November 3, 2021

Greentech is looking more bullish than it has in six months as enthusiasm gathers around EVs, solar and governments’ suggestions at the current United Nations Climate Conference to combat global warming.

This issue we look at an American company that has repositioned itself to be one of the primary providers of the next generation of semiconductors. EV makers, renewable energy providers and the aerospace industry in particular are eager to get their hands on this company’s chips and related products. It’s a growth story around electrification and decarbonization.

Given the bullish state of the sector, we also start building our Watch List once more, with three suggestions of securities some of us are already familiar with.

Wolfspeed (WOLF)

Overview
Silicon-based semiconductors are felt to be maxed out when it comes to the computing needs of emerging technologies. Specifically, the durability, heat tolerance and conductivity of silicon chips are deemed inadequate for the demands of renewable energy and EVs, among other applications. There are two likely replacements: silicon carbide and gallium nitride. Silicon carbide (SiC) is the combination of silicon and the carbon atom. It can occur naturally but is primarily manufactured in high-temperature ovens. The combination gives the chip high thermal tolerance and physical strength – it withstands shocks well – with its main advantages being superior electrical transference and the ability to operate at higher frequencies and voltages than silicon. SiC theoretically can offer electrical resistance 1/300^th of silicon. Gallium nitride (GaN) has similar properties, but is believed superior at even higher temperatures and frequencies than SiC. Demand for EV components, as well as smaller and more powerful devices are driving demand for SiC and GaN now. Estimates vary, but demand is deemed to be growing double digits annually.

Business Model
Wolfspeed (WOLF) is a manufacturer of both raw silicon carbide as well as semiconductor chips. It’s the company long-known as Cree. Cree has primarily been a U.S.-based maker of LED lights (with extensive Asia subcontractors supplementing its American factories). Five years ago, Cree management wanted to sell what was its Wolfspeed division of power applications to Infineon, a deal that was spiked by regulators. Two years later, Cree bought some of Infineon’s businesses instead, weaving them into the Wolfspeed division. Fast forward a few more years and the decision was made instead to sell the lighting business altogether and focus on the higher-margin chips. The intent to sell lighting was made in 2019 and part of the business was sold to Ideal Industries (now its Cree lighting division). The rest of the lighting operations were sold in March to SMART Global for $300 million: $50 million cash up front, a $125 million seller note to Wolfspeed due August 2023, and up to $125 million earn-outs from the first four quarters after the sale, also payable in a note. Last month, Cree changed its name to Wolfspeed and shifted its stock listing from the Nasdaq to the New York Stock Exchange.

So, what’s the business now? Wolfspeed has three lines:

• It makes and sells silicon carbide bare wafer, epitaxial wafers (grown and formed in a painstakingly uniform manner) and gallium nitride layers on SiC wafers. These are all sold to other businesses which build products on top of them, mainly RF (radio frequency emitting electronics, like Bluetooth), power and other applications.
• Produces power devices, like Schottky diodes used in electronics for low turn-on voltage and other purposes, MOSFETs, power modules and gate driver boards. These get used in EVs, solar inverters, industrial power supplies, uninterruptable power supplies, among other uses.
• Manufactures RF devices, mainly GaN-based MOSFETs, HEMTs and MMICs which are optimized for cutting-edge telecommunications and infrastructure purposes, as well as military applications.

Stripping out the discarded businesses, Wolfspeed generated $526 million in sales in fiscal 2021, ended June, and a loss of $3.04 a share, much of which is from large capital expenditures.

Business Outlook
As a now pure-play semiconductor maker, Wolfspeed is directly exposed to the growth in EVs and renewables. Much of the focus is on emerging opportunities which will scale up for the next couple of years, as EVs and other renewables become a greater part of the market. The company says it is investing heavily to meet a target of tripling sales to $1.5 billion for fiscal 2024. The exact mix of business anticipated in that year isn’t broken out, but the automotive side – however much that is – should be on target, given the lead times for manufacturers. Interestingly, China will be only about 10% of business in 2024, according to the company, a mix we feel will insulate the company from volatility Chinese customers often introduce. Overall, the company won $2.9 billion in deals in fiscal 2021. That doesn’t mean that will all convert into sales: deals aren’t guaranteed. Another $560 million of deals were won in the first quarter of 2022, of which half are for EVs.

