Note: Due to the celebration of Independence Day next week, the next issue will be delivered Tuesday, July 5.
The market rallied strongly last week, erasing some of the carnage of the previous two weeks, but the main trend is still down and thus caution is still advised.
This week’s stock is a growth company that serves the solar power industry, and the stock looks attractive now because it’s basically been treading water for 17 months.
As for the current portfolio, which is 25% in cash, there’s one Sell.
Details in the issue
Cabot Stock of the Week Issue: June 27, 2022
Last week saw the buyers take control of the market, recovering some of the losses from the previous two horrendous weeks. But the main trend is still down, and thus I continue to recommend a cautious stance, which means favoring low-risk stocks and cash. Today’s recommendation is an energy stock, chosen mainly because we lost three energy stocks in the previous shakeout, and I still believe that energy stocks, after many years out of the limelight, are likely to continue higher, in part because of the changes disrupting global energy markets. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader, and here are Mike’s latest thoughts.
Enphase Energy (ENPH)
“When it comes to alternative energy, the past couple of years have seen investors focus mostly on electric vehicles and everything that plays into it, but for the next bull run, we’re thinking solar stocks have a chance to reassert their leadership position. Shown here is the Invesco Solar Fund (TAN), which effectively bottomed back in February and is again threatening to move above its 40-week line, well ahead of the overall market.
In the sector, Enphase Energy is our top choice, as it’s positioned for years of strong growth from here and the stock is holding up well despite the market’s bear phase. The company’s story is all about inverters, which are needed to get power from solar arrays; solar panels produce DC current from sunlight, and the inverter then converts the DC current to AC which can power a house, commercial building or feed into the power grid.
The trick is that there are a couple types of inverters. One is known as a string inverter, which connects a bunch of panels together to one inverter; it’s cheaper, but there are drawbacks, with the string inverter only performing as well as the lowest-performing panel it’s connected to (and if one goes out, the ‘string’ goes out, sort of like an old string of Christmas lights).
And that’s one reason demand for so-called micro inverters is growing. In this case, each panel is connected to its own inverter, boosting efficiency both by avoiding the low-performing-panel problem just mentioned, as well as better adjusting each panel’s voltage and lasting longer, too.
Enphase Energy is the leader in micro inverters, having shipped more than 45 million of them (approximately 14 GW worth) in its lifetime, partially thanks to a huge 1,200 installers in its network (up from 900 less than a year ago), but also due to the success of the products. While the details are a bit of an ice cream headache, the firm’s super-fast chips and decision-making software lead to better performance and lower failure rates (0.05% by one estimate). Its next-generation inverter (iQ8) is even better, allowing the solar array to act as a microgrid even when the overall power grid fails, providing electricity to the household. All in all, Enphase sees an $8 billion-plus opportunity by 2025 here (three-quarters of which is residential).
But Enphase isn’t resting on its laurels. The firm moved into the battery business in the second half of 2020, enabling residential customers to store their solar power, with new products rolling out and in big demand; a 2023 release should see a huge step down in cost even as storage capabilities rise. The opportunity from storage alone should be north of $4 billion in 2025. Enphase is also getting into the EV charger market, with a new product likely in early 2023, and has other ancillary opportunities like load controllers and even fuel cells.
All told, the market for the firm’s products should easily grow 20% or more annually for many years to come, and there’s no reason Enphase can’t expand faster than that. Indeed, management sees Europe likely to be a huge demand source given its desire to wean off Russian supplies, though growth is already in high gear; in Q1, revenues grew 46% from a year ago while earnings were up 41%, with analysts seeing similar growth for the rest of this year and 25% to 35% growth in 2023 (which we think will prove conservative, especially as supply chain issues dissipate).
As for the stock, ENPH had a monstrous post-crash run into February 2021, with the stock topping at 229. Since then the stock has ridden the roller coaster up and down numerous times, with the stock closing near 200 to close last week … 17 months of no progress to wear out the weak hands. And there are near-term chart positives, too, with ENPH etching higher lows since January and, today, sitting not that far below multi-month highs, even as the market has only just gotten off its knees.”
|ENPH||Revenue and Earnings|
|Forward P/E: 55.6||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Current P/E: 165.2||(mil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) 10.9%||Latest quarter||441||46%||0.79||4100%|
|Debt Ratio: 221%||One quarter ago||413||56%||0.73||43%|
|Dividend: NA||Two quarters ago||352||97%||0.60||100%|
|Dividend Yield: NA||Three quarters ago||316||152%||0.53||212%|
|Stock||Date Bought||Price Bought||Yield||Price on 6/27/22||Profit||Rating|
|Allison Transmission (ALSN)||6/22/22||38||2.1%||39||Buy|
|Bristol Myers Squibb (BMY)||11/2/21||--||--||--||--||Sold|
|Brookfield Infrastructure Partners (BIP)||1/12/21||34||5.8%||37||Hold|
|Cisco Systems (CSCO)||7/27/21||55||3.4%||44||Hold|
|CVS Health Corporation (CVS)||4/19/21||104||2.3%||95||Buy|
|Enphase Energy (ENPH)||NEW||--||0.0%||208||--||Buy|
|Fanuc Corp. (FANUY)||5/17/22||16||2.4%||16||Buy|
|Nio Inc. (NIO)||6/14/22||18||0.0%||23||Buy|
|ON Semiconductor (ON)||6/7/22||65||0.0%||54||Hold|
|Organon & Co. (OGN)||2/1/22||33||3.1%||36||Buy|
|Ulta Beauty (ULTA)||5/10/22||382||0.0%||406||Hold|
The addition of ENPH to the portfolio brings it up to 16 stocks (from a maximum of 20), while the sale of Chevron (CVX) (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.
