Technology

Core Scientific and Plains All American Holdings have been highlighted as Zacks Bull and Bear of the Day

For Immediate Release

Chicago, IL – May 20, 2022 – Zacks Equity Research shares Core Scientific CORZ as the Bull of the Day and Plains All American Holdings PAA asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on MGE Energy Inc. MGEE and  Hawaiian Electric Industries Inc. HE.

Here is a synopsis of all four stocks:

Bull of the Day:

s broader The latest capitulation in the more speculative corners of the market has absolutely crushed Bitcoin-mining groups. Today, these miners are trading deep in oversold territory at fire-sale valuation multiples (just fractions of where they began this chaotic year), opening an incredible long-term investment opportunity or even near-term trading play for those Bitcoin bulls.

Bitcoin's buoyancy relative to the rest of the risk-on market since it bounced off its $25k support level in the wee hours of the morning last Thursday (5/12), further supports its Gold 2.0 "flight-to-safety" aspect that crypto enthusiasts have been campaigning around for years. The decoupling of Bitcoin from other risk assets is a healthy sign of growing adaptation and trust in blockchain technology.

Core Scientific, a captain of hyperscale-fueled blockchain solutions, holds market leadership in Bitcoin mining & blockchain-focused data center hosting and is looking ripe for a buy after a grand-slam Q1 earnings report last week (5/12).

Despite CORZ's rollercoaster price action since its official de-SPAC debut on the public markets in mid-January (most recently aimed at the center of the earth), its fundamentally-backed growth narrative is undeniable, and its quarterly release in mid-May invigorated analysts' interest in this egregiously undervalued leading BTC miner (but has its toes in every blockchain data center market).

CORZ analysts have been providing increasingly bullish outlooks for this best-in-class blockchain innovator across the board since its estimate impelling homerun Q1 earnings report, driving CORZ into a Zacks Rank #1 (Strong Buy).

The Q1 Catalyst

CORZ Q1 results revealed an incredible explosive growth narrative as its quarterly revenues rocketed 255% higher year-over-year with margin expanding operational efficiencies, allowing Core to generate a record 3,202 bitcoins in the first 3 months of 2021 (a nearly 1,500% increase from the same quarter last year).

At the same time, Core Scientific's hosting operations (a more reliable revenue source) grew by 162% to $33.2 million in Q1 2022, accounting for 17.2% of the firm's quarterly topline results. The company also participates in the sale of digital-mining equipment, where it managed to generate $26.3 million, which represented an -18% decline from the year prior. The firm's ability to quickly open the digital asset mining floodgates (hyperscale) allowed it to generate $133 million in Bitcoin sales (average sale price of $41,299 in Q1), which is the catalyst for today's pitch.

Now the real focus when evaluating digital asset miners is their hash rate, which embodies the firm's aggregate computing power and relative market share (explained further below). Core Scientific has an industry-leading total hash rate of 16.2 EH/s today (8.3 EH/s for self-mining & 7.9 EH/s for hosting) and plans to break above 30 EH/s before the end of 2022. In the latest earnings release CEO Mike Levitt explained that this hash rate expansion is "fully supported by existing capital structure," which indicates to me that the risk is to the upside.

Compared to its leading domestic competitors' Riot and Marathon, CORZ is trading at a relative discount across valuation metrics. Market cap to hash rate (or price to total hash rate per share: P/TH) is a critical measure of price to future profitability in this niche, and CORZ is trading at 147x P/TH compared to MARA & RIOT who are trading at 277x and 187x, respectively. CORZ forward P/E has seen an even deeper discount from the high teens following its public debut to begin the year and is now trading at an incomprehensibly low 3.5x, which is considerably below the valuations of RIOT and MARA.

Core Scientific is also provided with economically conditional operational levers concerning the use of its rapidly expanding computing power, which could be utilized primarily for self-mining in the case that BTC continues to trade buoyantly or for additional hosting revenue amid a crypto lull.

Either way, analysts have been offering up some very bullish outlooks for this stock, with the latest price targets sitting between $10 and $18 a share (depending on where BTC trades), representing an up upside of between 150% and 350% from where CORZ closed Thursday (5/19).

Crypto Mining & Hash Rates

Cryptocurrency mining, contrary to what your intuition tells you, is the process of verifying new transactions made with a given digital currency, and in turn, being "rewarded" for this act with new coins. Verifying a transaction involves immense computing power to validate each node on a blockchain network and an accurately updated ledger (a new block in the chain). This crypto-mining process is referred to in the cryptographic world as Proof-of-Work (PoW), which Bitcoin (the most heavily mined and leading cryptocurrency on the market) and Ethereum both employ. 

The practice of mining Bitcoin is often described to laymen as solving a highly complex math problem, and the computers that help find the solution are awarded newly minted Bitcoin. In reality, it's a speed-driven guessing game to decrypt a random code, with the fastest computers being the most successful. NVIDIA's best-in-class GPUs are perfect for this type of hyper-speed computing and are the most sought-after products in the crypto mining world. 