Closer in, with EVs, management expects to sell content of $250 to $300 per vehicle through 2024, with average sales prices starting to decline then as EV business scales up. Wolfspeed has high hopes for being integral to demand from domestic manufacturers. In particular, the company has a deal with General Motors (GM) to provide power device “solutions” for the future line of EVs. There is no formal agreement with Ford (F), but that company’s plans to push into EVs should generate additional demand either for Wolfspeed’s power devices or its base wafers used by other manufacturers. European automakers, including Volkswagen, are said to have a high level of interest in SiC and have toured Wolfspeed facilities. Outside of autos, the RF business for telecom, aerospace and defense are seen strong, as are industrial power and energy.

In its latest quarter, fiscal Q1 ending September, the company reported stronger-than-expected demand for silicon carbide from its customers to the extent it’s been unable to fulfill all the orders received. Earlier in the summer, management said around $100 million of demand could not be met due to capacity constraints. Wolfspeed is working to get a recently constructed factory in New York up to full operations – when it’s done, perhaps in calendar 2022, it will have the world’s largest SiC manufacturing plant. New York will make wafers up to 200 millimeters, which allows Wolfspeed to sell them for lower cost (by area), because they have up to 70% more surface area than more-available, smaller wafers. The company is also spending to optimize an older North Carolina plant to make SiC, although that plant will remain higher-cost and slower than New York regardless.

Issues to Consider:

• Wolfspeed is a supplier of silicon carbide to another portfolio holding, Onsemi (ON). It also is a competitor, selling chips to automakers. Onsemi is lessening its dependence on Wolfspeed by purchasing GT Semiconductor.
• Our Excelsior portfolio also owns a competitor in Navitas Semiconductor (NVTS), which focuses on gallium nitride-based semiconductors for automobiles and small electronics.
• The New York (Mohawk Valley) plant may not be contributing fully to top-line sales until 2024, based on possible construction delays and the current timeline. That could make hitting the $1.5 billion 2024 sales target harder.
• Semiconductors are a competitive market. Plus, there are real risks to EV demand not reaching projected levels in coming years.
• Guidance from management is for $165 million to $175 million revenue in the current quarter (Q2 2022), with a loss per share of 59 to 63 cents.

Technical Analysis
WOLF peaked with Greentech in early February this year, and declined with the whole sector into May. It diverged a bit from Greentech then, breaking down to fresh 2021 lows in August while the sector was range-bound. Shares rebounded a bit and then gapped well higher on the Q1 earnings results and better guidance. The follow-through broke shares to new highs in the 130s this week. Ideally, we’ll see shares ease a bit to provide a better entry. Charting suggests an 80 point upside from the breakout. The large chart gap between 105 down to 96 is support, with the 200-day in the 98 area adding additional support. Technically, shares could slip to the 118 area and not have any effect on the long-term setup.

What to Do Now
We’re going to recommend buying WOLF on some weakness here to get a better entry. BUY under 130

Wolfspeed, Inc. (WOLF)
Revenue (trailing twelve months): $566.7 million
Earnings per share (TTM): negative $3.60
All-time high (intraday): 135.25
Market cap: $15.29 billion
Recommendation: Buy under 130

Watch List

With our Greentech Timer telling us to be bullish, we want to quickly build back a Watch List for potential additions to the Real Money Portfolio. Here are three we like.

Security
Enphase Energy (ENPH)
The maker of microinverters – devices which convert raw DC power from solar panels to AC current for home and business use – reported last week, beating consensus estimates for Q3, and shares gapped higher and closed up 25% on the results. Microinverters cost more than simple inverters – in which one converts a whole photovoltaic system – but are preferred for solar installations because they prevent failure of the whole system or power reductions because of one less-than-optimal panel in the array. In addition to the fast-growing solar market – the second-fastest growing addition to the grid after wind – Enphase feels it can capitalize on selling existing customers battery storage and home energy management software – potentially another $6,000 in sales to customers who on average spent $2,000 on microinverters. Enphase has better margins and superior return on assets than SolarEdge (SEDG), its chief competitor and the market leader in microinverters globally.
For more, please see our original discussion in the September 1, 2021 issue.

