By Michael Cintolo, Vice President of Investments, Cabot Wealth Network
Coherent (COHR)
Coherent makes sophisticated products in networking, materials, industrial products and instruments. Each arm is growing, but it’s networking that’s seeing particular strength thanks to artificial intelligence-related demand. AI data centers are hungry for Coherent’s optical transceivers which allow the high-speed connectivity AI requires. In its fourth quarter, reported last month, total company revenue rose 9% to $1.3 billion, reversing a shrinking trend and powered almost totally by AI-targeted products. Starting in calendar 2025, Coherent will be rolling out even more powerful transceivers – 1.6 terabyte – more than double the through-put of its current top-line model. Those will be in field tests with some customers first, but the product should feed sales for the next few years. With a new CEO who vows to double down on growth areas while cutting underperforming ones, it’s a good bet Coherent will be focusing on AI more, which offers the types of margins that can improve profitability. Right now networking is about half of Coherent sales—the company’s other business lines aren’t millstones but it wouldn’t be a surprise to see one or two sold off. Coherent is known for precision fabrication of rare materials used in aerospace applications, such as making specialized windows for sensors on military aircraft; the materials segment performed better than expected as production hiccups in one raw material, silicon carbide, were fixed. Its Industrial materials arm, like OLEDs for smartphones, also was up single digits as was instrumentation, largely laser technology. But it’s the AI networking angle that is driving the stock and should drive a big upturn in sales and earnings for many quarters to come. As for the stock, COHR looked to be getting going in June, but the market’s July/August dip dragged it back down—but shares snapped right back when the pressure came off the market, and after a bit more rest, a powerful breakout came late last month.
Eagle Materials (EXP)
Lofty housing prices and mortgage rates kept many prospective homebuyers on the sidelines in the last couple of years, but the recent decline in rates has many thinking that will change, with existing U.S. home sales recently breaking a multi-month downward trend (albeit still at low levels). Aside from the rising prospects for a housing market rebound, continued infrastructure spending growth is another reason for the recent strength behind Eagle Materials. The Dallas-based company produces both heavy and light construction materials, including concrete, construction aggregates, gypsum and wallboard, as well as sand for hydraulic fracturing. But cement is its core market, with construction spending on infrastructure and heavy industrial projects continuing to drive cement demand. On the residential building front, the firm observed that “activity remains resilient” in the face of chronic housing-supply shortages and continued underlying demand strength. In fiscal Q1 (ended June), revenue of $609 million increased 1% from a year ago, with earnings of $3.94 beating estimates by 10% (a reason for the recent share price strength) and lifting 16% from a year ago. Adverse weather conditions across many of Eagle’s core markets affected sales volumes for the cement, concrete and aggregates segment, but the overall business performed well, with paperboard sales (used for making concrete forms) increasing 10% to a record 91,000 tons. Elsewhere, operating earnings in Eagle’s light materials sector rose 5% thanks to higher gypsum wallboard prices and lower operating costs. Looking ahead, the top brass sees years of strong public infrastructure spending ahead to support cement demand, with the residential housing market creating an “appealing performance backdrop” for the firm’s wallboard business going forward. Wall Street sees 12% to 15% earnings growth ahead, with share buybacks (share count down 4.3% from a year ago) helping the cause—and with lots of upside if the housing market kicks into gear. The stock had a beautiful run into March of this year, then spent months correcting and consolidating, with support appearing near long-term moving averages a few times. And now that the buyers are back, with some big-volume buying pushing EXP to new highs—the odds favor the next big move being up.
