The selling continued on Wall Street this past week, which has us trimming two more positions in the Stock of the Week portfolio. But most of our stocks are holding up well, and two in particular – Centrus Energy (LEU) and Ulta Beauty (ULTA) – are thriving. Today, we add a stock that not only insulates us a bit from all the selling, but also broadens our international exposure. It’s a value play, courtesy of Bruce Kaser, that’s also growing – up 24% this year!

Details inside.

Cabot Stock of the Week Issue: September 6, 2022

Three straight weeks of heavy selling makes it feel as if we’re on a collision course with the mid-June lows. And perhaps we are.

After all, the 9% sell-off in the S&P 500 since August 16 and the 12% decline in the Nasdaq since August 15 closely mimic the precipitous drop-offs in those indexes in January and April. Each time, the selling didn’t stop for another month-plus. As we enter what are historically the worst two months for stocks, it’s quite possible – if not probable – that the selling isn’t over.

And yet, double bottoms are quite normal, and typically lead to good things in the six months to a year that follows them. But that doesn’t diminish how painful they are in the moment. I do think a massive recovery is on the horizon; how far away that horizon lies is anybody’s guess. In the meantime, we’ll do our best to navigate the choppy waters. Speaking of waters, we’re headed overseas for our newest recommendation today.

We could use some more international exposure in the Stock of the Week portfolio, especially in light of recent weakness in the U.S. market. We could also use some more value at a time when most growth stocks are getting caught up in the chop. Fortunately, Bruce Kaser, Chief Analyst of Cabot Undervalued Stocks Advisor, has a stock that satisfies both needs – and it’s actually up 24% this year!

Here is the stock, and Bruce’s latest thoughts on it.

Arcos Dorados Holdings (ARCO)
Arcos Dorados (ARCO), which is Spanish for “golden arches,” is the world’s largest independent McDonald’s franchisee. Based in Uruguay, arguably the most stable country in Central and South America, the company has exclusive franchise rights for McDonald’s restaurants in 20 Latin American and Caribbean countries and territories. In 2021, Arcos generated about $2.7 billion in revenues, with about 95% coming from its 1,579 company-operated restaurants and the balance from its 682 sub-franchised restaurants. About 38% of its revenues are generated in Brazil and another 34% are produced in Mexico, Argentina and Chile. In 2021, its sales represented 3.1% of McDonald’s global sales. Arcos Dorados completed its initial public offering in 2011 and its shares are traded on the NYSE.

Arcos Dorados shares remain undervalued, as investors worry about lingering effects of the pandemic as well as inflation, political/social unrest and currency devaluations. In its geographic markets, the post-Covid environment remains uncertain as some consumers continue to avoid restaurants like McDonald’s, while labor and supply chain issues along with elevated inflation remain lingering headwinds. Brazil’s upcoming presidential election (October 2022) will likely be contentious. And, as Arcos reports its results in U.S. dollars, the volatile Brazilian/dollar exchange rate adds uncertainty and risk.

However, Arcos Dorados is a high-quality company that operates under one of the strongest brands in the world and has proven, capable leadership. As a holder of a master franchise agreement for a territory that is critical to parent McDonald’s, Arcos maintains strict adherence to high operating and oversight standards and works closely with McDonald’s to develop its geographic markets. McDonald’s retains the right to pre-approve the company’s marketing and promotion plans as well as the selection of Arcos’ CEO and chief operating officer. Relations with parent McDonald’s are considered to be very strong.

Financially, the depreciation of the Brazilian currency (-60%) and other local currencies since 2013 has obscured the company’s strength. During this period, dollar-reported results for revenues slipped a more modest 34% while cash operating profits, or EBITDA, declined only 20%. The company has increased its store count by about 10% during this period.

The company is led by the founder/chairman Woods Staton, a highly regarded Europe and U.S.-educated executive. He previously was the joint venture partner for McDonald’s in Argentina for over 20 years prior to creating Arcos Dorados in 2007. Staton holds a 38% stake in the company and remains closely involved in its strategic and operating activities.

Arcos navigated the pandemic exceptionally well, both financially and operationally. Revenues and profits have now fully recovered. On August 10, Arcos reported strong second-quarter results that illustrate the quality of the business and its management. Revenues rose 54% ex-currency, driven by a 48% increase in same-store sales. Earnings of $0.07/share increased from $0.02 a year ago. Adjusted EBITDA of $91 million increased 94% and set a second-quarter record. The adjusted EBITDA margin of 10.3%, which excludes the hyperinflationary Venezuelan market, exceeded the company’s pre-pandemic margin.

