We remain in a confirmed bear market, so caution is still appropriate.
But there’s always something interesting to consider buying, and this week’s recommendation is a young stock with a good story, which involves helping the oil and gas industries use water more efficiently.

As for the current portfolio, which is 25% in cash, there’s one Sell.

Details in the issue.

Cabot Stock of the Week Issue: July 5, 2022

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We remain in a confirmed bear market, and thus I continue to recommend a cautious stance, which means favoring low-risk stocks and cash. But don’t become a perma-bear! It’s typically darkest just before the dawn, when the news is terrible, and the downtrend looks guaranteed to go lower. But the market will turn up again—it always has—and when it does, we’ll get back to more aggressive investing. Today’s recommendation is a small company with a good story and a young stock that deserves more attention. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities, and here are Tyler’s latest thoughts.

Aris Water Solutions (ARIS)
Investors looking for fresh ideas these days that have attractive charts are challenged, to say the least—especially when scanning new IPOs. That said, while the list of top-performing IPOs has dwindled to a handful, Aris Water Solutions is holding up relatively well. This interesting energy play is a Houston, Texas-based company that provides water infrastructure and recycling solutions to oil and gas operators in the Permian Basin.

Aris helps the industry slash use of fresh and non-potable water by blending technology, integrated infrastructure, and logistics. Aris also helps customers achieve ESG (Environmental, Social and Governance) compliance, something that is increasingly important to oil and gas producers, as well as investors.

The company’s growing footprint helps it aggregate large volumes of produced water from several operators and treat and redeliver recycled volumes back to its customers. Produced water that is not recycled is safely disposed of in saltwater disposal wells.

The firm’s biggest customers are ConocoPhillips (COP), Chevron (CVX), Exxon (XOM), Occidental Petroleum (OXY) and Marathon Oil (MRO), which collectively drive around 70% of revenue.

While this customer concentration does pose some risks, there is upside as well, especially since, despite what some reports say, these producers are moving toward production increases. In just the last few months Chevron increased Permian growth expectations and ConocoPhillips talked about an uptick in Permian activity.

In Q1 2022 (reported in early May) Aris modestly surpassed expectations with total water volumes handled or sold rising 45% to 1.17 mbwpd (million barrels water per day) and recycled water volumes up 290% to 273,000 bwpd.

Revenue per barrel water sold was $0.68, up $0.04 from the year ago quarter.

Rising volumes and stronger pricing drove Q1 revenue up 54% to $71 million. Adjusted EBITDA rose 54% to $35.9 million while adjusted EPS came in at $0.46.

Management also announced a long-term water management deal with Chevron that expands produced water handling and (especially) recycling across an additional 50,000 Northern Delaware acres. News of the agreement was littered with references to both Aris’ and Chevron’s commitment to sustainability.

For the full year 2022, analysts now see total revenue growing around 40% to $320 million. Management has guided for adjusted EBITDA of $165 - $175 million, which implies adjusted EPS should come in around $1.01.

Looking out into 2023 analysts see Aris growing revenue by 28% to $410 million and delivering EPS of $1.98, up 96%.

The company will need to invest to support the Chevron agreement (and others) but with $268 million in liquidity ($68 million cash, $200 million revolving credit line) the $0.09 quarterly dividend (2.16% yield) appears very solid.

Given that this is a relatively new IPO and will tend to trade in sympathy with crude oil prices (which we’ve seen fall from recent highs above 120 to just under 105 today) it may make sense for new investors to start with a half position.

Investors should also be on the lookout for Q2 earnings (date not yet announced) as well as the naming of a new CFO to replace outgoing CFO Brenda Schroer, who will depart Aris on December 30.

ARIS came public in October 2021 at 13 and rose 10% the first day. Over the next four months the stock traded mostly in the 10 - 15 range, then broke above 15 following the Q4 2021 earnings report on February 28.

Shares briefly traded above 19 in March and April then fell back to 15 in the weeks after lockup expiration (April 20). ARIS turned north again after the Q1 2022 earnings report on May 9 and walked up to an all-time high of 22 by May 31. Over the last six weeks shares of ARIS have pulled back (along with crude oil prices) and the stock is currently trading just above the April support level of 15.

Current Recommendations

Changes Since Last Week’s Update

Nio, Inc. (NIO) to Hold
ON Semiconductor (ON) to Sell

The addition of ARIS to the portfolio brings it up to 16 stocks (with a maximum of 20), while the sale of ON Semiconductor (ON) (see below) takes it back to 15, and I’m comfortable with that in this market, particularly because so many of these stocks are lower risk and/or have great upside potential. Details below.

Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, makes footwear from sustainable natural materials and is growing at a good pace. But as with any low-priced stock, its percentage moves can be big, in either direction. Since bottoming at 3.71 in early May, the stock has climbed up to 6.06, and then drifted back down below its 25- and 50-day moving averages. It’s not strong, but it looks ready to rise when the market does—and as I write, it’s the rare stock in the portfolio that’s up in this morning of heavy selling. HOLD

Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here two weeks ago, is a midcap ($3.7 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. In his update last week, Bruce wrote, “Many investors view this company as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. However, Allison produces no car and light truck transmissions, instead it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Allison shares have 23% upside to our 48 price target. The stock pays an attractive and sustainable 2.2% dividend yield to help compensate for the wait.” Additionally, late last week the company announced that Emergency One, the U.K.’s largest manufacturer of fire and rescue vehicles, has integrated the Allison eGen Power 100D electric axle into its new E1 EV0 platform of fully electric fire and rescue vehicles. As the world’s first all-electric pumping vehicle that is fully certified to the BS EN1846 standard, EV0 exceeds standard requirements for electric driving range and pumping performance at zero emissions. It was designed to deliver optimum efficiency, fast acceleration, high speed and increased maneuverability, which are all critical for fire and rescue vocations. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a lower-risk technology stock that has become a good value. In his latest update, Tom wrote, “Technology has not been a good place to be this year and AVGO has been hammered. But there is a strong chance that the selling in the technology sector ends sooner than in most other sectors. Many stocks have been oversold and technology is still where the strong growth is.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has bounced modestly over the past two weeks, but remains deeply oversold. In his update last week, Tom wrote, “After outperforming the market all year, BIP has been worse over the past month. But earnings are very defensive and dependable, and the dividend is safe. It also has built-in inflation protections in its contracts. Just hold on and collect the dividend. It should serve you well over time. (This security generates a K-1 form at tax time)” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is one of the portfolio’s biggest losers, and thus a candidate for sale. But I’m holding because Bruce’s methodology is sound, and thus the stock will almost certainly come back, though it will take longer than anticipated. In his update last week, Bruce wrote, “The shares will likely come back to life as earnings reports show favorable growth and profit trends, so investors will need some patience. If we have a recession in global tech spending, Cisco would likely feel the downturn but not as severely as other technology companies due to the mission-critical nature of its products and services. Cisco won a reversal of a $2.75 billion payment for damages to Centripetal Networks. In the case, a judge was seen as biased due to his wife’s ownership of 100 shares of Cisco. Separately, the company announced its withdrawal from Russia in response to that country’s invasion of Ukraine. Cisco also said it will exit Belarus. The valuation is attractive at 8.8x EV/EBITDA and 13x earnings, the shares pay a sustainable 3.5% dividend yield, the balance sheet is very strong, and Cisco holds a key role in the basic plumbing of technology systems even if its growth rate is only modest. CSCO shares have 51% upside to our 66 price target.” HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, remains above its low of three weeks ago but below its 200-day moving average. In his update last week, Carl wrote, “This is a good value stock for this sort of market because its first-quarter revenue was up more than 11% year over year and CVS Health’s earnings per share has grown 26% each year, compounded, over the past three years. CVS stock is still a buy representing value since it is trading at just under 11 times forward earnings.” BUY

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, is the world’s leading provider of micro inverters, which are needed to transform DC current from solar cells to AC current that can power a house, commercial building or feed into the power grid. Since 2020, the firm has been in the battery business as well, enabling residential customers to store their solar power. And now Enphase is getting into the EV charger market, with a new product likely in early 2023. In Cabot Growth Investor last week, where Mike doesn’t own the stock (because he’s heavily in cash) but is keeping an eye on it, he wrote, “ENPH has been rejected from resistance in the 210 to 220 area again, which is a hallmark of a tough environment. Still, bigger picture, the stock is holding in its range and acting resiliently, and demand for its solar microinverters and storage systems should remain in fifth gear for a long time to come.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and serve as the “brains” of industrial robots. But the young stock is not heavily supported by institutions yet, so trading is loose. In his update last week, Carl wrote, “Fanuc’s stock offers us a high-quality stock that should be firm with its strong balance sheet with $7 billion in cash. Fanuc is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25.” BUY

Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, is one of the top five Chinese EV makers, and the stock is off to a great start for us, as it’s been trending up since early May. In his update last week, Carl wrote, “Shares ended the week largely unchanged but at one point pulled back sharply amidst a claim that the company overstated its sales and profits – a charge the company aggressively denied. Last week we were up 22% but I recommend that given this accusation you put in place a 20% stop-loss and I’m moving this to a hold until this situation clears up. Nio is launching the ES7, a five-seater electric SUV, and expects to start deliveries in late August. Nio’s ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S. In addition, Nio offers consumers its unique battery-as-a-subscription service whereby owners can swap batteries rather than wait for recharging.” We were already at hold so will stay there. HOLD

ON Semiconductor (ON), originally recommended by Mike Cintolo in Cabot Growth Investor, is a Phoenix-based manufacturer of semiconductors, focusing on intelligent power modules, power management chips and sensing semiconductors, which are perfectly suited for high-growth markets like electric and hybrid vehicles. Growth trends are good, but the stock has basically been in a trading range since November, vacillating between 50 and 70. Last week I wrote, “As long as that support level at 50 holds, I can be patient.” Well, Friday the stock plunged through that level and today it is lower still, making ON the portfolio’s biggest loser—so out it goes! SELL

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, is on its 200-day moving average today but above its lows of June, so the chart pattern looks good. In his update last week, Bruce wrote, “Organon was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings. OGN shares have about 31% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.2% dividend yield.” BUY

Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of Covid-related products and transformative M&A. The stock is now at its 200-day moving average, which remains in an uptrend. Plus it yields 3.0%! BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, lost half its value as it fell from last November’s high to its May low, but since then it’s held up well, even while the market has fallen apart, so odds are very good the bottom has passed. In fact, even the “bad” news delivered last week, which revealed that Tesla’s vehicle deliveries were down in the second quarter, due to supply disruptions and the temporary Covid-related shutdown of its Shanghai factory, failed to change the pattern. (Behind the headline was the fact that the last month of the quarter, June, saw record production numbers.) And the big story remains intact, as Tesla is expanding production capabilities in its factories and looks set to remain the global EV industry leader for the foreseeable future. The company will post its financial results for the second quarter after the market close on Wednesday, July 20. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped up on big volume six weeks ago after reporting a great first quarter (unlike so many retail stocks) but the market has pulled it back down below its 200-day moving average. Still, trading volume is light so I’m sticking with it. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been building a base at 190 for nearly six months now, but it hasn’t been able to develop an uptrend yet. In his update last week, Tom wrote, “V got knocked back down to the under-200 per share range amidst all this recession talk and the downgrading of global growth projections. But every time the selling pressure abates, V moves higher again. Visa continues to get a huge benefit from the removal of Covid restrictions globally despite slowing global growth. Earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock should be one of the first to reverse course and move higher when the market recovers.” HOLD

The next Cabot Stock of the Week issue will be published on July 11, 2022.

Analyst Bio

Timothy Lutts

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.

Timothy is also the chief analyst for Cabot Stock of the Week and chief analyst of Cabot Marijuana Investor.

Under his leadership, Cabot advisories have been honored numerous times by Hulbert Financial Digest, Dow Jones MarketWatch and Timer Digest as the top investment newsletters in the industry.

After working in this business for more than 33 years, Timothy says, “There are 8 things I know.

1. The business of investing can provide great rewards to those who work at it and are willing to learn. Those who refuse to learn will lose money.
2. To succeed as an investor in growth stocks, it’s best to buy when upside potential dwarfs downside potential, to cut losses short, and to let winners run.
3. To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
4. Your greatest enemies are your own emotions and the daily news (generally bad) which distracts you from a long-term focus. Try to ignore them both.
5. On the other hand, use your imagination to consider how great companies might evolve, remembering the power of the unforeseeable and the incalculable. When it began renting DVDs by mail, did anyone imagine Netflix could become a leading producer of content? When it began selling books, did anyone imagine Amazon would eventually sell almost everything?
6. For over two centuries, the long trend of the markets has been up, reflecting the growth of asset values, and I recommend that you invest in synch with that trend. Your greatest ally is time.
7. However, there will always be bull markets and bear markets, and you can use these to your advantage, particularly if you pay close attention to both chart patterns and investor sentiment.
8. Lastly, have faith in the ability of intelligent, innovative men and women to adapt, as they always have, and to solve the problems of the future in ways that are unimaginable to people of today. Invest in these people when you can.

Timothy has appeared on numerous podiums as an investing expert, including Bloomberg TV and the World Money Show, led Investor’s Business Daily discussion groups and been interviewed by Dow Jones MarketWatch,TopStockAnalysts.com, VoiceAmerica.com, AOL Finance and numerous other business news organizations.