Cabot Stock of the Week Issue: December 19, 2022

‘Tis the season, so let’s keep things positive in our last issue before Christmas and with Hanukkah already underway.

Stocks are still somewhat comfortably above their mid-October lows, with the S&P 500 about 6.5% clear of that mark. Also, we are entering the traditional “Santa Claus Rally” part of the calendar; stocks typically pick up steam in mid-December and rise through the end of the year. Plus, inflation is falling faster than expected, stock valuations are at four-year lows, and … well, 2022 is almost over!

Look, no amount of sugarplums and candy canes can sweeten what’s been a decidedly sour year for investors. But better times are ahead, likely starting next year. The market never stays down for long. The average bear market lasts just over 15 months. This one has lasted nearly 12 months so far, and about 13 months for the Nasdaq. There may be more pain ahead even after the calendar flips to 2023 – perhaps the market will re-test the lows, or possibly plumb new depths, sometime in the first quarter. But I’m guessing, and most institutions are forecasting, that stock prices will be higher a year from now than they are today – perhaps much higher.

Thus, we continue to add to the Stock of the Week portfolio. And this week’s addition is perfect for the current climate: It’s a dividend-paying utility recommended by Cabot Dividend Investor Chief Analyst Tom Hutchinson, yet it has an alternative energy component that has helped it beat the market for the last decade – and positions it well to do so again over the next decade.

Here are Tom’s latest thoughts on it.

NextEra Energy (NEE)

Utility stocks fill a great niche in any investment portfolio, especially in a bear market. The sector is the most defensive on the market as earnings are virtually immune to economic cycles. Stocks also pay high dividends and typically hold up very well in down markets.

NextEra Energy (NEE) provides all those advantages plus exposure to the fast-growing and highly sought-after alternative energy market.

NextEra Energy is the world’s largest utility. It’s a monster with about $20 billion in annual revenue and a $167 billion market capitalization.

Ordinarily, when you think of a huge utility you probably think it has lackluster growth and a stable dividend. But that’s not true in this case. Earnings growth and stock returns have well exceeded what is normally expected of a utility.

Amazing Track Record

For the last 10-, five-, and three-year periods, NEE has not only vastly outperformed the Utility Index. It has also blown away the returns of the overall market. NEE has more than doubled the returns of the S&P 500 over the last five- and 10-year periods, with returns of 144% and 520%, respectively (with dividends reinvested).

How can that be? It’s because it isn’t a regular utility. NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% of earnings and provides a higher level of growth.

Investors love it because they get the safety and income of a utility and still get growth and capital appreciation. It’s the best of both worlds.

Stability with Growth

Florida Power and Light is the largest regulated utility in the U.S. It has about six million customers in Florida. It is one of the very best electrical utilities in the country. There are a few good reasons why Florida is a great place to operate a utility.

The state has a growing population. Utilities have a limited geographical range, and a stagnant population can make it tough to grow. Plus, it is one of the most regulator-friendly areas in the country. That’s huge for getting approvals for periodic expansions and price hikes. It also doesn’t hurt that Floridians run their air conditioners like crazy, and just about all year long.

The alternative energy company, NextEra Energy Resources, is the world’s largest generator of renewable energy from wind and solar. Alternative energy is the future, and this company is at the top of the heap. The government and regulators love them for it. It’s also a huge benefit that the cost of clean energy generation constantly gets cheaper as technology advances.

There is also a huge runway for growth projects. NextEra has deployed about $55 billion between 2019 and 2022 on growth expansions and acquisitions. The company is expecting an increase in investments of 1.5 times from year-end 2019 levels between 2021 and 2024.

A key aspect of this recommendation is timing. Utility stocks were the worst-performing market sector in the fall selloff as interest rates soared to 15-year highs and fixed-rate alternatives became more attractive. NEE fell more than 22% in about five weeks to near the 52-week low. But the selling was overdone.

