5 Best Stocks to Buy in December
By Michael Cintolo, Vice President of Investments, Cabot Wealth Network
There are clearly pockets of stocks doing well, particularly defensive and yield-oriented stocks, as well as some economically sensitive names and the occasional growth area. The longer the intermediate-term trend can remain up, the greater the odds that more sectors join the party.
Despite a tepid residential real estate market, nonresidential and industrial construction projects in the U.S. are proceeding at a torrid pace thanks in part to recently passed federal legislation supporting infrastructure development. Emcor is a leading global engineering and specialty contractor with a focus on electrical and mechanical construction along with building, industrial and facilities services. The firm is comprised of more than 80 companies with over 180 locations and stands to benefit from the burgeoning infrastructure development trend. A solid Q3, complete with record quarterly revenue and EPS, is the reason for strength as Emcor delivered consensus-topping sales of $2.8 billion that rose 12% from a year ago and per-share earnings of $2.16 that beat estimates by eight cents and rose 17%. Emcor’s U.S. Construction segment accounts for ∼60% of total sales and recorded revenue of $1.8 billion (up 14%), goosed by a strong showing in U.S. Electrical Construction sales that increased 19% due to buoyant activity in the commercial market sector and project demand involving both traditional and alternative energy solutions. U.S. Mechanical Construction revenue was 11% higher, driven by several projects in the semiconductor, pharmaceutical and life science industries. In addition to construction market strength, the company said it’s benefiting from supply chain delays as customers are choosing to extend the useful lives of existing HVAC equipment when replacement equipment isn’t available. Looking ahead, record remaining performance obligations (RPOs) for each of Emcor’s construction segments should keep the momentum going, while Wall Street sees the bottom line growing 17% next year. Thus, it’s a solid (not sexy) story, and the stock is going gangbusters—after basically going nowhere (net-net) from June 2021 through September of this year, shares have catapulted on a string of big-volume weeks, with sellers unable to make much of a dent. Normal pullbacks should be buyable.
Impinj sells Internet of Things (IoT) hardware geared toward retailers and makers of consumer goods. The company pitches its small RFID tags as a superior alternative to security tags used by retailers around the world. The wafers don’t have batteries and instead can be seen by Impinj-made readers and exit gates within a 30-foot radius. Because they are small – wafer thin and about an inch to two inches square – they can be implanted or attached to most anything, allowing for real time inventory tracking, theft prevention, ensuring item authenticity, quicker product returns and automated self-checkout. The company also sees a market for warehouse storage operations and parcel shipping. The tags themselves cost a few pennies apiece, depending on the sophistication customers want, like cryptographic production identification and extra security for the tags themselves. Inpinj also sells its RAIN (Radio-Identification) software to operate its readers and which can be used for in-store inventory visualization to determine where individual items sit. Only perhaps three-tenths of a percent of products made today are network-connected, so Impinj feels it has a massive opportunity to stick a tag on seemingly everything, while claiming it has the technology in place to protect consumer privacy. Demand so far is outpacing Impinj’s ability to fully meet orders, though in the latest quarter sales of its tag readers and checkout systems hit new peaks. Supply flow is still lumpy, so it will push capital expenditures up in coming months. But it also should allow the company to push pricing up and investors are focused on the underlying demand trends—analysts see revenues up 25% next year while earnings leap 40%, both of which should prove conservative. The stock is a bit thinly traded and moves around a lot, but had a huge run off its spring lows, a constructive base-building effort in the fall and took off on earnings in October—and it’s held and even extended those gains some in recent weeks.
