The bulls came out swinging after Labor Day, putting at least a brief half to all the late-summer selling. Whether the mini-rally lasts another week (or longer) may depend on the new inflation data, due out tomorrow morning before the opening bell. For now, the bear market remains, but it was a good week for stocks – and an even better week for the Stock of the Week portfolio, with several of our stocks up double-digit percentages since we last spoke. And today we add a new stock that’s poised to lead the next true market rally – whenever it arrives – but in the meantime is faring quite well in its own specific niche.

Details inside.

Cabot Stock of the Week Issue: September 12, 2022

After a rough end to summer, the selling finally stopped last week, with the S&P 500 and Nasdaq both up nearly 5% since we last wrote. Is it another false start, or is the worst of the selling over?

A lot could depend on tomorrow morning’s (September 13) consumer price index data. Economists are anticipating another modest decline in the inflation number – 8.1% in August, which would be down from 8.5% in July and a peak of 9.1% in June. If the August figure is around that number or even lower, then perhaps the current mini rally will continue, at least for another week. That would be very good news for the Stock of the Week portfolio, which saw most of its stocks recover much faster than the broad market last week – many of them by double-digit percentages.

Big picture, however, we’re still in a bear market, with the Nasdaq 24% off its November 2021 highs and the S&P down 14% year to date. It’s why we’ve pruned our portfolio of some laggards in recent weeks to trim the number of stocks from 20 to 15. This week, however, we have no new sells, and are adding a stock that is part growth, part consumer staple, and has emerged as a new leader in a specific yet popular subsector – and also has the potential to lead the next big market uptick.

It’s a stock recommended by Mike Cintolo in his Cabot Growth Investor advisory, and here are Mike’s latest thoughts.

Celsius (CELH)
First, there was Red Bull, which wasn’t a big market winner (German company), but it basically launched the energy drink market and took a huge share many years ago. Then, about 15 years ago, there was Hansen, which started as a juice firm but moved into the energy drink market—now known as Monster Beverage, the firm’s offerings were the next winner, eating into Red Bull’s share as distribution (including a deal with Anheuser Busch) and notoriety increased, driving the stock much higher.

Now we have Celsius (CELH), which we think is the next leader in the group, with energy drinks that offer some major differences from the competition: While the company’s products are healthy in terms of having no preservatives, aspartame, high fructose syrup or added sodium, the bigger attraction is (according to a couple of neutral studies) that the firm’s formula turns on thermogenesis, where the body produces heat, which in turn burns calories. Thus, Celsius’ drinks are actually made more for the active person and not just someone looking for a sugary treat.

All of that is good, and the company has taken the step-by-step approach to expanding as we saw with Monster—as the company was able to get into more locations, the drinks gained in popularity, which in turn opened up more doors for it to sell (a network effect of sorts). And that pace has accelerated of late: At the end of Q2, not only had the number of club locations risen by more than 10% from the prior quarter and the number of convenience stores nearly doubled from a year ago, but Celsius was gaining traction with big players, including 175 new BJs warehouse locations last quarter, and earlier this year, more than doubling its distribution to Sam’s Clubs, hundreds of additional Walmart locations (all told, sales through Walmart rose 700% in Q2!), a rollout to 6,000 Circle K stations as well as a launch at Lifetime Fitness.

And these distribution trends are going to accelerate further thanks to the recent deal with Pepsi—Celsius’ top brass said in the Q2 conference call that the deal (which also included Pepsi taking a $550 million stake in Celsius’ convertible preferred stock—effectively an 8% ownership stake) would lead to a 40% incremental distribution boost over the next 12 months, above and beyond what was already in the till.

Celsius was already growing at lightning-fast rates before the deal, and there’s little doubt they’ll at least remain rapid for a long time to come thanks to the Pepsi deal. Indeed, the company had posted sequential growth for 16 quarters in a row, accounted for 34% of the growth in the entire energy drink market in the second quarter and is the second-largest energy drink seller on Amazon.

The numbers here are, frankly, hard to beat, with sales and earnings both growing at triple-digit rates (margins have been a bit choppy due to inflation pressures but that hasn’t slowed growth), and analysts see that continuing, with earnings expected to move up to 42 cents per share this year and $1.25 in 2023, both of which are likely conservative.

As for the stock, CELH had a monster run in the bull market, then imploded from 110 to 40 in just three months after the top. However, the stock held up after that, retesting the area twice and finding monstrous-volume support in May. Then came the rally, with CELH surging all the way back to its old highs on the Pepsi news, with the last few weeks, in general, looking like a normal up-and-down rest phase given the market. Buy on pullbacks.

Current Recommendations

Changes Since Last Week’s Update
None

Following three weeks of selling, we have no changes to our portfolio this week – a welcome sign. In fact, many of our stocks had very good weeks, with standouts including Centrus Energy (LEU), Cleveland-Cliffs (CLF), Enphase Energy (ENPH), Montauk Renewables (MNTK), Nio, Inc. (NIO), Tesla (TSLA) and Ulta Beauty (ULTA). A few of those have managed to rise to new all-time highs. All of them were up more than the market last week.