First, interest rates have been falling as the economy slows and we move toward a likely recession in 2023. The interest rate trade is being reversed. But it’s also true that utility stocks are among the very best stocks in a recession. One of the best recession stocks got cheap ahead of a likely period of historical outperformance.

NEE has moved sharply higher from the October low and already regained most of what was lost in the fall. Sure, NEE isn’t as cheap as it was, but it has established a solid upside trend and has momentum. It’s also still more than 10% below the high.

Current Recommendations

Changes Since Last Week’s Issue:

Brookfield Infrastructure Partners (BIP) Moves from Hold to Sell
NerdWallet (NRDS) Moves from Buy to Hold
Ormat Technologies (ORA) Moves from Buy to Sell

December has brought the sellers out of the woodwork again, dragging the S&P 500 down 6% and the Nasdaq down 7.7% this month. All that selling has taken its toll on our portfolio, and it’s time to part ways with a couple laggards before they turn into bigger losses. With 18 stocks already in the portfolio prior to the addition of NEE, it makes sense to do some end-of-year trimming – especially in this market.

Here’s what’s happening with all our stocks as 2022 winds down.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, keeps holding steady in the 7.2 to 7.6 range. No news. And shares of the world’s largest McDonald’s franchisee still have about 12% upside to Bruce’s 8.50 price target. BUY

BioMarin Pharmaceutical Inc. (BMRN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was about even in its first week in the Cabot Stock of the Week portfolio. It’s a biotech stock that Mike calls a potential industry leader in both the short and long term.

In case you missed it, here’s most of what Mike wrote about BMRN last week:

“BioMarin has seven drugs currently on the market, led by Vimizim, the first and only enzyme replacement therapy for what’s known as Morquio A syndrome, a rare genetic disorder in kids that prevents them from breaking down sugar chains in the body, leading to a host of issues. The drug has $512 million of revenue through the first nine months of 2022, up 10% from a year ago, with similar growth likely in Q4. There’s also Naglazyme (treats a condition that causes many tissues and organs to enlarge or inflame and eventually atrophy), with revenues of $343 million so far this year, up 15%); Palynziq (used to lower levels of an amino acid that can cause brain damage and seizures), with revenues of $183 million this year (up 5%); and a couple other smaller and/or drugs that are past their peak.

“That said, the real excitement here surrounds two treatments, one that hit the market late last year and one that should do so soon.

“The first is Voxzogo, which was approved by the FDA a year ago, becoming the first treatment for a certain form of short-limbed dwarfism. It’s a daily injection for those generally between the ages of 5 and 18 or so (when growth plates close) that helps patients grow faster than they would naturally. One analyst thinks the drug could have peak sales north of $1 billion, and it’s off to a great start—revenues came in at $48 million in the third quarter, with 713 children on the medication at the end of September in 29 active markets, including in Japan, which just went live in August. Growth here should remain rapid for a long time to come.

“And then there’s Roctavian, a gene therapy to treat hemophilia A (a hereditary bleeding disorder caused by the lack of a certain clotting factor)—interestingly, the FDA gave it the thumbs down two years ago (which caused the stock to plummet), but now it looks like it’s onboard, with a recent decision not to hold an advisory panel meeting, likely meaning approval is coming by the end of March. And this will come on the heels of Europe giving the go-ahead in the third quarter, with sales starting in that continent in Q4 and ramping into 2023—and at $2 million-plus per patient, the upside potential here is big.

“All told, Wall Street sees revenue growth accelerating from around 13% this year to 22% next year, and after a cost-heavy year, earnings are expected to triple to north of $2 per share, easily hitting new company records and growing nicely in the years after.

“As for the stock, BMRN has been mostly range-bound for the past couple of years, though it tried to break out in August—only to have the market yank it back down. But that retreat was normal, with support near 80 holding, and the good FDA tidings for Roctavian around Thanksgiving finally brought the decisive green light: BMRN gapped up on the news, tagged multi-year highs and lifted over the century market on a series of big-volume days.

