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SX Greentech Advisor
High Profit ESG Investing

Sector Xpress Greentech Advisor | August 4, 2021

Building Up
The $1 trillion infrastructure bill is now in the Senate’s hands, meaning Greentech faces a pivot point. Passage of the bill is a potential catalyst to get our sector out of its recent range-bound activity and back on bullish footing. Failure of the bill probably gives bears new life in the near term—investors pretty quickly get used to the idea of more money coming and, like the “taper tantrums” of the past decade, tend to express displeasure through their trading desks.

We’ve said before Greentech doesn’t need direct government support to succeed—renewable energy continued to take market share in recent years even under previously unsupportive federal leadership. This issue, we’re adding two stocks to our portfolio that show excellent strength due to macro trends and at least one of which will help catch any infrastructure bill momentum as well. We also make some shifts in our existing portfolio and watchlist as we adjust to market reactions to earnings.

A good opportunity to step out of the daily volatility of the market and get some perspective on the longer term would be to attend the 9th Annual Smarter Investing, Greater Profits Online Conference, August 17-19. My fellow analysts and I will present our look ahead and some of our best picks for the next year.

Contact me anytime with questions or comments at brendan@cabot.net. Thank you for joining me on the path to climate profits.

First Trust Water ETF

Overview
Just about 12 years ago a climate scientist detailed for us the consensus climate model for the U.S. water supply under global warming. It predicted permanent drought for the west and increased rainfall in the northeast, coming from more intense storms than the region had historically experienced. Like all serious scientists, the climate model was conservative with its data and projections, estimating these shifts were two to three decades off. The scientist did note, however, climate model predictions even then were coming true faster than projected. As the western and eastern water crises evolve, both will put great stress on systems for the delivery, treatment and recovery of water. Even setting aside climate models, much of America’s water infrastructure is old and will require a steady stream of capital investment to renew in coming years—regardless of a federal infrastructure spending bill or not. Two years ago, the EPA estimated more than $470 billion would be needed in the next 20 years to provide sufficient, safe drinking water—without any discussion of global warming. Similar to water supply, many dams and inland waterways need repair after decades of subpar maintenance commitments.

Business Model
One segment of Greentech that has been resilient since our sector’s retracement began in February has been water. Water stocks tend to be either utilities, which offer sedate growth and income options, or smaller, high-growth specialists, like Energy Recovery (ERII), featured in our May 5, 2021 issue. Growth hasn’t been in favor in the current market, but we don’t want to forgo exposure to water. With an infrastructure bill appearing to be more a likelihood, we want exposure without picking specific winners and losers just yet. That’s why we’re adding a water ETF, the First Trust Water ETF (FIW), to our portfolio. The ETF tracks the ISE CleanEdge HHO index, which consists of U.S.-listed businesses that get a significant portion of their revenue from drinking water and wastewater treatment. All of its holdings are in the Greentech universe of 240 stocks we follow.

The First Trust ETF holds 36 stocks in a modified market cap system, consisting of weighted tiers. The top 10 in market cap are given 4% each of the fund, numbers 11 through 15 are weighted at 3.5%, 16 through 20 at 3%, 21 through 30 at 2% and the rest evenly divided, at 1.25% currently. The ETF is rebalanced every six months.

Equal-weighted indexes are in our view the best for capturing broad sector performance, as opposed to market capitalization in which assets get concentrated into a handful of big stocks—one may as well simply buy the individual stocks and gain all the upside. The tiered market cap system First Trust uses is a fine compromise, given the range of market caps of companies held. The largest company by valuation is Danaher (DHR) at $53 billion. It has a sizeable environmental and water purification business, as well as an arm in life sciences, a not-uncommon combination among companies in purification. The smallest holding by market cap is the Brazilian utility Sabesp (SBS), a water and wastewater business owned by São Paolo, a city of 12 million people. In between are a number of stocks that have frequently made appearances in the past 18 months on our internal weekly scans for strongly performing stocks, including ERII, Pennsylvania utility York Water (YORW), IDEXX Laboratories (IDXX), which also has a life sciences arm, Algonquin Power & Utilities (AQN), and others.

