Today’s selection is a little-known small-cap stock with a revolutionary process that may change one of the world’s most noxious industrial processes. Plus, I think the stock is at a good entry point here.
Cabot Stock of the Week 145
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My main goal with Cabot Stock of the Week is to give you the best recommendations of the Cabot analysts for today’s market, assembled into a high-performing diversified portfolio. However, not all of my recommendations are appropriate for all readers; you’ve got to decide what is right for you. Which brings me to today’s recommendation. It’s a small company with a potentially revolutionary technology, but there are definitely risks involved, both fundamental and market-specific. I can’t do a thing about the company’s fundamental issues, but I can try to get you on board at what looks like a good entry point. Today I think we have one—but if I’m wrong, the stock could fall 25% to its 200-day moving average. So choose your position size carefully. The stock was originally recommended by Tyler Laundon of Cabot Small-Cap Confidential. Here are Tyler’s latest thoughts.
Aqua Metals (AQMS)
Aqua Metals is a $380 million market cap company disrupting the polluting and inefficient lead-acid battery (LAB) recycling industry.
LAB recycling is a $22 billion global market. And it’s not going away anytime soon. There are limited lead supplies out there, and lead is infinitely recyclable. Nearly 100% of LABs are currently recycled. But the status quo recycling process, called smelting, is bad news. It is toxic, dirty and energy-intensive. Dust is created throughout the entire process. Workers in smelting plants are constantly at risk of lead poisoning. And smelting is only economic when done on a large scale, so it can’t happen near where most batteries are turned in by end-users.
The smelting process is so bad that the EPA forced the closure of the last smelting plant in the U.S. in 2013. Batteries are now shipped all over the world to get recycled in under-regulated countries, such as Mexico, the Philippines and China.
Aqua Metals has set out to change all this. The company has already opened its first used LAB recycling facility in McCarran, Nevada. The business is built around a modular, patent-pending process called AquaRefining, which is cleaner, cheaper and requires less capital than lead smelting.
AquaRefining is a fully automated, water-based process done at room temperature. There is no dust, no gas and no lead-filled slag and dross byproduct. It uses a proprietary, non-toxic water-based solvent, which is reused indefinitely, to dissolve lead compounds.
Incredibly, permitting for recycling plants is relatively easy, as evidenced by Aqua Metals’ ability to get its Nevada recycling plant permitted, built and operational in under two years.
Like many potentially disruptive technologies, AquaRefining has its non-believers. In April, a short-seller targeted the company’s stock in an online investing forum, driving shares down by 10% overnight (the stock quickly bounced back).
The company might not live up to high expectations, but I have little respect for the author of the short attack, or the quality of his due diligence. Aqua Metals’ track record to date illustrates management’s ability to attract investment capital, obtain a USDA-backed loan to build a recycling facility, show the recycling process in action, and strike valuable partnerships with industry leaders.
In May 2016, Interstate Battery, North America’s largest battery recycler, made a strategic investment of $10 million in Aqua Metals and agreed to supply over one million used LABs as feedstock for AquaRefineries.
Then in February, Johnson Controls (JCI) and Aqua Metals struck a licensing deal in which AquaRefining technology and equipment will be supplied to Johnson’s LAB smelting facilities in North America, Europe and China. Aqua Metals will generate revenue dependent on the capacity of the equipment it supplies. It will also accept used LABs from Johnson, recycle them and return the lead to JCI for a “tolling” fee. Johnson Controls is the world’s largest automotive battery manufacturer, producing one-third of the industry’s output.
According to management, Aqua Metals has just begun generating revenue from battery recycling. The revenue ramp will be lumpy, but I expect revenue of roughly $5 million in Q2 2017, $40 million in 2017 and $120 million in 2018.
The stock is up 230% since it came public at 5 in mid-2015. News of the Interstate Battery deal sent shares to 13 in May 2016, which was followed by a retreat to 9. Then a post-election rally to 14 was followed by a pullback to 11. The Johnson Controls deal sent the stock to 18 in February 2017, and shares jumped above 22 for a moment in March. Most recently, they’ve been trading in the 16-17 range, where the stock has found support since the Johnson Controls deal was announced.
The stock is appropriate for risk-tolerant investors given the risks, which include a young company with a potentially revolutionary technology that’s not yet proven in the marketplace. I suggest you balance the risks and the potential with appropriate position sizing. We’ll get a business update very soon as Q1 earnings are due out on May 9, with a conference call to follow at 5 pm ET. BUY.
Aqua Metals (AQMS 17)
1010 Atlantic Avenue
Alameda, California 94501
510-479-7635
www.aquametals.com
CURRENT RECOMMENDATIONS
A bull market has a way of making investors feel smart. “Hey, I’m getting good at this,” they say, “I’ve finally figured it out.” But as the old saying goes, you shouldn’t confuse brains with a bull market.