“You can buy it here or on dips to new support around 102.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has fallen to new 2022 lows below 32. That now gives us a modest loss on the stock, which, aside from Tesla (TSLA), is the longest-tenured holding in the portfolio, recommended in January 2021. While BIP has had its moments, particularly when it reached as high as 44 this March, two years of no returns (and now a loss) means it’s time for us to say goodbye to this stock and make room for better opportunities in the new year. MOVE FROM HOLD TO SELL

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was down another point this past week, dipping from 33 to 32. We’ll keep it at Hold, since we still have a modest return on it. But the stock needs to stop the bleeding soon, having fallen from a high of 54 just three months ago, in early September.

In his latest update, Carl wrote, “Centrus Energy (LEU) surprised investors as it came out with a quarterly loss of -$0.42 per share versus the Zacks consensus estimate of +$0.78. This compares to earnings of $2.95 per share a year ago. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins that are above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million.

“Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, shed another point this past week, falling from 48 to 47. It’s nothing to be concerned about, as the stock appears to be simply falling along with the market at the moment.

In his latest update, Bruce wrote, “Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

“There was no significant company-specific news in the past week.

“CSCO shares fell 2% for the week and have 38% upside to our 66 price target. The valuation is attractive at 9.4x EV/EBITDA and 13.7x earnings per share. The 3.2% dividend yield adds to the appeal of this stock.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, remains stuck in the same 34-36 range it’s been in for the last month-plus. In his latest update, Bruce wrote, “With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worry about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

“However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, pay a generous dividend (recently raised 8%) and sizeable share buybacks.

“There was no significant company-specific news in the past week.

“Comcast shares … have about 21% upside to our 42 price target. The shares offer an attractive 3.1% dividend yield.” BUY

Corteva (CTVA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has fallen sharply since the calendar flipped to December, dipping from 67 to 59. Barely holding above its 200-day moving average, as well as its October lows at 57, we’ll hang on for now. But like Centrus Energy, CTVA needs to stop falling now or we’ll soon cut the cord.

In his latest update, Carl wrote, “Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. While the market is down sharply over the past year, CTVA is up more than (25%). Although the down market does lead to quality companies growing top-line revenue and net profits trading at bargain prices, a strong case can be made for stocks like Corteva that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%.” HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down another 4% last week, but bounced off support at 303 and remains well north of its November low (268). The trajectory is still very much up for this renewable energy stock, our portfolio’s best performer in 2023, so we’ll keep it at Buy. In his latest update, Mike wrote, “Like most potential leaders, ENPH has been choppy of late and taken the occasional body blow, but it’s held up pretty well despite the environment and isn’t far from new-high ground; it’s a similar story for most solar stocks, which have bobbed and weaved but held their ground. Interestingly, there’s been no meaningful news from (or much analyst commentary on) the company since earnings a few weeks back, but the writing remains on the wall for continued big increases in sales and earnings both in the U.S. and Europe as the dam has broken in the industry; year-to-year worries about subsidies and other factors have been (mostly) replaced by certainty, allowing firms to plan on big projects going forward. Ideally, ENPH decisively breaks out soon as growth stocks go bananas, and we’ll average up on our stake, but obviously, we’re open to anything. Right now, owning a half-sized stake and giving it some room to breathe makes the most sense. We’re OK grabbing some shares here or on pullbacks if you’re not yet in.” BUY

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, has had a rough couple weeks, plummeting from 15 to 9. Cannabis stocks as a group have taken it on the chin this month after Congress’ choice not to pass the SAFE Banking bill, which would give the cannabis industry the banking legislation it needs. There’s still a chance the SAFE Banking bill passes before the end of the year – it’s possible it will get attached to an omnibus funding package. For now, though, cannabis stocks are getting hammered. Are these a bad couple weeks, brought on by a classic market overreaction? Or the beginning of yet another extended dip for the industry? I’m betting it’s the former. So, for now, we’ll keep GTBIF at Buy. BUY