Lots to celebrate, at least for one week, so let’s get right to it!

Updates

Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up slightly with the market this week after successfully bouncing off support in the high 15s for the second time in a month. Trading just above its 200-moving average, we will continue to hold. HOLD

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, had a nice debut week in our portfolio, rising more than 6%. Spanish for “golden arches,” Arcos Dorados is the world’s largest independent McDonald’s franchisee, based in Uruguay but with 72% of its revenues coming from Brazil, Mexico, Argentina and Chile. In his latest update, Bruce wrote, “The shares are depressed as investors worry about the pandemic, as well as political/social unrest, inflation and currency devaluations. However, the company has a solid brand and high recurring demand and is well positioned to benefit as local economies re-open. The leadership looks highly capable, led by the founder/chairman who owns a 38% stake, and has the experience to successfully navigate the complex local conditions. Debt is reasonable relative to post-recovery earnings, and the company is currently producing positive free cash flow.

“Macro issues, including issues in Brazil related to its economic conditions (in particular, inflation, running at an 11.7% rate), currency and the chances that a socialist might win this year’s Brazilian presidential elections, will continue to influence ARCO shares.

“ARCO shares … have (10%) upside to our 8.50 price target. The ongoing rebound appears to be some recognition that the sell-off following the earnings report was not warranted.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, continued to bounce back following a strong earnings report the previous week. It’s up more than 9% since its September 1 bottom at 492 and is up more than 11% since the Fourth of July. In his latest update, Tom wrote, “The chipmaker and infrastructure software provider once again delivered an earnings beat with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. Broadcom kicks butt every quarter as business remains stellar with a bright future.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, continues to trade in a range between 41 and 43, but is up more than 17% since late June. In his latest update, Tom wrote, “The infrastructure partnership announced a joint venture with Intel to fund a $30 billion semiconductor fabrication plant in Arizona. It’s certainly a timely investment after the passage of the CHIPS Act and should get some generous government subsidies. Brookfield has been phenomenal at finding great investments over the years that are accretive and boost the stock price. BIP spiked higher on the news. It’s been on a torrid uptrend since mid-July and may be moving to a new high. (This security generates a K-1 form at tax time).” BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, has now crossed the 50 threshold – giving us a 75% return since we added it to the Stock of the Week portfolio in late July! If you bought shortly after that recommendation and are sitting on a similar profit, it’s not a bad idea to sell a few shares now to book some profit. Otherwise, LEU remains a strong buy, and our best recent performer. In his update last week, Carl elaborated on why the stock has been so strong: “Its order book is at around $1 billion, with multi-year contracts. Prices in the global uranium enrichment market have gained significantly so far in 2022, enabling Centrus to make long-term sales at higher prices and margins. In the first half of 2022 alone, LEU secured more than $135 million of new sales contracts and commitments. In its last quarter, net income of $37.4 million tripled year over year on revenue of $99.1 million in Q2 2022.

“Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry. Nuclear power provides 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 four times earnings.” BUY

Cleveland-Cliffs (CLF), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, bounced back nicely last week, advancing 7.5% to recover some of its recent losses. With shares of the steel and iron-ore pellet maker holding above their 50-day moving average, we’ll keep it at Buy as, in Clif’s words, “demand for the industrial metal is expected to rebound if China’s manufacturing picks up.” BUY

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just keeps rising, closing at new all-time highs above 317 last Thursday before pulling back a bit in the last couple trading sessions. Our gains in the stock are now in excess of 50% since we added it to the portfolio in late June. In his latest Cabot Growth Investor update, Mike wrote, “Given the market, ENPH is acting about as positively as possible, with the stock giving up very little of its July breakout, trading tightly for a few weeks (usually a sign of accumulation or at least very little selling pressure) and actually attacking new high ground yesterday. Fundamentally, a few recent press releases suggest Enphase is putting a lot of emphasis on Europe and Germany, where the energy situation is dire: It partnered with one smart green home firm (will be able to manage appliances and Enphase’s solar and battery assets from a smartphone app), acquired another (with its own Internet of Things platform), and expanded a distribution partnership with a third. Remember that, in its Q2 call, the top brass said revenues from Europe rose 89% from a year ago, and Q3 is expected to see a 40% bump compared to Q2 (!) as that continent scrambles for some semblance of energy independence. Back to the stock, solar certainly seems to be in pole position to be a leading sector of the next sustained rally, and while there are some interesting, smaller firms, Enphase looks like one of the top liquid leaders in the group. We’ll stay on Buy, though we favor entering on dips until the market can prove itself.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, recovered some of its recent losses last week, with an assist from the market. In his update last week, Carl lamented that the “stock continues to tread water even though global sales of industrial robots grew 27% year over year to a record in 2021 after two years of declines, according to the International Federation of Robotics. Jefferies estimates China’s working population will decrease by 35 million by 2025 from 2020 levels, which could hasten the pace of robot adoption, looking at the experience of Japan.