GE Aerospace (GE)
About the only press you see in the aerospace field these days is negative, with Boeing’s continued problems grabbing the headlines—but, in the market, many individual names remain in favor as the major trend of increased orders, deliveries and travel worldwide are firmly in place. We’ve written about GE Aerospace a couple of times in Top Ten, and it looks like it’s finally getting going after a couple of false starts: The firm is the industry leader in engines/propulsions (for both commercial, which is where most of the growth is, but also defense), an area that’s obviously a sure bet to grow as the sector does. Like many in the industry, there’s a huge recurring revenue component to the engine business; GE says that each engine sale leads to at least a couple of decades of service-related upkeep that eventually totals three times the initial sale. Right now, business is good and getting better—in April, the firm saw earnings of around $3.92 per share and free cash flow of “more than $5 billion,” but after a very solid Q2 report (including orders or commercial engines/services up a huge 38%), their outlook was bumped to $4.08 and $5.45 billion. And that should be just the tip of the iceberg, as the post-split Investor Day earlier this year sees annual free cash flow growth in the mid-teens through 2028, and these things usually prove conservative as they hope to topple expectations. Of course, this or other aerospace plays aren’t going to suddenly grow at triple-digit rates, but GE Aerospace quacks like a liquid leader that institutions can steadily accumulate as business and shareholder returns ($2.3 billion of buybacks in Q2; $15 billion authorization 2024 through 2026) pick up. Shares had a huge, pre-split run into May and then went tight for a couple of months before some ups and downs with the market in August and September. But now it’s lifted off on the upside, and while it’s not going to double overnight, we see it as a potential magnet for institutional money given its rapid, reliable growth profile.
KKR (KKR)
Right now, the long-term trend of stocks (and even bonds) is up, the Fed (and other central banks) have started an easing program and big-picture sentiment is mixed at best. Put it together, and the backdrop for Bull Market stocks is about as good as you could hope, especially if the new easing regime bolsters the struggling real estate sector (commercial and residential). KKR is one of the lead dogs in the group, with $601 billion of assets at the end of June spread around private equity, real assets and credit (which is the largest) up a healthy 16% from a year ago despite the so-so environment (including $32 million organically raised); 81% of those assets are fee-generated and more than 40% are perpetual! A big factor here was last year’s decision to buy out the portion of Global Atlantic (a good-sized insurer) it didn’t already own, which now has $183 billion of assets (three-quarters or so is credit), providing plenty of net investment income. Business is very strong now and this should be the tip of the iceberg—in Q2, KKR had fee-related earnings of 84 cents per share, up 25% from a year ago, and operating earnings of $1.17 per share, up 36%, but that pales in comparison with the long-term outlook, with the top brass having a goal of $4.50 per share of fee-related assets by 2026 and total earnings of $7.50 per share by then as total assets get to $1 trillion or more. Obviously, long-term forecasts in the markets can be taken with a grain of salt, but there’s no question that KKR is on a path to get much bigger thanks to its own moves and the bullish backdrop. The stock got going in November of last year, so it’s not in the first inning of its advance, but after months of very choppy action with little net progress, shares have acted well from the panic August low and it looks like the buyers are worn out. We think it’s ready for another run.
Samsara (IOT)
Samsara might have the best growth story that most investors have never heard of, with a cloud software offering that is addressing a gigantic opportunity, provides real, meaningful savings to huge companies and is still very early in its growth phase. The firm’s platform is targeted at any entity that has tons of physical assets—think trucking, construction, airlines (including ground crew vehicles), waste management, delivery and even departments of transportation among the states—helping them to dramatically boost efficiencies thanks to telematics for equipment (its recently introduced industrial grade Bluetooth tags are off to a strong start; they can attach to smaller items like tools and toolboxes, chemical containers and the like for better tracking), safety training, predictive maintenance, connected forms and workflows (automatically assign forms and approvals, etc.) and more; all of it is driven by what is now more than 10 trillion (!) data points. Interestingly, whereas most software firms sell into the technology budget, Samsara’s proven savings mean it’s usually part of the (much more resilient) operations budget (at day’s end, the firm is really selling a system of record for physical operations), which is one reason why business continues to crank ahead. In the July quarter, sales rose 37%, annualized recurring revenue was up 36% and earnings and free cash flow were in the black as all of its segments (video-based safety, telematics, equipment monitoring) are growing at 30%-plus clips as its current and new clients get bigger (2,133 customers pay at least $100k a year, up 28% from a year ago) and business broadens out (87% of new recurring revenue booked was from non-transportation verticals, while 16% was overseas). To be fair, the valuation here is huge (market cap is about 10x recurring revenue), but we have little doubt buoyant growth will be seen for years to come. IOT has had a ton of false starts over the past year, but the breakout after earnings has stuck and led to some follow-on buying. There will be ups and downs, but the path of least resistance has turned up.
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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.
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