Changes Since Last Week’s Update
Chevron (CVX) to Sell
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. HOLD
Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here last week, 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. Its 35% EBITDA margin is sharply higher than its competitors and on par with many specialty manufacturers. And, it is a leading producer and innovator in electric axles which all electric trucks will require. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle. The company generates considerable free cash flow and has a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years. Allison shares have 26% upside to our 48 price target. The stock pays an attractive and sustainable 2.2% dividend yield to help compensate for the wait.” 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 most other sectors. Many stocks have been oversold and technology is still where the strong growth is. It’s worth noting that in the recent panic selling, technology fared better than the overall market after leading it lower for most of this year. Things may get worse in the near term, but AVGO should be a lot higher six months to a year from now.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, bounced weakly last week, 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. It’s likely that the indiscriminate selling took everything down. 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 K1 form at tax time).” HOLD
Chevron (CVX) originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new high three weeks ago, but has been pulled down by the market since as recession concerns grow, and Tom is now selling based on that likely future. In his update last week, he wrote, “This energy giant has had a great run. But the events of the past week have changed the math. The continuing high inflation and the more aggressive than previously expected Fed have prompted recession expectations over the next year. Energy stocks thrive in inflation but falter in recession as demand plummets. There are still forces that can drive energy prices higher in the near term, but markets tend to look past that. Even if a recession doesn’t occur, the expectation of it can drive the stock a lot lower. The portfolio already took a profit on half of the position at a higher price. It’s a good time to secure the profit and raise cash for a market rebound down the road.”
Personally, I think the stock has a chance to rally here, given that it’s fallen to nearly its 200-day moving average. And as I wrote in my intro to the Enphase recommendation, I think energy stocks have the potential for a prolonged run. However, we do have a significant loss in this stock, and oil doesn’t have the growth prospects of solar. Thus, the verdict is sell. SELL
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, remains above its mid-May low, ready to climb back up. 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 will likely feel the downturn but not as severely as other technology companies due to the mission-critical nature of its products and services. 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, rallied nicely last week but remains below its 200-day moving average. In his update last week, Carl wrote, “This is an attractive 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 Health is one of the nation’s leading healthcare companies with 300,000 employees including more than 40,000 physicians, pharmacists, nurses, and nurse practitioners. It has almost 10,000 stores and its core markets grow each year even in a weak economy. CVS stock is still a buy representing value since it is trading at just under 11 times forward earnings.” 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, “Sales and earnings growth should have decent upside as a record weak yen drives exports that represent about 90% of sales. Fanuc’s stock offers us a great balance sheet with no debt and $7 billion in cash. Fanuc is a high-quality, high-margin 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, and featured here two weeks ago, is one of the top five Chinese EV makers, and the stock is off to a great start for us. In his update last week, Carl wrote, “Shares were up 22% this past week as investors seem to be focusing on Chinese electric vehicle stocks as growth ramps up and the Covid slowdown recedes. Nio recently announced an upgrade to existing models with an advanced in-vehicle intelligence digital system with a digital cockpit controller and better sensing capabilities and hardware. Nio is also launching the ES7, a five-seater electric SUV based on an updated, highly autonomous driving platform. Nio 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. Nio is one of the top premium EV makers with significant growth potential and my target is for this stock to go from 22 to 40 over the next year.” BUY
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, and the stock has basically been in a trading range since November, vacillating between 50 and 70. As long as that support level at 50 holds, I can be patient. HOLD
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, rebounded strongly with the market last week, 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 39% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.4% 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 has now climbed back above its 200-day moving average, and thus 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, and since then it’s held up well, even while the market fell apart, so odds are very good the bottom has passed. TSLA is a very visible stock, and a big company, too; first-quarter revenues were $18.8 billion, while at little Nio, they were just $1.6 billion, so I don’t think the stock deserves a buy here. But I do think it’s worthy of a strong hold, given the great growth possibilities for the company in the energy sector, where demand is growing for relief from high oil prices. HOLD
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped up on big volume five weeks ago after reporting a great first quarter (unlike so many retail stocks), and as I write it’s trading above all its moving averages, which is very impressive. 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, “Remember, Visa is not a credit card company. It’s a payment processing company. Of course, a recession is bad for transaction volumes as consumers tighten their wallets. But as bad as a recession is, Covid was probably worse. Visa continues to get a huge benefit from the removal of Covid restrictions globally. Visa’s 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 5, 2022.
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.
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.
- 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.
- 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.
- To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
- 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.
- 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?
- 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.
- 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.
- 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.