Arcos Dorados’ 3-D strategy of delivery, digital and drive-thru not only helped the company continue operating during the pandemic but is now helping it accelerate its post-pandemic growth. The company continues its disciplined new restaurant openings (opened 12 free-standing units and two others in the second quarter) and its disciplined approach to its overall business. Digital sales continue to climb and now comprise more than 40% of total revenues. We are impressed with Arcos’ commitment to technological and daily innovation.

The company’s balance sheet is strong. Its debt, net of cash, is a modest 1.1x its EBITDA. Free cash flow is also healthy, providing an enduring source of financial strength.

Overall, this high-quality company offers investors a source of enduring value at a reasonable 7.1x estimated 2023 EBITDA. Its 2.2% dividend yield adds further appeal.

Current Recommendations

Changes Since Last Week’s Update
Broadcom (AVGO) Moves from Buy to Hold
Cisco Systems (CSCO) Moves from Hold to Sell
Visa (V) Moves from Hold to Sell

A third straight down week for the market means we have two more “sells” for a third straight week, leaving us with a mere 15 stocks in the portfolio. Given the depth and breadth of the selling since mid-August, that feels like the right amount. We also are downgrading Broadcom (AVGO) to Hold, though we still like its upside if and when tech stocks right the ship (which, if this year’s pattern follows, will happen before the rest of the market bottoms).

Two major bright spots amid all the selling? Centrus Energy (LEU), which despite a down week remains a massive winner since we added it a little over a month ago, and Ulta Beauty (ULTA), which is flirting with new all-time highs on the heels of a very good quarter.

Here’s what’s happening with all our stocks.

Updates

Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down a point this week, though is still holding above its August lows. We’re now at about breakeven on our position. With the stock trading just north of its 200-day moving average as of this writing, we’ll hold for now. But any move below support in the 15.7-15.8 range could prompt us to reevaluate its standing in the portfolio. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is down sharply in the last two weeks but seems to have gotten a momentary boost from last Thursday’s earnings report. The company beat fiscal third-quarter estimates by a sizable margin, especially on the top line, and earnings per share grew 70% year over year while sales improved 25%. Broadcom has also now generated $15.3 billion in free cash flow over the last four quarters. That’s all good news, and the stock bounced on Friday in response. But it’s given back those gains today and is down 12% in the last three weeks. Let’s move to hold until we see an established bottom. MOVE FROM BUY TO HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was down two points this week, coughing up some of its recent gains. No matter. The stock had been on a tear for a solid two months prior to this market-induced pullback. 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.” BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, pulled back 6% this week but remains near all-time highs and still up more than 60% since we recommended the stock in late July. In his latest update, Carl wrote, “Centrus Energy (LEU) shares … have surged 56% in the last month. Net income of $37.4 million tripled year over year on revenue of $99.1 million in Q2 2022. In addition, its long-term order book is approximately $1.0 billion, and the company has secured more than $135 million in new sales contracts so far in 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, and more than all other sources such as wind, solar and hydroelectric combined, according to the Department of Energy. Centrus’ stock is still trading way off its 52-week high and at just over four times trailing earnings.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, fell another 3% three weeks removed from a weak earnings report. Now down 20% since we recommended the stock, it’s time to sell. For his part, Bruce still believes in CSCO, saying it has about 50% upside to his 66 price target. But as a pure value investor, he can afford to be more patient with the stock. We’d prefer to part ways with CSCO – the biggest loser in our current portfolio – and make room for better growth opportunities. MOVE FROM HOLD TO SELL

Cleveland-Cliffs (CLF), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, has had a rough go since we added it to the portfolio three weeks ago, down about 12%. Clif actually sold out of the stock last week after it tripped his (admittedly tight) stop-loss just under 17. CLF is up slightly since then and was the rare stock having a good morning today. And with shares of the steel and iron-ore pellet maker holding firm right around 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, is holding up remarkably well, flat in the past week as nearly all other growth titles melted down. Here is Mike’s latest take on the stock: “Enphase Energy has been tedious in recent weeks, basically hovering between 270 and 300 and rejected at round-number resistance many times—but like our other names, it hasn’t done anything wrong, with its 50-day line down near 250 and with the stock not having given up much of its post-breakout gallop higher. Moreover, many other solar names (from mega-cap plays to down-the-food-chain stories) are also holding well; there’s no surety, but the group certainly looks like a fresh leader, especially given all the industry incentives in the green energy bill that recently passed.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, has faded a bit of late, falling from a high of 18.55 to 15.71 as of this writing. It was enough to downgrade the stock to a Hold last week. That’s where we’ll keep it this week. In his latest update, Carl wrote, “Fanuc shares were down slightly this week despite the fact that its 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 computerized numerical control (CNC) devices that are used in machine tools and also serve as the ‘brains’ of industrial robots. Fanuc 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 bounced nicely in the last couple trading sessions, though it was still down a point in the last week. Here are Bruce’s latest thoughts on the stock: “Molson Coors Beverage Company (TAP) is one of the world’s largest beverage companies, producing the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its revenues come from the United States, where it holds a 24% market share. Investors worry about Molson Coors’ lack of revenue growth due to its relatively limited offerings of fast-growing hard seltzers and other trendier beverages. Our thesis for this company is straightforward – a reasonably stable company whose shares sell at an overly discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently reinstated its dividend.

