Cabot Stock of the Week Issue: September 26, 2022

It was another brutal week for the stock market, thanks mostly to the Fed and its vow to hike interest rates multiple times through year’s end in an effort to reel in inflation. And just like that the major indexes are either at new 2022 lows (the Dow) or are testing their June lows (the S&P 500 and Nasdaq). Whether the latter two bounce off that support or plumb new depths will likely be determined by all the economic data coming out this week: the latest Consumer Confidence report and August’s new home sales (Tuesday), August’s existing home sales (Wednesday), the latest GDP numbers (Thursday), and the Fed-favored personal income report (Friday) are the big ones. Given how steep the losses have been in recent weeks, needless to say, this is a pivotal week for the market.

Most of our stocks were caught up in the selling, which is why we’re parting ways with three more stocks this week. And it was tempting to go with a safe, low-risk value play or dividend stalwart for this week’s addition. But here’s the thing: In bear markets like this one, nothing is truly “safe.” In fact, two of the three stocks we’re selling this week are large-cap dividend payers and/or value plays. So, when everything is bad, in keeping with Warren Buffett’s “be greedy when others are fearful” philosophy, why not take a big swing? It’s why today, I am adding a little-known, small-cap pick courtesy of Cabot Early Opportunities chief analyst Tyler Laundon. If you go to the gym a lot, you may have heard of it, since it’s in almost every state; better yet, it’s growing at its fastest rate in years as America returns to normal in a post-Covid world.

Here is the stock, with Tyler’s latest thoughts on it.

Xponential Fitness, Inc. (XPOF)

Xponential Fitness (XPOF) 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.

The company’s brands cross several verticals, including Pilates (Club Pilates), barre (Pure Barre), cycling (CycleBar), rowing (Row House), dance (AKT), yoga (YogaSix), running (Stride), boxing (Rumble), functional training (BFT), and stretching (StretchLab).

Xponential offers small class sizes in easy-to-access retail locations, often with several brands located in a “fitness row.” Most consumers are female, ages 20 to 60 years old. They can buy recurring memberships or just walk in. Retail locations sell both branded and third-party products.

Xponential has done well growing even through the pandemic. While 30% of U.S. boutique studios closed, Xponential opened 555 new studios and grew members by 49%.

Acquisitions have been a part of the growth story for years and continued in 2021 with Rumble (14 studios) acquired in March 2021 and BFT in October 221 (151 studios).

BFT, in particular, has helped Xponential grow internationally given its studios are located in Australia, New Zealand and Singapore. BFT sellers have become Xponential Master Franchisees and will continue to help the company expand internationally.

Another new initiative spurring growth is XPASS, an offering with three different price points/classes that gives consumers access to all brands’ class offerings on one platform.

There is also the XPLUS virtual on-demand class offering ($19 - $29.99 per month) that offers access to all brands and gives consumers an alternative to Apple Fitness+ and Peloton.

Finally, Xponential has been increasingly active on the partnership front. A new partnership with L.A. Fitness and City Sports Club will add Xponential brands in more than 500 Fitness international locations. Buildout costs for these locations will be less than standalone studios.

And the company just signed with Princess Cruises to bring at least eight of the company’s brands to each of Princess’ 15-ship fleets, meaning over 120 licensed studios will launch with the cruise line.

Despite understandable challenges during the pandemic, Xponential has posted strong growth. Sales fell 20% in 2020 (pandemic) then surged by 49% to $155 million in 2021.

In Q2 2022 revenue grew 66% as North American same-store sales jumped 25%. Revenue is on pace to grow by 42%, to $220 million, this year. Analysts see low to mid-20% growth in 2023 too.

Xponential is also on the verge of turning profitable in the upcoming quarter. That should push EPS into positive territory for the foreseeable future. Analysts see EPS of $0.31 this year and just over $1.00 in 2023.

As for the stock, XPOF came public at 12 in July 2021, and after an uneventful couple of months, the stock took off in late September, ultimately reaching 24.7 on November 12.

Shares lost altitude and fell to 12.9 heading into lockup expiration in mid-January 2022, then rallied to an all-time high of 26.9 by the end of March. Another big retreat then followed, and XPOF bottomed at 11.2 on June 23. Since then, the stock has been much better.

XPOF walked up to 16.3 ahead of the Q2 report on August 11, then jumped above 20 afterward. That put shares above the 200-day line for the first time since early June. Over the last six weeks or so, XPOF has mostly traded in the 17.8 to 21 range. The only wobble came on Friday when the stock broke below its 200-day line (the broad market was awful).

