Cabot Stock of the Week Issue: September 19, 2022

Let’s not sugar-coat it: Last week was a rough one for stocks. It included the worst single-day selloff since 2020, and all three major indexes plunged back to their mid-July lows. While still comfortably above the mid-June bottoms, another bad day or two like we saw last week could have stocks soon retesting those intermediate-term nadirs. A lot will depend on whether the Fed decides to raise interest rates another 75 basis points (all but guaranteed) or 100 basis points (20-30% chance, according to most economists) later this week.

It’s difficult to make money in markets like this, though a couple of our stocks did actually advance, led by Enphase Energy (ENPH), which somehow hit new all-time highs! Not all of our positions fared quite so well, though, prompting us to sell three of the weakest performers in this issue. One group that’s been fairly immune to all the recent selling? Renewable energy, thanks in large part to the August approval of the Inflation Reduction Act. Fortunately, we have several renewable energy names in the Stock of the Week portfolio (including Enphase), and they’re all among our best performers. So today, we’ve decided to add another.

It’s the only public geothermal company in the U.S., and it was recently recommended by Brendan Coffey in his surging Sector Xpress Greentech Advisor newsletter. Here is the stock, with Brendan’s latest thoughts on it.

Ormat Technologies Inc. (ORA)

Greentech stocks have been decoupling from broader technology stocks, with renewable energy stocks in particular showing strength. We were already seeing signs of this before the unexpected mid-August boon of the Inflation Reduction Act, which is directing more than $350 billion toward clean energy and decarbonization. It can’t guarantee the sector won’t be pulled down by broader market troubles, but the act has energized Greentech investors, which is why the sector has so far resisted the September swoon of the broader markets.

One company to benefit is Ormat Technologies (ORA), the only publicly traded U.S. geothermal company. The climate part of the bill extends tax credits for new construction renewable energy projects out 10 years. Before now, renewable tax credits were subject to an annual Congressional staring contest over letting the credits expire. The decade-long certainty is something Greentech businesses have long been clamoring for since it provides a measure of cost certainty.

For Ormat, it comes at a fortuitous time. For years, it was a nice business with decent growth, averaging around 7% a year. Recently management decided to speed up its pulse and ratchet up project development in geothermal, also adding solar and energy storage to its project mix. The credits, 33.75 cents per kilowatt hour (KwH) for domestic geothermal, suddenly make their aims more affordable. So, too, do strong investment tax credits for renewable energy and easier trading of those credits among businesses.

Ormat owns and operates 910 MW of geothermal in 23 developments in the U.S. and abroad, mainly around the “ring of fire” of the Pacific Ocean. About 30% of Ormat’s capacity sits in Guatemala, Kenya, Honduras, France’s Guadeloupe island and Indonesia. It’s the second largest geothermal producer in the U.S., after CalPine, and, when including international assets, the second largest in the world, after Phillippines National Oil Company. Management aims to boost total electricity generation capacity to 1.2 GW by year-end 2023. This will come from nine geothermal projects under development and six solar projects underway, all in the U.S. (although credits aren’t available for projects that had already started by the time the recent bill was signed).

The company has been diversifying beyond geothermal as part of its desire to grow faster. A small part of the business right now is solar, about 13 MW after an expansion this year by 6 MW, all at Tungsten Mountain, Nevada, as part of a hybrid solar-geothermal plant. More substantial are plans in the energy storage market. In 2017, Ormat entered energy storage when it acquired a Philadelphia company, Viridity Energy, for $35 million. It now has 83 MW of renewable energy storage, about half in New Jersey and the rest mainly in California and Texas, two markets it sees as having huge potential given the problems both have with grid stability. It aims to boost storage volume to as much as 800 MW by 2026.

Management says the business will produce revenue of $710 million to $735 million this year with adjusted EBITDA around $440 million. Wall Street expects about $73 million net income, or $1.30 per share, a fraction of a penny better than last year. By the end of this year, the company’s “run rate” of adjusted EBITDA will be more than $500 million, according to Ormat. The stock pays a dividend of 12 cents a share, quarterly. The most recent distribution was in August. If long-term plans come to fruition, Ormat will be producing revenue of $1.15 billion in 2026.