When I start feeling this good, I know it’s time to start looking for the exit—not so I can run to it, but just so I can be prepared. Also, I take a look at my holdings and ask if it might be time to take profits (or partial profits) in any stocks. You’ll find a few suggestions below.
As to selling today (to keep the portfolio from growing beyond my 20-stock limit), I found two, but it wasn’t easy. Details below.
Adient (ADNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, climbed right back up to its old high at 75 yesterday, telling us that despite worries about the automotive industry slowing, there’s optimism that Adient’s management can navigate the road to growth. However, this afternoon the stock sold off sharply on big volume, a sign that some big investor is getting out. Given that I have no conviction in the stock’s ability to fight the trend, and that we have no profit after one month and that I trust the chart above all, it’s time to sell and move on. SELL.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, continues to hit new highs! Crista no longer has it rated Buy, mainly because the stock is fairly valued. But she’s happy to hold on as long as the upward momentum continues—and she thinks it will, given that earnings trends in the industry are very positive. Still, some profit-taking—or a close stop—might be prudent here. HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has pulled back since gapping up on an excellent earnings report, but the long-term trend remains up. In his latest update, Roy wrote, “Biogen reported solid results. Sales advanced 3% and EPS jumped 17% after increasing 1% and 12% in the prior quarter. Recently launched Spinraza (treatment for spinal muscular atrophy) is off to a promising start with the company working on expanding the drug’s access to all patients. Spinraza received a positive opinion in Europe this week. On the Alzheimer’s disease front, Biogen said that it expects both the ENGAGE and EMERGE studies on aducanumab to be 50% enrolled by mid-May.” Roy’s Maximum Buy Price is 276.66, so if you don’t own the stock, you can buy here. However, given that I downgraded the stock to Hold last week when it jumped above that level, and that it is likely to be up there again soon, I’ll leave it rated Hold. HOLD.
Celgene (CELG), also recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has pulled back since last week, but remains in a basing pattern centered on 124. In his latest update, Roy wrote, “Celgene recorded solid sales and earnings results. Sales climbed 18% and EPS soared 27% after increasing 16% and 36% in the previous quarter. Celgene’s main drugs for multiple myeloma, Pomalyst and Imnovid, grew 33%. Cancer drugs Revlimid and Abraxane grew 20% and 5%, respectively. Otezla, a drug for psoriasis and psoriatic arthritis, increased 24% to $242 million in sales, but failed to meet analysts’ $337 million forecast. Management predicted the positive momentum will continue during the remainder of 2017 and raised its earnings forecast a tad.” Roy expects CELG to climb to his Minimum Sell Price of 188.17 within two years, and rates the stock a Buy if it’s under 128.72. Since we’re already on board, I’ll continue to rate CELG Hold, but if you’re new, feel free to buy here. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, notched a record high last Friday, but volume was light, and now the stock is trying to hold onto that gain. In my opinion, there’s great potential for a well-deserved correction, which could take the stock down toward its 50-day moving average, currently at 62. Thus, I’m going to downgrade the stock to Hold for now. In fact, given the substantial profits that the stock has brought us over the past year, plus the potential for investor sentiment toward China to cool, plus the potential for the stock to retrace a substantial portion of its advance, you may want to take partial profits here. On the other hand, we must be mindful of the continuing upside potential for the stock as well, as China’s lodging industry continues to mushroom. One strategy we’ve followed successfully before (with Tesla, for example) is to designate the stock a Heritage Stock—which means that, having great confidence in the stock’s long-term future, we resolve to hold the stock through thick and thin. But that’s a decision for another day; we can’t officially bestow that designation until our profit is solidly over 100%. HOLD.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is a turnaround stock, expected to rebound as faltering sales at the company’s 7,700 stores in 14 countries are supplanted by more profitable online ventures. The company’s next earnings report, due May 25, will provide solid data on how that switch is going. In the meantime, the stock’s price/earnings ratio is a dirt-cheap 6.7 while the dividend yield is a fat 6.6%. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, is now too high to buy; Roy has a Maximum Buy Price of 59.94. So now it’s just a matter of holding patiently until ICE hits his Minimum Sell Price, currently 76.77. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is another Chinese winner! In Paul’s latest update, he wrote, “JD has eased off on the speed of its advance in recent days, but the six-day run from 33 to 35 was a major move. JD is advancing with the market, but is also getting a boost from news that the company will begin offering logistics and supply chain management services to other businesses. As with many of our holdings, JD is a little extended, so look for a slowdown or pullback to get started.” If you’ve got profits, and you have more of a trading mentality, taking some off the table here might be a good idea. BUY.
Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, hit a record high last week and has pulled back normally since. You can still buy here. BUY.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, last week reported results for its fiscal fourth quarter ended March 31. Net income was $0.76 per share, up from $0.50 the previous quarter. Assets under management (AUM) were $728.4 billion, up from $669.6 billion the year before. The company announced that it bought back 2.6 million shares during the quarter, and also announced an increase in the dividend of 27%. The stock, which had hit a new high in expectation of the good news, has sold off normally since. BUY.