Here is the sector breakdown of components:
* Industrials: 20 holdings
* Utilities: 9
* Health Care: 3
* Information Technology: 2
* Consumer Staples: 1
* Materials: 1

Total assets in the fund are $1.1 billion. Turnover of holdings is low, at 15% in its most recent year. In the past decade, it has had six years of returns of 20% or greater, one year with a sliver of a gain, and three years of losses between 8% and 9.8%. Somewhat surprisingly, perhaps, the ETF tracks more closely with the broad market than with utilities specifically.

Issues to Consider:

  • There are three other viable water ETFs (viable meaning assets over $150 million): Invesco Water Resources ETF (PHO), Invesco S&P Global Water ETF (CGW) and Invesco Global Water ETF (PIO). We prefer FIW because it is more evenly balanced among its components, the better to capture the water sector’s growth. The fact it is the best performer over the short, medium and long term is, of course, a strong factor in its favor too, and a result of less market-cap bias.
  • The fund pays dividends quarterly. They have ranged from about 5 cents to 13 cents the past three years. Last year, all dividends were qualified, under IRS rules. The next ex-dividend date is likely August 24.
  • There clearly is an infrastructure spending component at play in share action, given the fund saw buying spikes on U.S. election day last year and inauguration day this year. That brings in risk if Congress doesn’t pass an infrastructure bill.

Technical Analysis
Shares have been making all-time highs recently, always a positive technically because there is no pent-up selling waiting overhead. Shares are getting a little hot now, so it wouldn’t be unusual to see a move back to what should be excellent support at 84 and then to the 82.50 area, which is the bottom of its Bollinger band, a measure of normal standard deviation and theoretically an area of support. The 200-day moving average is approaching 77. Buying volume has improved in recent weeks, telling us the recent move higher has force behind it. When FIW shares take natural, cyclical breathers, its retracements are about 5% from the recent top.

What to Do Now
We’re adding FIW to our real Money Portfolio at market prices, currently around 88. We’re going to give ourselves a sell-stop just beneath a number of support indicators that are congregated in the 83-84 area. We suggest near 82. BUY

FIW-080321

First Trust Water ETF (FIW)
Net asset value per share: $88.58
Dividends per share (TTM): $0.38
All-time high (intraday): 88.67
Total assets: $1.142 billion
Recommendation: BUY

ON Semiconductor Corp.

Overview
Greentech relies a lot on efficiency, making maximal use of the energy at hand and getting it to where it needs to be. That means the semiconductors that manage processes can command a premium put on less power usage, better power management, superior heat dissipation, lighter weight and smaller footprints. The shift toward EVs and renewable energy rely heavily on semiconductors to add intelligence to operate advanced features and bring crucial advances in energy transfer. Semiconductors have been around so long they may be expected to be a lower growth business, but the sector globally continues to grow more than 12% a year as it is in the midst of what researcher IDC calls a “super cycle” of demand.

Business Model
ON Semiconductor (ON) is a Phoenix-based semiconductor maker spun off from Motorola in 1999 and which went public in 2000. It has been a boom-and-bust type provider of a slew of circuits to the marketplace. A new CEO, Hassane El-Khoury, took over in December and is shifting the company toward high-margin, high-demand semiconductors needed for EVs and renewable energy, and away from commodity “fab fillers” that lead to 10-to-15-point swings in results depending on market conditions. The company just reported a great second quarter as demand has surged and the start of the repositioning appears to be taking hold.

Sales rose 38% to $1.4 billion in the quarter and EPS of 42 cents a share, led by automotive and industrial sales, ON’s two largest business segments accounting for 33% and 26% of sales, respectively. Results bested the most optimistic of Wall Street projections. Some of this growth is from pent-up pandemic demand and price increases from the global semiconductor shortage. Management emphasized that its work on focusing on widening gross margin and aiming to service high-growth sectors like EVs and clean energy to continue growth beyond the one-time bump in demand. It expects the strong market demand to continue for the next year. In its automotive segment, ON saw sales leap 69% year-over-year, led by sensing equipment—chips powering lidar and other traffic sensors—and future order strength also seen in safety and electrification. EVs, obviously, electrify much of the mechanical and fluid-driven processes of conventional automobiles. Safety products, such as blind-spot sensoring, are being increasingly originated in autonomous vehicle research, which is also heavily into using ON’s image-sensing products. The company has long been a provider of chips to the auto industry, consistently in the top 10 suppliers, offering about 10,000 products.

Its industrial segment, which grew 24% from the 2020 quarter, includes Greentech areas of renewable energy and LED lighting as well as cloud computing power, consumer appliances, and industrial power and motion—the things needed for factory robots. ON’s industrial business also includes military and medical applications.