We’re currently looking for XPOF to hold above its 50-day line in the mid-17s and regroup for a push higher into the end of 2022.

Current Recommendations

Changes Since Last Week’s Update
Aris Water Solutions (ARIS) Moves from Hold to Sell
Brookfield Infrastructure Partners (BIP) Moves from Buy to Hold
Centrus Energy (LEU) Moves from Buy to Hold
Molson Coors (TAP) Moves from Hold to Sell
ONEOK, Inc. (OKE) Moves from Buy to Sell
Qualcomm (QCOM) Moves from Buy to Hold

Unfortunately, we have to do more trimming this week, taking the Stock of the Week portfolio down to the studs. OK, not really – but we are reducing our count to 13 stocks after peaking at 20 a little more than a month ago. This week, we say goodbye to laggards Aris Water Solutions (ARIS), Molson Coors (TAP) and ONEOK, Inc. (OKE) after each of them sold off sharply not only last week but for the past several weeks. We are also downgrading three other stocks from Buy to Hold.

It’s no fun having to keep kicking stocks to the curb, but we don’t want any truly big losers weighing down the portfolio. Hopefully, we won’t have to do much more whittling in the coming weeks. The next bull market will eventually arrive—perhaps in a few weeks, perhaps in a few months, or longer. When it does, that’s when the real money is made. In the meantime, let’s focus on the stocks that are keeping their heads above water, and saving us from some sleepless nights while this market nightmare persists. Most of the following are doing just that.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was down more than 7% last week, landing at a two-month low right at 7 per share. In his latest update, Bruce wrote, “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 (21%) upside to our 8.50 price target.” BUY

Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, fell off a cliff last week, plummeting well below three-month support in the 15.7-15.9 range and falling all the way to the high 12s. Yikes. With our losses going from modest to well into double digits in a matter of a week, it’s time to sell. MOVE FROM HOLD TO SELL

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was down more than 6% last week, falling to new 2022 lows. Do we sell while we’re still at a modest gain on the position (recommended by Tim at 465 in February 2021), or hang in there another week to see if it bounces back? Let’s see what Tom had to say about the stock in his latest update: “The chipmaker and infrastructure software provider once again delivered on earnings (in early September) 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 25% 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. But this market hasn’t seemed to care about any of that. Things may get worse before they get better for AVGO, but it can make up for lost time quickly when it turns around.” On the heels of another strong earnings report, let’s hang on to this one a bit longer to see if it can deliver on Tom’s promise of making up for lost time once the market gets going. Another down week for the market, and the stock, may have us cutting bait next week. HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, kept falling last week along with the market, dipping below its 200-day moving average for the first time in two months. Still, we’re sitting on a nice profit, and the dividend (3.6% yield) helps. In his latest update, Tom wrote, “Even this defensive infrastructure partnership has taken a hit. It’s down almost 5% this month. But just about everything goes down in a panicky market. The fact remains that BIP is ideally suited for the current environment. Revenues are highly recession resistant, and it has inflation adjustments built into the contracts. It also pays a solid dividend with a long-term uptrend and is less volatile than the overall market. (This security generates a K-1 form at tax time).” Tom has downgraded the stock to Hold, so let’s do the same here. MOVE FROM BUY TO HOLD

