1 Stock for the Uranium Bull Run
There's a massive opportunity setting up in the commodities market — and this is the one stock you need to be in on...
· Enphase Overview
· Performance Update
· Cameco’s Acquisition
· CPI Data
This week, energy and inflation are our two main focuses. First, we’ll look at the emerging solar titan, Enphase, followed by an overview of uranium giant Cameco’s massive acquisition of Westinghouse.
Lastly, we’ll wrap things up by going through the CPI data that came out last week. For a quick summary, watch this video:
But before we dive in, check out my new segment: The Hot 🔥 Crypto Takeaway of the Day!
The Hot 🔥 Crypto Takeaway Topic: Crypto Disrupts Banking
Like Bitcoin, Ethereum is a blockchain that records transactions. In addition to that, Ethereum enables something called “smart contracts,” which Bitcoin doesn’t have.
Smart contracts allow a wide variety of transactions to take place, like buying and selling cryptocurrencies, or lending out crypto to earn interest and borrow against.
This is what’s given rise to the explosion of decentralized apps, or “dapps,” in the crypto space.
Think about Ethereum like the Android network, where developers can build applications that allow people to do all sorts of things.
For the most part, dapps have use cases pertaining to finance, earning the nickname “DeFi” (decentralized finance).
DeFi Seeing Adoption 👀
One example is Uniswap, which has become a prominent crypto exchange. Altogether, people traded over $620 billion worth of crypto on Uniswap in 2021, and this year, the total is over $488 billion. 🤯
Another example is Aave, which allows people to lend out crypto to earn interest. In addition to that, they can also borrow against their crypto.
Compared to the traditional finance world, Aave is a huge step in the right direction as it makes services available to everyone in an instant. Right now, over $2.9 billion is being borrowed on Aave.
At the height of the bull market, this total exceeded $11 billion!
Overall, Ethereum is an amazing new piece of technology that will bring endless innovations to our lives.
And over the coming weeks, I’ll show you some cryptos that I believe will change the way we interact with money and present an awesome investment opportunity
1 Sector Hot With Growth ☀️
At this point, solar energy really doesn’t need much of an introduction. Its growth around the world has been nothing short of incredible, and it’s still going strong. Here are some quick stats:
· Global solar energy capacity grew by another 23% in 2021 and hit 1 terawatt earlier this year (enough electricity to power several million homes).
· Solar was the world’s fastest-growing source of electricity for the 17th year in a row in 2021.
· Fifty countries are now using wind and solar for 10% or more of their total energy.
When you consider the magnitude of these numbers, it’s crazy to think that solar power still only accounts for about 3.7% of the world’s electricity. However, that just means more market share to capture for companies like Enphase Energy Inc.!
1 Stock for the Solar Bull-Run
Enphase is creating an all-in-one solar energy management system for homes and businesses. Not only does this make energy consumption and maintenance a whole lot easier — as it allows you to see all kinds of stats and metrics in an app — but it also makes Enphase a one-stop shop for residential and commercial solar products.
One of the key parts to this system is its microinverter technology, which was its breakout product. Put simply, microinverters make solar panels much more efficient.
On top of that, Enphase makes storage batteries which have seen a massive surge in demand. This is especially true of its larger battery systems, as the overall megawatt hours (MWh) of capacity shipped in the first half of 2022 grew 198% from the first half of 2021.
Even when you consider how hot the market for solar has become, Enphase’s revenue growth over the past several years is still shockingly high.
In 2018, it brought in $316.2 million in sales. And this year, its expected sales are a massive $2.24 billion. If it hits that target, it’d be 609% growth in just four years!
Enphase is also capturing lots of market share around the world. Last quarter, its international sales grew 75% from a year prior. This is impressive considering a lot of that is in Europe, and the euro fell 9% against the dollar that quarter.
Now, whenever you see 609% growth in four years, the likelihood of that pace continuing is pretty low. However, with solar only accounting for 3.7% of all electricity, there’s still a huge market out there for Enphase to capture.
Cash-wise, Enphase is in a very solid position as well. It currently has $1.25 billion in cash versus $1.2 billion in debt. The debt may sound a little high, but only $88.4 million is due before 2026.
Levered free cash flow (LFCF) has been strong as well, with a total of $569.9 million over the past two and a half years.
LFCF is the amount of cash that the company has left over after its debt payments have been made. This is the cash it uses to fund its operations.
As I’ve been saying every week, having self-sustaining cash flow is extremely important as debt becomes more expensive and less available.
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Performance Update:
Performance:
Disruptors Index: -3.87%
S&P 500: 1.11%
Nasdaq: 2.11%
Russell 2000: 2.09%
ARKK: -3.06%
Top 3 Performers:
Airbnb Inc. (Nasdaq: ABNB) +7.33%
Proto Labs Inc. (NYSE: PRLB) +2.18%
Bitcoin (BTC) +0.33%
Bottom 3 Performers:
Cameco Corporation (NYSE: CCJ) -15.17%
Pinterest Inc. (NYSE: PINS) -10.31%
Guardant Health Inc. (Nasdaq: GH) -10.24%
Airbnb is showing its strength once again as it continues to be a top performer. In fact, it beat the S&P 500 by 24% in Q3, and it’s beating it by another 8% in October.
Cameco was the worst performer in the index as it sold off after its announcement that it’s buying a 49% stake in Westinghouse Electric, a major player in the nuclear energy industry.
However, with nuclear rapidly growing in popularity, I don’t think this was a bad decision by Cameco at all.
Cameco’s Acquisition
To me, whenever a huge deal is made seemingly out of nowhere, that’s a sign that management sees extreme promise in the future.