Management expects sales to be constrained somewhat by its manufacturing footprint and sees 3Q revenue hitting $1.6 billion, which would be a 23% rise over 2020. Consensus estimates right now (they will likely rise) are for EPS of 67 cents. When possible, ON has shifted this year to stockpiling inventory—which sits on its balance sheet—to be able to meet customer fulfilments. El-Khoury and his managers have also been looking to optimize production by exiting commodity-semiconductor segments and repurposing capacity for higher-end products—one of the factors ON pointed to as providing strength in the quarter.

Business Performance and Outlook
In addition to the efforts mentioned above, management has two other focuses: one is getting production running full speed on 300-millimeter chips at its East Fishkill, New York, facility, which is leased and shared with another company. 300mm is the in-demand size right now, driven by vast hunger for cloud and other types of computing. Most of the company’s capital expenditures are going to gear up Fishkill. ON is now running those chips out of the factory and expects production volumes to continue to come on board into 2022.

Management also wants to reduce its debt, which is now $3.3 billion after paying off a $140 million note at the end of 2020. It’s clear the new management team has a focus on cutting debt and delivering higher margin, less volatile results over time—ON’s exposure to commodity semiconductors and the variability in pricing that brings—has been a factor in shares largely spending the past 15 years in a range between 4 and 12. The company hosts and analyst day tomorrow to pitch institutional investors on its plans to go deeper into high-margin EV and energy products.

The outlook has ON shares appearing to be in value territory, at 17 times projected 2021 EPS after the rally accompanying disclosure of results. The average forward P/E of semiconductor producers is 44 as of January 2021, according to data from New York University.

Issues to Consider:

  • How much of ON’s excellent 2Q is pent-up pandemic demand from automakers and industry that will abate in coming months? The answer isn’t clear, in part because of the expected increase in demand for EVs and industrial robotics regardless of the pandemic.
  • ON has historically been valued at a lesser P/E than semiconductor peers in part due to volatile results and sales into “fab filler” commodity segments.

Technical Analysis
Shares gapped higher Monday on 2Q results. That leaves a good 3-point gap between 39 and 42 that is initial support. The all-time high was at 45, previously set in April. It’s immediate resistance even as shares closed higher yesterday–it sometimes takes a day for bears to come out and sell. In the past, gap-ups for ON haven’t led to runaway gains but instead shares experience a period of consolidation. The break higher is very bullish, however, and we’d expect to see some follow-through buying as ON’s growth and value equation comes into focus for more investors. Charts show a path to rally toward 64, while support includes the gap, and the moving averages at 36-37.50. The 39-40 area is a level of past congestion, and appears to be a level where there should be good buying support. That present a potential 4:1 reward-risk ratio.

What to Do Now
Growth stocks and Greentech have been facing headwinds for months now. ON is a clear momentum play backed by solid fundamentals we believe the market will continue to recognize. We’re buying here and setting a sell-stop near 39.87 – a level in that area, below 40 to avoid triggers on round numbers. BUY

ON-080321

ON Semiconductor Corp. (ON)
Revenue (trailing 12 months): $5.46 billion
Earnings per share (TTM): 79 cents
All-time high (intraday): 45.18
Market cap: 18.8 billion
Recommendation: BUY

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. We screen further to eliminate widely held companies we believe have clear ESG problems. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

S&P Global (SPGI)
What is it?
A market researcher, index provider and bond ratings business.

Why is it ESG?
S&P Global has a strong, independent board and strong employee benefits practices, good for shareholders and workers, respectively. It gets high marks for its environmental practices. ESG funds own $164 million of its shares.

Why now?
It is buying a similar, well-regarded business, IHS Markit (INFO), in an all-stock transaction. Shares are at all-time highs and reported very strong 2Q results last week.

SPGI-080321

Nike (NKE)
What is it?
An athletic shoe and apparel company.

Why is it ESG?
Nike is a leader in in the large apparel companies in shifting toward use of renewable energy—all its North American facilities use renewable energy; it aims to get that fully renewable-sourced power worldwide by 2025. About 85% of the cotton it sources is sustainable or organic. ESG funds owns $1 billion of its shares.

Why now?
Its Jordan brand has seen great strength during the pandemic and digital sales have as well. The company has reported great results so far in 2021 and continues to see buying follow-through from blow-out results in late June that sent shares gapping much higher.