“Fanuc is the world’s leading manufacturer of industrial robots and FANUY offers us a high-quality stock that should be firm with its strong balance sheet with plenty of cash. My six-month price target for this low-risk stock remains 25.” HOLD

Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, has encouragingly bounced off support in the 51 range, though it still remains well shy of its late-July highs. Not much news to report. Bruce says the shares have about 30% upside to his 69 price target, adding, “The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.6x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.9% dividend yield only adds to the appeal.” BUY

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, had the best week of any stock in the portfolio. It was up 15% to reach new all-time highs near 20, with more than half the gains coming this morning, as the stock was up more than 9%. The rapidly improving climate for renewable energy stocks has certainly contributed to the surge, as did a very impressive second-quarter earnings report in early August in which Montauk blew EPS estimates out of the water, reporting 13 cents per share when only 2 cents were expected. Revenues were also up 114% year over year. All that growth has captured the attention of Jim Cramer, who on the Lightning Round of a recent Mad Money CNBC show singled out MNTK as one of his favorite stocks today. This stock is a strong buy, but if you haven’t already bought you may want to wait for the next dip considering how much it’s run up in the last week alone. BUY

Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, got a huge boost from earnings last Wednesday, advancing more than 20% including a 10% boost in early Monday trading. What did the market like so much about the quarter? For starters, revenues for the Chinese electric vehicle maker improved 21.8% year over year, while deliveries were up 14.4%. Meanwhile, the company anticipates 31-38% revenue growth in the third quarter and a 27-35% jump in deliveries. Profits are narrowing, as the company reported a loss of 25 cents per American Depositary Share, up from just a seven cents per share loss in the same quarter a year ago. But those were due to higher operating expenses, and investors seemed to shrug them off. NIO is now trading above its 50-day moving average but remains below its 200-day line (22.3), so we will keep it at Hold for now and see if the post-earnings surge continues or fizzles in the coming week. HOLD

ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up with the market to recover most of its late-August losses. In his latest update, Tom wrote, “OKE tends to be more volatile than the other midstream energy positions. … It’s having a subpar year compared to its peers. That’s because it had a huge year last year, returning about 70%, and earnings are not growing as much as other energy companies because they never went down much during the pandemic. Natural gas demand tends to be more resilient in a recession. This is one of the few companies that can endure inflation or recession or both.” BUY

Qualcomm Inc. (QCOM), originally recommended by Tom Hutchinson in Cabot Dividend Investor, finally stopped the recent bleeding last week, bouncing off support around 126. We’re still down on the position since adding it to the portfolio in late August (just before the selling started), but not as sharply. In his latest update, Tom wrote, “After a strong summer rally, QCOM has hit the skids again. It got hit as technology sold off again amid fears of higher rates and continuing inflation. Then it took another hit as semiconductor stocks sold off on recession worries. Even though QCOM is performing well individually on an operational basis, it just can’t overcome a market that is souring on the sector. The selling is overdone as earnings continue to be strong and the stock already sells at a cheap valuation. It can move higher fast and make up for lost time when the going gets good again.” Maybe last week was the start of it. This week will tell us a lot. BUY

Samsara (IOT), originally recommended by Tyler Laundon in Cabot Early Opportunities, recently reported earnings that beat expectations, though the stock hasn’t done much since except put in a fairly solid-looking bottom in the 12-13 range. It’s a potentially decent setup should the market get going again. But there’s no hiding the fact that this stock is off to a disappointing start since we added it a month ago. With the chart starting to look healthier and the company reporting impressive earnings two weeks ago, however, we’ll keep it at Buy as a bet that the next big move will be up. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up 10% this week, mostly in sympathy with the rise in the market. There was some good news though: The company is considering building a lithium refinery for EV battery production in Texas this year, which would be the first of its kind in North America, according to the Texas Comptroller’s Office. If approved, construction on the lithium hydroxide refinery could begin as early as the fourth quarter of this year. The move would help expand and diversify Tesla’s lithium and battery production at a time when lithium prices are going through the roof – up 120% this year. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had another excellent week, advancing more than 4% to reach new all-time highs at 445. The stock is now up nearly 20% since the beginning of August, with much of the gains coming since the company reported very strong second-quarter earnings last month. Ulta Beauty’s sales and earnings beat analyst estimates, same-store sales posted double-digit growth, and the company increased its market share in the prestige beauty space. Furthermore, the company raised its full-year 2022 guidance. Boosted by easing Covid restrictions, sales grew 16.8% year over year while earnings per share improved nearly 15%. BUY

The next Cabot Stock of the Week issue will be published on September 19, 2022.

Analyst Bio

Chris Preston

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.

Chris joined Cabot in 2015, where he previously served as staff analyst, web editor, and Chief Analyst of Cabot Wealth Daily, our free investment advisory, which in 2019 was named “Best Financial/Investing Newsletter or Ezine” at the SIPA (Specialized Information Publishers Association) Awards, with Chris at the helm.

Prior to joining Cabot, Chris was an analyst and assistant managing editor with Wyatt Investment Research. He has been an investment analyst for more than a decade and a professional writer/editor for nearly 20 years, picking up multiple writing awards along the way. His bylines have appeared in Forbes, The Money Show, Time Magazine, U.S. News and World Report and ESPN.com.

Chris lives in Vermont with his wife, two young kids and their golden retriever, Scout. He occasionally sleeps.