dividend Investor, lost another 2.5% in the last week and is currently our biggest loser. The stock has been in a downtrend for more than two months now, dipping well below its moving averages. Although it has bounced nicely on Monday, I don’t like the overall trend. Let’s step aside here and make room for better opportunities in preparation for when the next sustained rally finally arrives. MOVE FROM HOLD TO SELL
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down big today (7.5% as of this writing) after the company missed expectations on its third-quarter deliveries. The company delivered 343,000 cars in Q3, well shy of the 364,660 that were expected. While production was up from the previous quarter, issues at its new factories in Germany (where a fire recently broke out) and Texas weighed on overall production. Still, despite missing estimates, Q3 deliveries marked a new quarterly record and were 42% higher than the same quarter a year ago, and much higher than the previous record of 310,000 deliveries, set in the first quarter of this year. Given that, I think today’s sell-off is overdone, and that TSLA is likely to bounce back in the coming weeks, at least until earnings are released later this month. And the stock is still up 17% from its mid-May bottom. My guess is TSLA will be higher by year’s end, and that today’s selling presents a prime entry point for those of you who have not yet bought the stock. BUY
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced back nicely last week, up 3.7% since our last issue. While well short of its mid-September highs (446), ULTA is still up 7% since reporting very strong earnings in early August. I like the trend, despite a rough couple weeks in September. BUY
Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, had a very good first week in the portfolio, up 8%. The company is the largest franchisor of boutique fitness brands in the U.S. with roughly 2,000 studios across 48 states. It also has over 175 studios open in 11 foreign markets and even has studios on cruise ships crossing the world’s oceans. As people return to gyms in the post-Covid era, Xponential Fitness saw revenues improve 66% in the second quarter, is on track for 42% revenue growth in 2022, and expects to turn profitable in the coming quarter. Meanwhile, the stock is trading smack in the middle of its recent 17.8-to-21 range. BUY
The next Cabot Stock of the Week issue will be published on October 10, 2022.