NKE-080321

Automatic Data Processing (ADP)
What is it?
Payroll and human-resources-related software and services.

Why is it ESG?
Worker benefits are considered very good in a competitive industry. The CEO and Chairman roles are separate, unlike many U.S.-listed businesses, benefitting shareholder-friendly governance. The CEO is subject to performance clawbacks on compensation.

Why now?
ADP saw 9% organic growth in its latest quarter with slightly faster earnings growth and sees more ahead, through 2022. Shares are at all-time highs and weathered the pandemic panic better than most issues.

ADP-080321

Our Greentech Timer

Greentech continues to be not-bullish and is also not-bearish. We’re rangebound, stuck below the moving averages above and a lack of bearish initiative to sell lower. On a macro basis, the sector completed a Gann retracement—a 50% walk back from a peak—in early May, a classic cyclical sign that we’re ready to move ahead again. And yet the sector continues to struggle to gain momentum. There are mixed signals from internal price action, some suggesting things are about to turn higher, others saying we have to wait. Ultimately, the moving averages are the best indicator of the trend. Our Greenetch Timer is telling us to be cautious and pay attention to our sell-stops without being needlessly bearish. Time is our friend here.

PBW-080321

Our Greentech Timer is fully 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 says to stay cautious. We could be at the bottom of a period of weakness or we could continue lower from here. Keeping mostly in cash as we have been with the Greentech portfolio is the prudent stance.

Current 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. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Always remember sell-stops are essential to long-term success to our approach.

The special opportunities portfolio is Excelsior, which is managed without consideration of the Real Money Portfolio. The current Excelsior portfolio is an evenly divided basket of SPAC warrants. We have no firm sell-stops; use your discretion.

SX Greentech Advisor Real Money Portfolio
StockBuy DateBuy PricePrice on 8/3/21Sell-StopGain/LossRating
Ameresco (AMRC)62.02Watch
Aptiv plc (APTV)169.14Watch
Chipotle Mexican Grill (CMG)7/22/211773.911884.496.23%Buy
First Trust Water ETF (FIW)New88.57Buy
General Motors (GM)57.88Watch
ON Semiconductor Corp. (ON)New45.38Buy
Steel Dynamics (STLD)5/19/2161.1364.65near 56.975.76%Hold
Stem Inc (STEM)27.89Watch
Trex (TREX)5/5/21107.4497.35near 93-9.39%Hold
SX Greentech Advisor Excelsior Portfolio
SecurityBuy DateBuy PricePrice on 8/3/21Gain/LossRatingNote
Live Oak Acquisition Corp. II (LOKB) Warrant6/16/212.5652.00-22.03%BuyNavitas Semiconductor
Origin Materials (ORGN) Warrant6/16/212.4251.41-41.86%Buywas Artius Acquistion (AACQ)
Peridot Acquisition (PDAC) Warrant6/16/212.421.78-26.45%BuyLi-Cycle
RMG Acquisition II (RMGB) Warrant6/16/211.811.61-11.05%BuyReNew Power
Tortoise Acquisition II Corp. (SNPR) Warrant6/16/212.211.83-17.19%BuyVolta
Ree (REE) Warrant6/16/211.11.4430.91%Buywas 10X Capital (VCVC)

Portfolio notes: STLD paid a 26-cents a share dividend to holders of record as of June 30. Add .425 of a percentage point to the Gain/Loss to get our total return on the position.

Real Money Portfolio
Ameresco (AMRC)
Ameresco reported results Monday evening and came in at $252 million in sales and EPS of 22 cents, both below Wall Street consensus of income of 26 cents per share on sales of $259 million. A plan to expand in renewable natural gas, a promising area where waste gas from landfills and dairy waste pools are collected, failed to impress analysts on the earnings call. Shares fell hard on the results Tuesday, slicing through initial support. We can see how shares rebound, but likely there’s some technical damage. WATCH

Aptiv (APTV)
Aptiv broke through resistance at 160 as we wanted to see, and we could be buyers now. However, given market conditions and the fact management unveils quarterly earnings Thursday before the market opens, we’re going to play conservatively here and wait for earnings and market reaction. Given market conditions, we’ll sacrifice some upside here to avoid getting whipsawed into a quick loss if results disappoint. Expectations are for 67 cents earnings per share on sales of $3.6 billion. WATCH