There’s a wild card, too, which I suspect Ormat could take advantage of. Recent advances in a more efficient type of geothermal, called superhot rock, have won funding under the new climate bill. Superhot rock plants drill deep, 2 to 13 miles, to access rock that generates 10 times as much steam energy as a conventional geothermal well. Ormat isn’t involved in superhot rock, but it’s a natural extension of its expertise and an obvious path for management to really quicken its growth. Superhot rock has the potential to provide half the world’s electricity, according to a recent study.

Technically, shares look primed for further advances. Ormat shares were halved, from all-time highs around 120 to about 60, in the first half of 2021 on aggressive short-seller accusations against an Israeli board member alleging corruption during work at a different company. That board member has since left, and Ormat shares have stabilized and built a nice base over 15 months. ORA broke out with the August climate bill and looks to have formed another, higher, base at 91-92 from which they can work higher.

Current Recommendations

Changes Since Last Week’s Update
Cleveland-Cliffs (CLF) Moves from BUY to SELL
Fanuc (FANUY) Moves from HOLD to SELL
Molson Coors (TAP) Moves from BUY to HOLD
Samsara (IOT) Moves from BUY to SELL

Another big down week for the market means a few more of our laggards have to go. This week we’re selling steel and iron-ore pellet maker Cleveland-Cliffs (CLF), Japanese robot manufacturer Fanuc (FANUY), and Internet of Things upstart Samsara (IOT); all three companies still have promise, but their stocks haven’t responded accordingly of late, and in this market, having a short leash is a necessity, at least as far as this advisory is concerned. We are also downgrading beer-making value play Molson Coors (TAP) from Buy to Hold, though the stock does seem to be bouncing off support on Monday.

These three sells, plus the addition of Ormat Technologies, leave us with 15 stocks in the portfolio, three-quarters full. Twenty-five percent “cash” feels right given all the selling in recent weeks. Let’s hope we can start putting more of that cash to use in the coming weeks.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was down less than the market last week, about 3.7%, and is still slightly higher than it was when we recommended it in this space two weeks ago. In this market, that’s a victory! 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. In October, Brazil holds its presidential elections, with incumbent Jair Bolsonaro facing a previous president, Luiz Inacio Lula de Silva. Bolsonaro leans right and has threatened a ‘vote steal’ campaign if he loses. De Silva is a socialist who appears to be leading in the polls. A smooth, non-contested transition and post-election period, or the winner taking a somewhat centrist approach, would be much better for Arcos shareholders than other outcomes.

“The Brazilian currency also drives the shares. Since early 2020, the currency has generally stabilized in the 1.00 real = $0.20 range. As the company reports in US$, any strength in the local currency would help ARCO shares.

“Arcos shareholders can monitor the iShares MSCI Brazil ETF (EWZ) for sentiment toward the overall Brazilian stock market.

“There was no significant company-specific news in the past week.

“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

Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down a point last week to dip just below its 200-day moving average. However, with the stock still holding three-month support in the 15.7-15.9 range as of this writing, we will continue to hold for now. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell along with the market last week, down about 5.7%. The stock remains above its September lows (492), but trades below both its 50- and 200-day moving averages. In his latest update, Tom wrote, “The chipmaker and infrastructure software provider once again delivered on earnings with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. But the stock is down over 20% YTD because it has been dragged down by the technology sector. It currently sells at a forward price/earnings ratio below that of the overall market and below its five-year average. Good things are bound to come to this stock eventually. It may flounder for longer, but once it moves it can make up for lost time. In the meantime, you get a solid dividend yield while you wait.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell below its recent 41 to 43 range for the first time in about a month. Still, we’re sitting on a nice profit and the story hasn’t changed, as Tom wrote in his latest update: “The infrastructure partnership is one of the best places to be in this market. The reliable earnings generated by crucial infrastructure assets make BIP very defensive and recession-resistant. It also has inflation adjustments built into its contracts. The partnership also 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.” BUY