Technical analysis
We got stopped out of ENPH in mid-September after owning shares for only two weeks. Such stops are frustrating but inevitable – whatever line one draws as a sell-stop, there will always be an example of a stock that immediately rebounds. ENPH isn’t quite that – it fell 10 more points after we sold – nevertheless, having sold isn’t a reason to not buy again, especially after the 30-day window has passed to allow for the tax write-off of the loss. Shares have regained the bullish side of the moving averages and have blown out to all-time highs on earnings. They really look due to ease back to let off steam of an oversold condition. BUY between 215 and 229

Security
KraneShares MSCI China Clean Technology (KGRN) ETF
Chinese Greentech stocks are very volatile from a combination of a lack of transparency, the commodity-like nature of products positioned as the low-priced options and the whipsaw nature of the autocratic government’s policy pronouncements. China may never become the world’s largest economy, as was long predicted, due to demographic issues, but it remains one of the world’s most important. It’s certainly the fastest-growing large economy. The country is the largest market for renewable energy, accounting for about half of all installations in 2020, adding 117 gigawatts (GW). In the past decade, China’s power consumption has risen about 80% and car ownership has more than doubled. Given the volatility in Chinese stocks – and a wariness from past history of deceitful behavior by some players – the ETF is a good way to get exposure to China while we wait for specific opportunities. In particular, the KraneShares fund is primarily in mainland China listed stocks – with just six of its 42 holdings U.S. listed. WATCH
For more, please see our original discussion in the August 18, 2021 issue.

Technical analysis
We got stopped out of KGRN at essentially a wash on a bearish September 16 that knocked us out of a few Real Money Portfolio holdings. Shares look to be on the verge of breaking out of the trading range stretching back to June between 42 and 50. Volume isn’t quite confirming the move, however, with a high-volume doji formed on the weekly charts last week. A doji is a candlestick formation that signals indecision between the bulls and bears. It’s not predictive – things can go either way – it’s a warning. For that reason, we’re watching for a confirming move higher out of the range. A move lower in the range to 45 wouldn’t do any technical damage. A break below there would be a reason to drop. WATCH

Security
Aptiv, plc (APTV)
Aptiv is an auto parts supplier that makes about $500 per vehicle supplying electrical parts for internal combustion engine (ICE) cars, selling into one in 3.5 conventional autos globally. EVs require a great deal more wiring than their ICE counterparts and need a lot more high-voltage electronics. The company sees itself selling $1,200 worth of components for EVs and is in one of every two EVs hitting the market from 2020 through 2022. Aptiv is already heavily in Tesla EVs, as well as Volkswagen’s new ID EV line, as well as EVs from Ford, Volvo and GM. By 2023, Aptiv will be in 23 EV carmakers overall. Management has pivoted swiftly to EVs. High-voltage components were $250 million in 2019. They’ll be about $1 billion this year and should be $2.5 billion come 2025. The company says its overall EV architecture can save weight and commodity costs, since many EVs use too much wiring and components through quick, sub-optimal design conversion from ICE models.
For more, please see our original discussion in the July 7, 2021 issue.

Technical analysis
Aptiv shares muddled through the summer, dragged around a trading range by general weakness in Greentech, and EVs in particular. Mid-September bearishness broke crucial support in the 140s, but only briefly. APTV recovered by early October and closed at an all-time high of 175.73 Monday. It’s showing improving relative strength and momentum. The company reports quarterly earnings next Thursday, November 11, before the market opens. Consensus is for earnings of 37 cents a share, but the estimates vary widely, from 17 cents to 86 cents. We’re inclined to wait for earnings and see investor reaction to the results and the outlook, given concerns over supply chain issues. WATCH

The ESG Three

The ESG Three are three technically strong stocks selected from the 200 most-held stocks in environmental, social and governance focused mutual funds and ETFs. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. We screen top performers further to eliminate widely held companies we believe have clear environmental, social and/or governance problems. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

Advanced Micro Devices (AMD)
What is it?
A manufacturer of semiconductors.