Chipotle Mexican Grill (CMG)
Chipotle looks good, with our near-term concern only that it looks technically overbought, with its RSI close to 90. We’ve noted before that RSI is a better indicator for a non-trending stock, because a strong stock can continue to stay overbought for a long time. Last week we raised our recommend sell-stop to around 1,587—let’s add another hundred points to it here, and raise the sell-stop to around 1,687. The temptation is to put our sell-stop at our buy price, but it looks like normal volatility could bump shares below that and not ruin the long-term uptrend. Trading charts suggest good upside from here and we want to stay in the trade. BUY

General Motors (GM)
GM reported earnings this morning ahead of the market. The company reported revenue of $34.2 billion and fully diluted EPS of $1.97. Consensus estimates were for $2.23 EPS and revenue of $30.9 billion. Shares sold off steeply this morning on the earnings miss and we’re watching to see if support around 51.50 holds and if buyers step in. WATCH

Steel Dynamics (STLD)
Shares continue to bump up against recent resistance in the 65 region. The proposed infrastructure bill would direct $40 billion to bridge repair and replacement, which would be the largest amount ever dedicated under the interstate highway system and bullish for steel. HOLD

Stem Inc. (STEM)
Shares are struggling a little bit here, below the 20- and 40-day moving averages, but above the 200-day, which provides support just over 25. In all likelihood, we need earnings, in a week, to be our catalyst. The energy storage company will report earnings on August 11, after the close of trading. Stem probably will report a loss of 11 cents on sales of $18-$19 million. The outlook is the primary driver here—utility-scale energy storage is expected to be a high-growth business. WATCH

Trex (TREX)
Trex made 52 cents a share earnings on $312 million sales in its second quarter, announced Monday. Wall Street expected 53 cents EPS and $302 million in revenue. Shares fell sharply at the open and tested the 200-day moving average, then rebounded to finish Tuesday higher. The outlook was mixed - business is good and higher lumber prices are a tailwaind, but labor availability troubles meant Trex couldn’t run its lines at full capacity, and recycled plastics that form the bulk of Trex’ raw materials, are facing rising prices. All in all, a wash, and probably not enough to inspire the bulls. HOLD

Excelsior Portfolio
Our rating remains BUY on each of our SPACs, preferable as a basket of even positions. We have no sell-stops.

Li-Cycle / Peridot SPAC (PDAC warrant)
Peridot shareholders will vote on the Li-Cycle merger on August 4 with results coming on August 5. Shares and warrants have been weaker on a sell-the-news approach from arbitrage traders. It doesn’t change our approach, which has a longer time frame.

Navitas Semiconductor / Live Oak II SPAC (LOKB)
A rule of thumb (as opposed to something with more data behind it) for SPAC warrants is that warrants trading above $1 are an indication of longer-term investor faith in the business plan. Even as our warrants are down this week, they’re above $2.

Origin Materials (ORGN)
Origin filed to sell as many as 35.5 million shares on behalf of investors in the SPAC transaction. The company won’t get any proceeds from the sale. That’s negative for shares and the company needs to cycle out of arbitrage traders that funded the SPAC and find new investors for the longer term

Ree (REE)
With the SPAC merger closed last week, Ree is experiencing some volatility in shares and warrants as some people buy in and some sell out. A Wall Street brokerage, Cowen, started coverage on the stock with a target of 15, which implies our warrants should go to 3.50. Analyst coverage is important to get investor notice more than price targets.

ReNew Power / RMG II SPAC (RMGB)
The vote to complete the SPAC merger is scheduled for August 16. ReNew inked a deal this week to build and supply up to 500MW of renewable power to RackBank, a server company in India.

Volta Charging / Tortoise 2 SPAC (SNPR)
The merger of the SPAC and the EV charging station company will take place on August 25. Management is presenting at five investor conferences this week and next to make the case for its ad-driven EV charging business model. Management also just announced plans to expand into Europe, with the opening of a Germany office.

Thank you for being a subscriber. Contact me anytime with questions or comments at brendan@cabot.net. The next issue of SX Greentech Advisor is out Wednesday August 18. Next Wednesday we’ll review our portfolio as part of our regularly scheduled updates. We’ll alert you with any buy or sell alerts as needed before then.


The next Sector Xpress Greentech Advisor issue will be published on August 18, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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