Considering that Cameco’s management has actually been criticized for being overly conservative with their money, the fact that they’re spending $2.2 billion on Westinghouse is an absolute green-light that the uranium/nuclear market is going to take off in a huge way over the next several years.
In hindsight, I think this is why Cameco decided to file for a $1.5 billion share offering back in September.
Westinghouse drew a lot of attention back in 2017 due to an unfortunate issue with its newly-designed power plants. Basically, these plants turned out to be much more expensive than anticipated, causing the company to shut the project down and file for bankruptcy.
Ironically enough, the project that caused this bankruptcy was the Vogtle Plant in Georgia, which is now expected to be finished next year as the first new U.S. nuclear plant in over 30 years.
However, this incident distracted from the absolute titan that Westinghouse is to the nuclear industry.
Despite what happened, it still serves as the core service provider to over half the world’s nuclear reactors. This means that not only is Cameco one of the largest uranium producers/refiners in the world, but it now has an enormous stake in the servicing part of the industry as well.
So, why did the market sell off on this news?
For one thing, the market rarely bids up a stock that’s making an acquisition, and CCJ is no exception as it went down over 13% the day after the acquisition was announced.
Investors are likely skeptical of the amount of debt Cameco is taking on. Westinghouse, like many utility companies, is highly levered, meaning it finances a lot of its operations through debt.
However, this isn’t something to worry about for Cameco’s business. The tides are turning fast for nuclear, and the coming uranium shortage is going to bring lots of money into leading companies like Cameco.
CPI Data Update
Last Thursday, September’s much-anticipated CPI report came out. Total CPI beat expectations again (although it didn’t set a new high), coming in at 8.2% year over year and 0.4% month over month.
Of course, the thing that’s been holding total CPI down is energy, which has been down 13% over the past three months.
Energy was supposed to be the thing that cooled down inflation, as expensive oil and gas makes just about everything else more expensive. However, we haven’t seen that unfold just yet.
The part that I believe spooked markets was the Core CPI, which excludes food and energy prices. This did set a new high with a yearly increase of 6.6%. The monthly change wasn’t much better with 0.6% growth for the sixth time in the past year.
While a lot of people have been focusing on energy prices coming down, the core inflation continues to grow steadily. A lot of this is being driven by the “shelter” metric, which attempts to measure rent and housing prices.
In fact, shelter is almost an entire third of CPI, with a 32.5% weighting.
In September, shelter was up for the fourth time in the past five months, this time by 0.7%. Even though we all know house prices are coming down, the CPI version of housing continues to climb.
Unfortunately, the correlation between shelter and actual home values is low. As you can see here, shelter barely even budged during the 2008 housing crash:
The reason for this is because it attempts to convert the price of actual houses into a somewhat-arbitrary measure called Owners’ Equivalent Rent (OER).
Instead of taking the price of a home, they try to figure out what the owner could charge if they were to rent it out. Probably not the best way to value real estate!
However, ultimately this game is being played by the Fed, and if we’re going to try and figure out what it’s going to do, we need to know what it’s watching — no matter how inaccurate it may be.
In addition to shelter, there are a couple other areas within Core CPI that have been persistently high…
First, medical services have a 6.86% weighting in total CPI. This basically measures the cost of going to see a healthcare professional, and its inflation in September was 0.99%.
Transportation is another one worth pointing out, with a 5.86% CPI weighting. It covers things like car repairs and insurance, and its monthly September inflation was 1.69%.
Overall, the smaller components like these are holding up very well. As a result, Median CPI is still moving up, meaning that inflation continues to make new highs for a lot of things:
So, what does all this mean?
It means that the inflation we’re seeing is not due to one single thing. Sure, energy is probably responsible for a good part of it … but despite energy prices going down for three months, inflation just about everywhere else continues to be rampant on a monthly basis.
Another cause that I think has been largely ignored is the labor market.
I know I talk about this pretty much every week, but the labor shortage is still alive and well with 1.75 job openings for every unemployed person in the labor force.
That means companies have to offer very competitive pay to fill their openings. The two major input costs to a ton of companies are labor and energy. Energy is down, but labor costs continue to grow, which also increases output costs.
At some point, we’re going to see companies dial back their labor because of deteriorating margins (decreased profits) or deteriorating demand. Considering demand for goods and services is still very high, it’s more likely that we’ll see financial issues lead to layoffs.
This earnings season, one of the most important things to watch is how much the mega-cap margins fall apart. This isn’t going to all happen at once, but we’ve seen early signs of it for the past two quarters.
During a recession, it’s not uncommon to see earnings for the market as a whole to drop by 20% or more, and as input costs keep going up, I think this is inevitable.
These financial issues will lead to the demand destruction the Fed has been looking for.
Again, I don’t expect this to happen right away, I think we’ll need to see at least three to four months of significant month-over-month declines in Core CPI before they stop hiking rates. But seeing that demand is still as strong as it is, it’s going to be tough to tame.
So, why is demand so strong?
First, people built up a lot of savings over the 2010s:
Then came stimulus checks, tax credit, and lots of other forms of financial relief, freeing up even more savings.
After the lockdowns promptly ended, everyone was accustomed to having all this money on their hands, and the stock market’s recovery helped create a nationwide wealth effect (people feel richer because they see their stocks going up). Naturally, people went out and spent.
But then, inflation drained all the excess savings and more:
In addition to inflation, people got so used to spending and the “reopening” lifestyle, that even with high inflation, discretionary spending is still unusually high.
So, as we begin to see the actual effects of these rate hikes on corporate earnings over the next six to nine months, I think we’ll ultimately see blue chip profits plummet, leading to layoffs, which will be the first catalyst for deflation.
That’s all for today!
I really enjoy the update. Strong hands on both CCJ and ENPH.
Enjoy the factual macro overview, thanks, Ian!