Mining is a necessary operation to ensure the security of Bitcoin's (or any other PoW digital currency's) blockchain network, and the more miners the more secure the coin. The caveat here is that Bitcoin is becoming incrementally less lucrative to mine, with 90% of the coins (roughly 19 million) having already been mined and only 2 million of these digital coins are left to be mined (expected to be mined by 2040), and incremental PoW rewards are slowly dwindling. 

Furthermore, the cost associated with mining bitcoin (energy and processing power) are extremely high and only provide profits when the cryptocurrency is trading above a threshold price. Crypto mining is all about scale, with just a few operators controlling most of this market. 

Miners' market share is represented by hash rates, which signifies the speed at which entities computes transaction verification data necessary to reap the Bitcoin rewards and scale is the single most important differentiating factor. The higher the hash rate the more nodes that can be verified per second, meaning that hash rates and mining efficiency are directly correlated. Unfortunately, this positive hash rate correlation is a also factor of energy usage (higher hash rates require more energy). 

Hash rates are measured in seconds (hash per second or H/s), and you will often see kH/s, MH/s, or even EH/s, which are in terms of 1,000 hashes per second, 1 million hashes per second, or 1 quintillion hashes a second, respectively.  

The total global Bitcoin mining market has an endlessly expanding hash rate of more than 220 EH/s today, and US miners now control 38% of this total computing power (85 Eh/s) with the latest regulatory crackdowns in China's crypto opening the door for massive market share growth domestically (though Chinese miners have continued to operate below the regulatory radar). 

Final Thoughts

CORZ provides you with a leveraged way to bet on Bitcoin's inevitable mass adaptation as the  next generation's Gold 2.0. Millennial's penchant for progress since the pandemic started has propelled Bitcoin from less than $5k to $65,000 per coin (1,200%) in the 52-weeks that followed the pandemic sell-off.

83% of Millennial millionaires (the leaders of the future) own cryptocurrency and roughly 500,000 crypto-backed Web3 projects are currently in development (the average developer age is 36). The level of commitment and dedication by the next generation to decentralize the global economic system is unparalleled and Bitcoin stands at the heart of this ecosystem.

Keep in mind that CORZ is on the far-right barbell of extreme high-risk/high-reward so bear this outsized risk in mind. CORZ also holds that de-SPACed taboo, which many traders have been indiscriminately short-selling into oblivion (providing this valuable opportunity today but expect the choppy trading to continue into the summer months).

Nevertheless, the 4 covering CORZ analysts are calling the stock a strong buy today, with presumed BTC buoyancy remaining at the core of that argument. If BTC drops materially below $20k (the pivotal support level that traders are watching for) I would be rethinking this investment, but I continue to be bullish on the space and would consider Riot Blockchain as an equally judicious buy here.

Bear of the Day:

Energy is the singular one of the S&P 500's 13 sectors to generate materially positive year-to-date returns, as a medley of inflationary pressures drive demand past what was thought initially to be ample supply (remember the supply glut that caused the unprecedented negative oil prices in April of 2020) and recent pressures from Russian energy sanctions have exacerbated these price constraints.

Oil & gas enterprises are getting an enormous near-term bid due to elevated near-term profits from global price pressuring supply shortages, and the conflict in Eastern Europe has magnified its globalized impact. Nevertheless, increasingly lucrative energy commodities like oil & gas will inevitably revert to their mean over time, diminishing the recent gains from legacy players.

US consumers have been making a perennial shift in consumption patterns away from antiquated dirty energy sources like oil & gas and towards clean sustainability, which is not only more economically viable from a long-run profit standpoint but aligns with growing global environmental concerns.

Plains All American Holdings, one of the largest oil & gas distributors in North America, is one such midstream oil enterprise that looks like it's well on its way towards obsolescence after 4 consecutive quarterly disappointments which have shown a growing deficit between expectations and reality.

PAA's increasingly conservative estimates are being missed by a growing margin, demonstrating the firm's inability to capitalize on the spike in oil & gas prices, which has temporarily flooded profits into the energy sector. When conditions normalize (or worse begin to deteriorate) PAA's paper-thin margins will go negative in the blink of an eye.

Of course, midstream energy players don't enjoy the same degree of upside as E&P operations. However, with transportation & storage costs soaring alongside oil & gas (Plain's core segments), PAA's inability to expand its earnings is concerning, and the latest EPS miss (largest miss since 2017) expands PAA's list of bearish qualities.

PAA's growing underperformance between both the broader energy sector as well as the midstream niche is liable to continue expanding as conditions normalize.

Analysts have been dropping their EPS estimates across all investment horizons like hotcakes, sending PAA down into a Zacks Rank #5 (Strong Sell).

The Existential Energy Crisis

I believe there is more downside to PAA's narrative here because the only substantiated bull case for this mid-stream player is made under the presumption that production in the Permian basin (Plain's primary operating region) will continue to grow throughout the remainder of the decade. I view this longer-run production growth as an unlikely outcome considering the material shift consumer patterns have already adapted (sprinting away from fossil fuels), not to mention the recent scarcity of prime drilling locations in the region.  