Martin Marietta Materials (MLM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth Portfolio, released an excellent first-quarter report this morning, beating analysts’ estimates on both revenues ($844 million) and earnings ($0.66 per share). The stock gapped up at the open in response, reinforcing the persistence of the stock’s long-term uptrend; short-term, our goal is a breakout above the January high of 242. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, announced yesterday that it would acquire Veresen, a fellow Canadian energy company, for $9.7 billion (Canadian), thus strengthening its position as the third-largest company in the industry. Strategically, the benefit is increased diversification; while Pembina is primarily an oil pipeline company, Veresen is primarily in natural gas. PBA sold off on the news, on big volume, presumably because the acquisition will add debt and may slow the company’s growth in the short term. But the long-term synergies are attractive—plus, when the deal is completed later this year, the dividend will be raised to close to 6%! With the stock just bouncing off its 200-day moving average, I think the stock is a good buy here for long-term investors. Note: earnings are due May 4 after the close. BUY.
PRA Health Services (PRAH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released its first-quarter earnings report last week and the results were good. Revenue was up 14.7% from the year before, and earnings per share hit $0.62, beating analysts’ estimates of $0.60. Commenting on the results, Colin Shannon, PRA’s CEO, said, “2017 is off to a solid start, and I am pleased with our first quarter financial results, which demonstrate a continuation of our momentum from 2016. We continue to execute consistently across our business, as evidenced by our double-digit revenue growth and a very strong book-to-bill ratio. We continue to stay focused on our key strategic objectives and our client deliverables, and we look forward to continuing to deliver strong results for the remainder of 2017.” However, the stock sold off in response, on high volume, and this, combined with the fact that we have no profit in this young position, is reason enough for me to downgrade the stock to Hold. HOLD.
Q2 Holdings (QTWO), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, hit another new high today, driven by the continuing bull market and growing awareness of the company’s value proposition. The long-term prospects for the company remain bright, but it’s important to remember that the company is not the stock, and my judgment is that short-term, this stock is at risk of giving up some of its recent gains—we’re up more than 40% in less than a year! So I’m going to sell QTWO here and take our profit, and see if Tyler’s newest recommendation (today’s featured stock AQMS) can do something similar. SELL.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, saw its stock rise every day last week—and fall so far this week. If you haven’t bought yet, you can still buy here. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has climbed steadily higher over the past week, repeatedly hitting new highs. The company is expected to release its earnings report tomorrow, May 3, after the market close, and the stock is saying the results will be good. Still, if you haven’t bought yet, you should wait until after the report to see how the stock reacts. The stock’s 50-day moving average is down at 17.14. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, is also expected to report earnings after the market closes tomorrow, so my advice is the same as for SQ; if you haven’t bought yet, wait until after the report. Short-term, there’s real potential for profit-taking here; the stock has gained 33% since the end of February and is up 50% year-to-date. Long term, however, the prospects for growth remain very bright, as Tesla continues to lead the automotive revolution. BUY.
Total (TOT), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities portfolio, has pulled back normally since gapping up after the French primary election. In Crista’s latest update, she wrote, “Total reported first-quarter results on April 27. Earnings per share were $1.01 (U.S. dollars, not euros), when analysts were expecting an average of $0.95 to $0.96 EPS. The quarter was characterized by good operational performance, higher commodity prices and lower production costs. Free cash flow of $1.7 billion rose to a six-year high, and fully covered the dividend, which the market was not expecting. Total’s long-term debt ratio decreased from 27.1% in the fourth quarter of 2016 to 22.7% in the first quarter of 2017, due to the $3.2 billion sale of Atotech. (I consider 23% to be a relatively low number.) TOT is a greatly undervalued, aggressive growth stock. I expect the stock to produce very attractive returns for investors going forward.” BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, hit new highs for six days in a row before pulling back today. Roy’s Maximum Buy Price is now 83.33, so if you’re not on board, it’s too late to buy. His Minimum Sell Price is 117. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, gapped up last week in response to an excellent earnings report and has traded tightly around 125 since, which is technically positive. In her latest update, Chloe wrote, “Wynn reported excellent first-quarter earnings after the close yesterday, and gapped up in response this morning. EPS beat the average analyst estimate by 25%, rising 16% year-over-year, to $1.24. Analysts were expecting a 9% decline, to $0.97 per share. Revenue of $1.48 billion beat estimates by $100 million, and was 48% higher than in first-quarter 2015. Wynn’s properties in Macau and Las Vegas are all thriving, and developments in Boston and Las Vegas are on schedule. Steve Wynn expects the rest of the year to bring even faster growth from the Palace (Wynn’s new Macau resort) as the monorail and MGM construction next door are completed. If you don’t own WYNN yet, try to buy on pullbacks.” BUY.
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All Cabot Stock of the Week buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s growth stock policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MAY 9, 2017
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