Insulet’s Omnipod 5 is a big hit and the reason why the stock is threatening new all-time highs. The device is a wearable, tubeless, virtually painless insulin delivery system for people with Type 1 and Type 2 diabetes. Rolled out earlier this year, the device has been heralded as a big leap forward in insulin delivery, in part because its automated system learns how to personalize treatment schedules early on in its use, eliminating a lot of back and forth between patients and doctors to tweak wearable injectors. It’s also controlled by a patient’s smartphone, which means no one has to plug in to get the data from the device. In Q3 earnings released last week, the Omnipod 5 drove U.S. revenue for Insulet up 42% over last year, helping overall sales rise 29% on a currency-neutral basis (24% overall), with an adjusted net income three times better than expected, at 45 cents a share. Insulet historically has done a good job of attracting users who still perform multiple daily injections to manage their diabetes, usually about 80% of new sales. And now, the Omnipod 5, there are strong signs patients are flipping from competing pumps made by Medtronic and Tandem, too. What’s encouraging about Insulet right now is that the company is still investing in its Omnipod sales force, and with European Union regulatory clearance just coming in September, a large new market opportunity is there or the taking. For the year, the company expects revenue to be up 11% to 14% globally to the mid $1.2 billion area, including strong foreign currency headwinds. For the next three years, sales are expected to grow at a 17% annual clip as earnings take off. The stock was pretty much a nothing starting in early 2021, and it did fall hard into the spring, but it reached a much higher low in October (even as the market was retesting its low) and exploded all the way back to its highs after earnings before trading tightly the past few weeks. If the market holds together, we think the next real move here will be up.
Neurocrine Biosciences (NBIX)
Biotechs have been in a three-steps-forward, two-steps-back uptrend since early summer, and Neurocrine Biosciences continues to look like a leader in the space, both technically and fundamentally. The story here is all about Ingrezza, which is a treatment for a rare side effect of antipsychotic drugs that causes involuntary movements in the face and body that obviously have a negative pshychological impact (being self concious) and sometimes can become permanent without treatment. While rare, the drug is a big seller, with an expected $1.4 billion of revenue this year, up 30%-ish from last year, and more important, management sees a ton of opportunity just in its core area, with more than a half million undiagnosed patients in the U.S. alone (it thinks only 15% are both diagnosed and on treatment), so the potential is there for Ingrezza sales to easily more than double over time. Neurocrine also has another niche product likely to hit the market soon—it’s applied for approval of valbenazine (likely approval early next year), which treats another disease that causes involuntary movements (side effect of Huntington’s) that affects maybe 25,000 people. Those two should keep the numbers kiting higher, with analysts seeing the top line rising 20% next year while earnings reach nearly $4 per share—all while the firm’s excellent pipeline (12 mid- to late-stage programs in trials; a key Phase II readout for a child epilepsy treatment due by year-end, with two more Phase II results in other drugs next year) continues to progress. The stock actually broke out above the century mark months ago and held that level even as the market caved into October. And now it’s perking up with the market, with a mid November shakeout finding support near the 50-day line. The path of least resistance is up.
Shoals looks like an emerging arms supplier in the solar wars: It’s the leading provider (more than twice the size of its nearest competitor) of what are called electrical balance of system (EBOS) products, which are the endless boxes, cable assemblies, fuses, monitors and more that are needed to gather, regulate and transfer the energy collected from the actual solar panels—it’s needed on every single solar project, so it’s obviously a big deal. The products themselves aren’t anything special, which is the one worry here, whether this is basically a commodity-like business that will see margins tank and competition soar. But Shoals has a couple of advantages beyond its size, the most important of which is its installation methods—installation costs are a big factor (can be 6% of the overall project cost), but Shoals has developed a better way with more above-ground activity, far less wire runs and doesn’t require licensed electricians, slashing costs by 20% to 40%, and leading to more custom solutions (which include some proprietary products) for clients. Plus, EBOS is a key factor is EV charging stations (more than half the cost of an EV station is EBOS!) and battery storage systems, too. Shoals’ numbers were a bit lumpy as the sector had some early-year uncertainty, but the future is clearly bright: Q3 saw sales (up 52%, a big acceleration from recent quarters) and earnings (up 42%) top expectations, while EBITDA rose 57% and, more important, the backlog actually grew by 74%--analysts see sales up north of 50% next year while earnings more than double, and even that’s likely to prove conservative as the green energy bill gave the sector a lot of certainty. The stock bottomed in May, lifted in June after passage of the bill and then pulled back for a few weeks with the market—but now it’s going again after a huge earnings gap.
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About Cabot Wealth Network
This report is published by Cabot Wealth Network which was founded in 1970 by Carlton Lutts, a disciplined investor with an engineering mind who developed a proprietary stock picking system using technical and fundamental analyses.
Since then Cabot Wealth Network, headquartered in Salem, Massachusetts, has grown to become one of the largest and most-trusted independent investment advisory publishers in the country, serving hundreds of thousands of investors across North America and around the world.