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

“TAP shares fell 5% in the past week and have about 30% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.8x 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 and featured here last week, was down a tad in its first week in the portfolio. Still, shares of this small-cap renewable natural gas company are up 86% since July 1, and Brendan isn’t concerned about the recent dip, as he wrote in his latest update: “MNTK has eased back after having a good run through most of August. It has all the appearances of a normal rest during a bull move. A dip into the 16 area to initial support may be coming.” If so, let’s hope it’s short-lived. BUY

Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, fell sharply ahead of earnings tomorrow (September 7) before the bell. Analysts are anticipating 6.9% sales growth and a 17-cents-per-share loss, up from 7 cents a share in the same quarter a year ago. We’ll continue holding through earnings to see if the company can outpace its rather downbeat projections. Nio accounted for almost 60% of global electric vehicle exports in 2021, and the stock is already more than 70% below its highs, so there’s a lot of potential upside here, and an earnings beat could be just the thing to help get it going. HOLD

ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, finally had a down week after two months of stair-stepping higher. The dip from 64 to 59 was likely market-driven, as energy stocks are now being dragged down with nearly every other sector. The stock is now trading just above its 50-day moving average. We’ll see if it can bounce off it in the coming days. BUY

Qualcomm Inc. (QCOM), originally recommended by Tom Hutchinson in Cabot Dividend Investor, continued to sell off last week, and is down about 10% since we added it to the portfolio two weeks ago. We’ll keep it at Buy for now, but any further slippage could prompt a downgrade next week. In his latest update, Tom wrote, “The chipmaker stock looks like it wants to recover. In a friendly market, it rallies nicely. In a bad market for technology, it tends to fall less. Although it reduced guidance for the rest of the year, the company still anticipated 23% revenue growth for the second half of the year. Meanwhile, QCOM sells at less than 11 times forward earnings, which is cheap for this level of growth.” BUY

Samsara (IOT), originally recommended by Tyler Laundon in Cabot Early Opportunities, reported earnings that beat expectations last week, putting at least a temporary halt to the stock’s recent slide. We’ll see if it holds. In his latest update, Tyler dug into the earnings a bit more: “Revenue of $153.5 million (+52%) beat by $10.5 million while EPS of -$0.04 beat by $0.03. Full-year guidance of $612 million implies 43% growth. The company had a huge hiring quarter in Q2 which will weigh on profits in the near term, but big picture, Samsara continues to march toward profitability year over year. It’s worth noting that around 53% of revenue comes from transportation, retail/wholesale trade and construction, which could be challenged markets if we get a recession. That said, IOT’s products help these companies save money, so it would seem logical that Samsara would be somewhat insulated from any softness, should it occur. We continue to have a buy-a-half rating on IOT and that seems appropriate right now.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continued to slide in the wake of its 3-for-1 stock split. Overall, however, the intermediate-term trajectory remains up, with the stock still up 30% since late May. Likely hurting the stock of late are reports that the company is having trouble scaling up production of its 4680 batteries, which would halve the cost of the Model Y battery, thus saving 8% of the car’s U.S. starting price, according to Reuters. Cutting battery costs would boost the company’s profits and give it an even larger edge over its electric vehicle rivals. So slow production of the 4680 battery that will get them there is unwelcome news for the company, and its investors. But Elon Musk has conquered production problems before. Keeping at buy. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to rise and is on the cusp of matching its April highs on the heels of a good earnings report two weeks ago. Trading at 425 as of this writing, the stock is up 15% in the last month, validating our upgrade to Buy in last week’s issue. In its second-quarter report, 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

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is down 8% in the last three weeks and has dipped well below both its 50- and 200-day moving averages. It’s time to sell. According to Tom, it tends to have strong support around the 200 level, where it currently trades. But the stock has gone nowhere since we recommended it nearly nine months ago, and our patience has run out. MOVE FROM HOLD TO SELL

The next Cabot Stock of the Week issue will be published on September 12, 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.