Why is it ESG?
Low worker attrition (8% in 2017-2019) and good efforts to encourage diversity. Exposure to Greentech opportunities in its semiconductor business. ESG funds owns $170 million of shares.

Why now?
The company beat estimates in its Q3 earnings reported last week and guided higher for the fiscal year.

PNC Financial Services Group (PNC)
What is it?
A consumer bank, brokerage and asset management conglomerate operating primarily in the eastern U.S.

Why is it ESG?
It’s scored as a leader among peers in environmental ratings and has strong employment management policies. ESG funds own $306 million shares.

Why now?
The bank has largely integrated the June acquisition of a large bank, BBVA, into its operations. Costs savings of up to $900 million should buoy the company’s financial metrics.

Anthem (ANTM)
What is it?
A large health insurer in the U.S.

Why is it ESG?
Compared to peers, it has very strong anti-corruption and whistleblower protocols, and its majority independent board is considered a positive for shareholders. ESG funds own $141 million shares.

Why now?
The company beat Q3 expectations in the quarter announced two weeks ago and sees the easing of COVID-19 helping results next year, compared to 2021.

Greentech Timer & Current Portfolio

Greentech Timer
Our Greentech Timer is bullish, with our benchmark index well over the 20- and 40-day moving averages, which are trending higher. That’s our base definition for gauging bullish sentiment. The sector also made its first appearance over its 200-day moving average since June. June’s appearance was brief and this one could be, too, of course, especially given uncertainty over federal incentives. Another 5% rise higher would break what is probably mild resistance based on buying volumes of the past year. Every sector of Greentech looks positive right now, with solar and EVs looking very strong, fuel cells and nuclear are quite positive while water has recovered enough from its recent slump to be more bullish than bearish.

Our Greentech Timer is bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential).

Right now, the Timer suggests it’s a good time to build positions.

Current Portfolio

Real Money Portfolio

Excelsior Portfolio

Real Money Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. Sell-stops allow us to absorb small losses, preserving capital for big winners we let run. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows.

Aemetis (AMTX)
The California ethanol, renewable natural gas and renewable jet fuel producer inked a deal to provide its expertise in permitting and engineering to CTCI America, a multinational firm building its own renewable diesel plant in California. Terms of the deal weren’t disclosed. AMTX is consolidating between 18 and 20 right now. We’re raising our stop-loss to “around 15.76,” which should lock in a profit for us while keeping us from getting stopped out too easily. Our prior stop was “below 15.” AMTX continues to look technically quite strong, though 20 has become an obvious level of resistance. BUY

Aspen Aerogels (ASPN)
Aspen Aerogels had a very encouraging Q3 earnings report last week, beating expectations for sales and net loss and raising revenue guidance for the year. In particular, management indicated demand for its aerogel for EV batteries looks to be perhaps triple what they had anticipated last quarter. Shares spiked to an all-time high of 54.46 Monday. We’re raising our sell-stop from “below 39.75.” to “around 45.” BUY

Centrus Energy (LEU)
The uranium refiner is at all-time trading highs this week, well over 60 (that is, shares have never traded at these prices, despite reverse splits showing much higher historical prices). Shares appear a tad overbought here, which suggests, but doesn’t guarantee, we may take a step back from here to blow off steam. We’re raising our sell-stop from “around 38.50” to “near 42,” given the 40-day moving average is now around 40.50. That should lock is a profit of more than 25% for us, although shares look well positioned to continue to move higher from here. BUY

Chipotle Mexican Grill (CMG)
We sold Chipotle last week after its very good third quarter didn’t match Wall Street expectations. We recommended selling with last Wednesday’s update. The portfolio exited at 1,774.68, the mid-point of the high and low of Thursday, essentially a wash to our buy price. Shares are modestly higher but do appear caught in a near-term downtrend. SOLD

