Four Favorites for Long-Term Growth
06/03/2015 10:00 am EST
Timothy Lutts is editor and chief analyst for Cabot Stock of the Month; here, he looks at four favorite stocks: a renewable energy yieldco, an electric car maker, a recent IPO in the gourmet burger sector, and a technology firm involved in high-definition video.
Steven Halpern: Our guest today is Timothy Lutts, editor and chief analyst for Cabot Stock of the Month and head of the Cabot Publishing Group, which—for some 45 years—has published many of the industry’s most respected and widely followed newsletters. How are you doing today, Tim?
Timothy Lutts: Great, Steve, glad to talk to you.
Steven Halpern: At Cabot, you oversee a dozen advisory services ranging from small-caps and options, global investing, as well as growth- and value-oriented services, and the newest one focuses on dividends. Could you walk us through the decision to introduce a dividend service and how important dividends are in the market cycle now?
Timothy Lutts: Sure. This publication—called Cabot Dividend Investor—aims to give investors—and steer investors toward—sources of regular income that they’re missing because interest rates are so low.
Interest rates, I think, are staying low and I think investors, especially as baby boomers head into retirement, I think they’re going to gravitate toward these various sources of dividends.
In particular, you know, blue chip stocks, of course, but there’s a great trend toward increasing dividends. Since 1900, in fact, the average dividend payment on stocks has been about 5.4%, but today it’s down around 2%, so just to get back to average, and get us back to 5.4%, which is something to look forward to.
The other thing happening with dividends is some people are coming out with new vehicles, you know that in recent…okay, so, we’ve had REITs and then we’ve had NRPs, but the newest wrinkle is things called yieldcos. Yieldcos, there are only a few of them out there so far, they’re pretty young.
Steven Halpern: Speaking of yieldcos, you recently highlighted one in particular called TerraForm Power (TERP). Could you just briefly explain what a yieldco is and walk us through what you like in particular about TerraForm?
Timothy Lutts: TerraForm, like most of the yieldcos, is focused on the energy industry, specifically renewal energy, solar and wind in particular, and what they do is, the parent company (or companies) drop down their secure assets, which have long-term contracts, and therefore, a steady cash flow looking decades ahead.
And then, investors are encouraged to invest in these for the steady dividends, which—in the case of TerraForm—is a 3.2% yield.
Some are higher, so investors get the dividend. The parent companies get a new influx of cash for investment in new development and I think there’s going to more of them coming out in the years ahead. TerraForm is one.
Steven Halpern: Among growth stocks, you’ve been a long-term fan of Tesla (TSLA). In fact, you’ve been bullish on the shares at many times when the market was most skeptical. What kept you confident in the outlook for Tesla and what’s your outlook now?
Timothy Lutts: Well, number one is management. They’ve got a genius running the show with some big visions looking forward and is still surprising people in his ability to come out with things the market gets excited about.
Now, the first and still main part of the business is the electric cars, but just recently, they came out with this whole new plan to provide storage batteries, not just to homes, but to utilities.
This is a great solution to utilities that are looking for load levelers for their solar and wind part of the picture, and they want to keep the grid running, and this balances the grid just when it’s needed, so big potential here and I think the market’s excited again.
Tesla went through, early on in 2013-2014, you had the romance phase of the stock and the stock bid up pretty well and very excited. Then it cooled off for nine months, or so, in 2014 into this year, which is normal for a young stock.
Now, you’ve got romance again in the fact of the energy business and the storage battery business, and the cars are still doing fine, so I’m really excited about it still and I still have it on buy long-term.
Steven Halpern: Now, let’s turn to a recent IPO, the burger chain called Shake Shack (SHAK). Could you share your thoughts on this firm and perhaps touch on what different factors you need to consider when you are looking at a recent new issue?
Timothy Lutts: I like new issues because there are more potential buyers than sellers. We don’t recommend IPOs, but once we see a stock that is strong in the months after the IPO, we’re interested. The Shake Shack is a classic, cookie-cutter story, meaning they can open restaurants as fast as they want.
And they’re growing—actually accelerating growth of revenues in recent quarters—some 56% the past quarter. I’ve never eaten in one so I can’t testify to the food, but obviously people like them and, you know, it’s the same model that grew McDonald’s, Starbucks, Chipotle, so, good potential there.
Steven Halpern: Now, finally, in the tech sector, you highlight a company called Ambarella (AMBA), a semiconductor firm involved in high-definition video. What’s the story here?
Timothy Lutts: Well, video as we know is booming thanks to both entertainment, like GoPro, and surveillance, both police, home, businesses, and big trends, so Ambarella has the guts that shift the software, which many and more and more people and companies are behind. The stock is very strong.
A lot of stocks I've mentioned, I should mention, are not value stocks. I like growth. I don’t mind paying up for great growth and investing in a bright future, and historically, Barclays valuation doesn’t matter for the greatest growth companies, so as long as trends are strong, I like them.
Steven Halpern: Again, our guest is Timothy Lutts, head of the Cabot publishing organization. Thank you for taking the time to speak with us today.
Timothy Lutts: Thank you, Steve.