Celsius (CELH), originally recommended by Mike Cintolo in Cabot Growth Investor and added to the Stock of the Week portfolio last week, was up 3% in its first week - a good sign considering all the indexes were down. Here’s what Mike had to say about the stock and company in his latest update: “Celsius tested support in the mid-90s last week and did so again at yesterday’s lows, but each time the buyers showed up; all in all, the stock continues to effectively mark time following the big run and gap on the Pepsi news at the start of August. We remain optimistic the next big move is up, but with the market iffy we’re sticking with our plan: We’re holding on here, but we also have a mental stop in the 90 area (a touch below) in case the market/CELH keels over from here.” BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, is down sharply since our last issue, falling from 50 to 44. Such a dip comes as no surprise considering LEU shares had basically tripled (!) since May; it finally got caught up in last week’s market selloff. No need to panic – having recommended the stock at 29 less than two months ago we’re still sitting on about a 50% profit. In his latest update, Carl wrote, “The company announced yesterday that it has secured new nuclear fuel sales contracts and commitments with an estimated value of $320 million in the last 12 months – including approximately $270 million year-to-date. Most revenues come from multi-year contracts with major utilities, often signed years in advance.

“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, fell through its 50-day moving average last week – and kept on falling. Clif advised his Gold & Metals Advisor readers to sell the stock a couple weeks ago. Let’s cut our losses and do the same now. SELL

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was remarkably UP 3% this past week, touching new all-time highs above 320 before pulling back slightly. Why the strength? Here’s what Mike said in his recent update: “Everything we’ve written in recent weeks remains the same: ENPH looks like a liquid leader in one of the top sectors (solar) should the market get off its duff, and fundamentally, demand for its microinverters and various other offerings should soar for a long time to come. A dip to 250 or so (the 50-day line is at 253) would probably be abnormal, but at this point, the buyers are in control.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, has done nothing but fall for the past month-plus, and what was once a nice short-term winner has turned into a very small loser in our portfolio. With the 50- and 200-day moving averages well in the rear-view mirror, it’s time to part ways and search for potential leaders of the next upswing – or at least stocks that aren’t in relative free fall. Carl is still recommending the stock to his Cabot Explorer readers and maintains a 25 target price on it. But with the stock having fallen to new three-month lows, let’s go ahead and step aside now. SELL

Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, was down 4.5% last week, in line with the market. We’re down about 15% on the stock, but with shares bouncing off three-month support around 50 this morning, we’ll hang on another week and see if TAP can get its act together. However, we will downgrade the stock to Hold. Bruce maintains a 69 price target on the stock and writes that it “trades at 8.7x 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.” MOVE FROM BUY TO HOLD

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was up and down last week, holding well above its September lows in the 16 range. Brendan does not view the recent volatility as concerning, saying, “little technical damage was done.” There was no news about the company otherwise, and its short-term trajectory – shares have still doubled since July 1 – remains decidedly up. BUY

Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, cooled off a bit last week after a huge earnings gap up the week before. Net-net, the stock is up from 17 to 20 in the two weeks since those strong second-quarter earnings were reported. 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. HOLD

ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, continues to chop around in a range between 59 and 66. The stock still trades at a modest valuation (less than 14x forward earnings) and pays a robust dividend (6.2% yield), plus we’re up double-digits on it, and Tom still likes it, writing, “Natural gas and NGLs are the best place to be as those fossil fuels are fast growing, in high demand, and the most recession-resistant.” BUY

Qualcomm Inc. (QCOM), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down 6% last week, falling with almost all other technology stocks. It does appear to be forming a bottom in the 124-125 range, however. We’ll see if it holds. 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.” BUY

Samsara (IOT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has had a rough go since we added it to the portfolio six weeks ago, back when the market appeared to be getting its act together. The story (IoT company with a focus on the auto industry) and growth (43% revenue increase expected this year) haven’t changed, Wall Street simply isn’t in the mood for somewhat speculative mid-cap technology stocks at the moment, which is why IOT has quickly become the biggest loser in the Stock of the Week portfolio. Let’s go ahead and Sell, with the possibility that we’ll come back to this promising company once the market becomes more sympathetic to fledgling IoT stocks. SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the rare stock that was actually up slightly in the last week. No major news, other than that the company hopes to double sales in Germany this year and still plans to build a new battery plant in Germany after applying for an extension in May. The fact that shares continued to rise despite the recent selloff, particularly in other big tech names, is quite bullish. A break above 309 could accelerate the uptrend, especially if the market gets off its knees. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell about 6% after weeks of nothing but gains. Similar to LEU (see above), the stock was likely due for a pullback, particularly in this market. Happily, ULTA shares remain well above our original buy price (382), so we will keep it at Buy. BUY

The next Cabot Stock of the Week issue will be published on September 26, 2022.