Celsius (CELH), originally recommended by Mike Cintolo in Cabot Growth Investor and added to the Stock of the Week portfolio last week, had a rougher week than most, down 10%. That comes on the heels of a strong first week in the portfolio in which shares of the energy drink maker were actually up 3% while most other titles were down. But as my colleague Jacob Mintz wrote this morning, all bear markets eventually come for stocks that still have “meat on the bone,” and that’s exactly what happened to CELH last week. Still, we like the stock and will keep it at BUY for now. In his latest update, Mike wrote, “The firm has been all quiet on the news front, but there’s little doubt that everything is going well fundamentally; energy drinks offer a bit of a defensive flavor (they’re more of a staple than a discretionary purchase), so a slowing economy shouldn’t crimp things much, and of course the Pepsi tie-up will put Celsius’ offerings in front of thousands more consumers in the months ahead. That said, we’re just going to follow along with the stock’s message: After a great run from 72 in July to 118 three weeks ago, this digestion is normal so far, but any drop under 90 (give or take) at this point would probably have us kicking our half-sized position out—mostly because our stake would be at a loss, but also because such a dip would raise the odds of a deeper, more drawn out base-building phase. We remain optimistic—and, frankly, we think a good day or two (and a market that isn’t bleeding out) could kick off a new rally in CELH.” As of this writing, CELH trades at 91.5. So, per Mike’s instructions, we will keep it at Buy. BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, has come crashing back to earth in the last three weeks (speaking of “meat on the bone”), falling from as high as 54 to as low as 36 last Friday. It’s having a nice day (so far) Monday, rising back up to 38, and still well clear of our entry price at 29. Still, it’s pretty jarring when a stock loses a third of its value in just three weeks, which is why we are going to downgrade LEU to Hold today. In his latest update, Carl wrote, “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 with most revenues coming through 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 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 less than four times earnings.” MOVE FROM BUY TO HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was another “meat on the bone” stock that the sellers came for last week, falling from all-time highs above 320 to 284. That’s an ugly drop-off, but this is key: ENPH held September support above 279, and the stock still trades above both its 200-day and its 50-day moving average. So we’re keeping it at Buy, and so is Mike, as he wrote in his latest Cabot Growth Investor update: “ENPH continues to act in a classic, resilient fashion, not only holding up well but trading relative tightly (on a percentage basis; the point moves can be big because it’s a higher-priced name) and actually making a little upside progress during the last month even as the Nasdaq has pulled in 14%. The news this week that Russia is essentially doubling down on the war in Ukraine should help the cause in a sense, keeping that continent’s energy disaster in place—and thus keeping demand high from people/companies who want control over their own energy production, including solar rooftop systems. Obviously, we’re remaining flexible when it comes to the stock; good stocks can go bad in a hurry in a bad market, remember. But the longer ENPH can resist the terrible action, the greater the odds it can have a big run. We’ll stay on Buy, but only if you have plenty of cash on the sideline.” BUY

Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, fell below three-month support around 50 and kept falling all the way to 47. This beermaker was my first recommendation when I took over the Stock of the Week portfolio in mid-July. I figured it would be a relatively safe, cheap addition to the existing portfolio, and that may well be the case in the long term, as Bruce continues to rate TAP a Buy. But it hasn’t worked out, and the losses have piled up in a short amount of time. So, let’s part ways with it here, clearing out even more space for when the inevitable market upswing arrives. MOVE FROM HOLD TO SELL

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was down last week, but only about the same as the market, so there’s no need to panic here. The stock still trades well above its moving averages. Renewable energy remains a solid place to be, both in the short and long term, and MNTK is less than two weeks removed from hitting all-time highs above 20. Keeping at Buy. BUY

Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, has coughed up most of its post-earnings gains, falling from 22 to 18 in the last two weeks. But shares of the Chinese electric vehicle maker are still holding above September lows at 17, so we’ll keep it at Hold. HOLD

ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, fell off a cliff last week, as the sellers came for energy stocks. This stock had been a steady performer for us for more than a year, but we are now suddenly at a modest loss. I don’t like the chart, as OKE shares have dipped to levels not seen since August 2021, with no buying happening this morning even as the markets rallied slightly. Let’s get out now while our losses are mild. MOVE FROM BUY TO SELL

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, fell less than the broad market in its first week in the portfolio, which counts as a victory these days. ORA’s resilience further validates our reason for being heavy on renewable energy stocks of late, in the wake of the CHIPS Act passing. 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 15% run-up this year. BUY

Qualcomm Inc. (QCOM), originally recommended by Tom Hutchinson in Cabot Dividend Investor, trickled lower last week, and has fallen steadily for the last few weeks. In his update last week, 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.” For that reason, we’ll keep it in the portfolio for now. But let’s downgrade to Hold. MOVE FROM BUY TO HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, got caught up in the selling last week too, though it remains north of its September lows, and is still up 33% since mid-May. Not a whole lot of news, other than that a fire broke out at the Tesla Gigafactory in Berlin, which didn’t seem to impact TSLA shares much today. Earnings are due out in the third week of October; the last time the company reported earnings, in mid-July, served as a springboard to a big run-up. We’ll see if that’s the case again this time, though a lot of it may depend on the market improving in the next few weeks. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down another 6% last week in sympathy with the market. Like Centrus Energy, ULTA has been hit hard the last two weeks after peaking at 2022 highs in the first half of September. Shares are testing support at the 200-day moving average and are still up about 5% since reporting stellar earnings in early August. Keeping at buy. BUY

The next Cabot Stock of the Week issue will be published on October 3, 2022.