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, remains in a range between 3.95 and 4.38. A break higher could be coming if and when the market gets its act together again, so we’ll keep it at Buy. BUY

NerdWallet (NRDS), originally recommended by Tyler Laundon in Cabot Early Opportunities, has had a rough few weeks since we added it to the portfolio, falling from 12 to 9. There’s been no news; likely, NRDS is getting tossed aside like most growth stocks in the last two weeks. It’s currently our biggest loser, as the timing on this one has been far from ideal. Let’s downgrade to Hold, and if it still remains in the doldrums a week from now, we’ll likely sell and collect the tax break. MOVE FROM BUY TO HOLD

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, has fallen below support at 88, and it’s time to sell. We added ORA when renewable energy stocks were humming a few months back. Now, that group is in retreat mode, and with two other renewable energy stocks (ENPH, LEU) in the portfolio that have demonstrated more strength, plus today’s addition of NEE, we no longer have much need for ORA. MOVE FROM BUY TO SELL

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is holding smack in the middle of the 61-to-65 range it’s been in for the past two months. In his latest update, Tom wrote, “This legendary monthly income REIT tends to trend high and then get choppy for a while. But O still has the right stuff for this market. It’s recession-resistant and a great source of income. Again, defensive stocks tend to outperform in weaker economies and recession. O should provide a steady income and relative strong performance during likely turbulence in the first half of 2023. It will still likely continue to trend higher, but perhaps in a choppier fashion than we’ve seen recently.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is at new 2022 lows this morning, falling below 150 for the first time in more than two years. Yikes! There’s been no major news that would prompt such continued selling – the recent weakness is due likely to a combination of growth stocks getting tossed overboard for most of December, and Elon Musk’s ongoing public missteps since taking over Twitter. Neither of those has anything to do with Tesla as a company, which is still growing just fine. But, given how steep the losses have been of late – TSLA has lost more than half its value in just three months! – I wouldn’t recommend buying the stock until it establishes a clear bottom, even though I’m almost positive buying here would turn out well a year from now (probably much less than that). But you can’t fight the trend, so we’ll keep it at Hold until the selling subsides. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has predictably coughed up some of its October/November gains, falling 6% this past week. Still, the stock is up 16% in the last two months and remains one of our top performers. Third-quarter earnings, reported on December 1, were excellent: Comparable-store sales improved 14.6%, well ahead of the 8.8% jump analysts anticipated. Net income increased 27.5% year over year, to $274.6 million. And full-year earnings guidance was raised to a range of $22.60 to $22.90, ahead of the $20.70 to $21.20 expected. So, let’s keep this one at Buy, despite the recent mini-slump. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, was down about 3% this week but is still above its 50- and 200-day moving averages. In his latest update, Mike wrote, “Stop us if you’ve heard this before: WING hasn’t been making much upward progress in recent weeks, but it’s constructively consolidated its big earnings move in October, held up above key support (it bounced off its 50-day line last week) and isn’t far from multi-month highs—i.e., it looks ready to go if the environment improves. While near-term recession fears have toyed with some consumer stocks, many factors are improving, too; falling energy (and gasoline) prices, as well as lower interest/mortgage rates, falling inflation and a still-strong job market should help the consumer spending cause. Of course, we’re not macroeconomic investors, so we’ll just stick to the growth story (remains solid, with wing price deflation likely to help boost already-great store economics) and chart, both of which look proper. We’ll stay on Buy.” We will too. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is holding firm in its 34-to-37 range. The fund offers a high dividend yield and some of the highest-quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, dipped from 22 to 21 this past week but has been building a nice-looking base while most other growth stocks have fallen sharply. A breakout similar to the one it had in November could be forthcoming … IF the market can shake off the cobwebs. The company is the leading franchisor of boutique fitness studios in the U.S., and it recently expanded its growing international presence by inking a master franchise agreement in Japan that gives Xponential the option to license a minimum of 100 new fitness studios in Japan over the next eight years. BUY

The next Cabot Stock of the Week issue will be published on December 27, 2022.