Onsemi (ON)
The semiconductor maker blew past expectations in its Q3 earnings reports issued Monday morning, reporting 87 cents per share earnings and $1.74 billion sales, compared to consensus for earnings per share of 74 cents on sales of $1.7 billion. Shares gapped higher 14% Monday to 55 on huge volume, the best in a year, followed by another high volume Tuesday advance. The bottom end of the gap, 48, would be a level where support has been eaten away. We’re going to move our sell-stop to there (“around 48”), from “below 39,” to lock in a modest profit if things unexpectedly go pear-shaped for us. However, the outlook for strong automotive/EV demand, among other tailwinds for Onsemi, lays the groundwork for shares to move still higher after a likely period of some consolidation here. We’re also shifting our recommendation from Hold back to Buy, though it’s likely better to wait for a step back here as share blow off steam. BUY

Excelsior Portfolio
Our special opportunities portfolio is named Excelsior, which is managed without consideration to the Real Money Portfolio. Not every position will have a sell-stop. Currently, all holdings are warrants from original SPAC entities.

European Sustainable Growth SPAC / ADS-Tec Energy (EUSGW)
No news this week from the ultrafast charger entity from Germany. Europe is obviously a prime market for ADST and the company has been taking strides to expand its focus on the U.S. Two weeks ago, it issued a release that it is partnering with Smart Cities Capital, a Florida consulting firm that works with municipalities on infrastructure for sustainable growth. The deal puts ADST in the mix for future EV charging implementations. BUY

Li-Cycle (LICY.WS)
The lithium recycler’s warrants have been very strong, up 17% the past week (shares are up about 5%). That puts us up more than 50% on the position and we remain bullish. There’s been no news the past week, other than positive sentiment around the market. However, as noted previously, the warrants became exercisable on October 23 – one year from the SPAC IPO. Given the company has the option to initiate a cashless redemption if shares trade at 10 or greater for 20 of 30 days (LICY shares have been over that mark since September 22), a notice may be coming soon. For that reason, we don’t recommend buying the warrants any longer. HOLD

Navitas Semiconductor (NVTSW)
The gallium nitride semiconductor maker warrants are up 50% the past week and its shares are also up strongly on a press release citing the “perfect” alignment between the Ireland-domiciled Navitas and China’s Xiaomi, which makes mobile phones, appliances and, recently announced, EVs. The release came during Xiaomi’s portfolio day in China. That obviously gets up hopes for future business, given Xiaomi’s president was quoted by name. There is an early redemption clause for warrants when shares are trading over the price of 10 for 20 of 30 days, which makes the company eligible to issue a redemption notice. For that reason, we don’t recommend initiating a position now. HOLD

Origin Materials (ORGNW)
Origin installed the prefabricated modules in its first stages of building Origin 1, the company’s first biomass-to-plastics plant. The modules, six-story-high prefab networks of pipes and machinery, are in six months ahead of schedule. That’s helped the warrants rise about 25% the past week, while the underlying shares rose 16%. HOLD

Ree Automotive (REEAW)
Little news for the EV chassis maker this week. Warrants under 1 and shares around 4 signal a long road ahead to gain investor favor. The warrants expire in July 2026 so there’s time. HOLD

ReNew Energy Global (RNWWW)
ReNew was listed in Fortune’s top ten of the annual “Change the World” list, by virtue of it being India’s largest renewable energy company. How important is landing on the list just behind Bank of America and ahead of The Change Company, which offers structured journaling products for positive life change? Not very, but investor awareness continues to be important for SPAC-based companies. Shares are up 16% the past week, warrants 29%. HOLD

Volta Inc (VLTA.WS)
EV-related companies are perking up after chatter of a large tax credit for EV buyers being discussed at the federal level. EV charger maker Volta has benefitted, adding more than a dollar to the warrants the past week, and shares jumped nearly 3 points, to close to 10. One catalyst seems to have been fortuitous timing of a press release touting that Volta chargers have delivered 1 million driving miles to cars. Earnings will be announced November 10. Estimates are for a loss per share of 12 cents on $10.1 million in sales. HOLD

Thank you for being a subscriber. Our next SX Greentech Advisor issue is published Wednesday, November 17. Our next regular weekly portfolio update is November 10. We will send a special bulletin with any interim recommendations.

Contact me anytime with questions or comments at brendan@cabot.net.

The next Sector Xpress Greentech Advisor issue will be published on November 17, 2021.