Global supply constraints have made US oil & gas products more valuable than ever, but that won't last forever with the world economy already making big moves to get rid of big oil.

The existential crisis of mortality that the pandemic (and its lockdowns) induced has society looking towards the health of our planet, with Millennials & Gen Z's flooding into the public markets since the lockdowns began with a penchant for sustainability.

This next-generation cohort's market-moving Reddit message board r/WallStreetBets demonstrates the level of interest that the next generation of economic leaders has for the flood of new electric vehicle (EV) companies that have hit the public markets in recent years like NIO, Lordstown, Rivian, Lucid and of course everyone's favorite EV winner Tesla.

This cohort has also had a proclivity for sustainability-focused energy sources like solar with bids for shares of Invesco's Solar ETF, Enphase and SolarEdge. Uranium stocks like Cameco and Energy Fuels have even seen a revival from their decade-long slump, with younger retail investors flooding into the nuclear space, a key ingredient for achieving our zero-emission goal.

The world is rapidly turning away from fossil fuels, and the energy crisis in Europe has nations looking to achieve energy-independent in the next few years, with the now evident global reliance on Russian oil & gas supplies highlighting the profit-driving need for sustainable energy.

USAC has finally returned to its pre-pandemic share price levels. Still, I question its ability to maintain this buoyancy with its bottom line at risk of flipping back into negative territory while interest rates soar.

Final Thoughts

PAA's inability to effectively capitalize on the oil boom like its midstream competitors suggests to me that this company is an archaic player in a fleeting space (Plain's antiquated IR page tells the whole story), which does not allure me in the slightest even if it is offering up an 8% dividend.

PAA is trading at its highest forward P/E multiple since 2019 when the stock was more than double the value it's at today, and its nominal annual dividend yield has fallen equally. This stock will continue to make these cuts and disappoint investors when the oil market finally looks like it's turning in your favor. I'm staying clear of unadopted energy stocks at the elevated market multiple this entire bloated space has been given.

Additional content:

Which Is the Better Power Utility to Buy, MGEE or HE?

Utilities operating in the United States are taking measures to strengthen their power infrastructure, which involves the process of generation, transmission, distribution, storage and the sale of electricity to customers. Per the U.S. Energy Information Administration (EIA), the total electricity consumption is expected to improve by 1.6% in 2022 and 1% in 2023 from respective year-ago levels.

Utilities have been benefiting from various favorable factors, such as new electric rates, customer additions, cost management and the implementation of energy-efficiency programs. Moreover, the ongoing investments to improve the resiliency of electric infrastructure against extreme weather conditions and a transition to the cost-effective alternate sources of fuel to produce electricity are advantageous for the power industry.

Per the EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 20% in 2021 to 22% in 2022 and 24% in 2023 due to the continuous addition of solar and wind-generating capacity. However, the performance of capital-intensive utilities is likely to have been adversely impacted by an increase in interest rates from near-zero levels. An increase in borrowing costs and a resultant rise in interest expenses are likely to have adversely impacted the earnings of companies operating in the space.

The ultimate goal of utilities is to make the system strong, resilient and reliable. Per the EIA, major utilities in the United States have been spending more on delivering electricity to customers and less on producing it. These upgrades will assist the network in performing better amid adverse weather conditions and ensure that end-users get a 24x7 supply of electricity and face minimum outages.

In this article, we run a comparative analysis on two Utility – Electric Power companies — MGE Energy Inc. and  Hawaiian Electric Industries Inc. — to decide which stock is a better pick for your portfolio now.

Both the stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1  Rank(Strong Buy) stocks here.

MGE Energy has a market capitalization of $2.96 billion, while the same for Hawaiian Electric Industries is $4.6 billion.

Growth Projection & Surprise History

The Zacks Consensus Estimate for MGE Energy's 2022 earnings has moved up by 1% in the past 60 days to $3.13 per share.

The Zacks Consensus Estimate for Hawaiian Electric Industries' 2022 earnings has moved up by 3.3% in the past 60 days to $2.19 per share.

MGEE delivered a negative average earnings surprise of 3.8% in the last four quarters, while HE delivered an earnings surprise of 30.8% in the last four quarters.

Dividend Yield

Utility companies generally distribute dividends. Currently, the dividend yield for MGE Energy is pegged at 1.9%, while Hawaiian Electric Industries' dividend yield is 3.3%. Hawaiian Electric Industries' dividend yield is better than the industry average of 3.1%.

Debt to Capital

Debt to capital is a good indicator of the financial position of a company. The indicator shows how much debt is used to run the business. MGEE and HE have a debt to capital of 60.6% and 52.3%, respectively, compared with the industry's average debt-to-capital level of 60.2%.

Return on Equity

Return on Equity (ROE) is a measure of a company's efficiency in utilizing shareholders' funds. ROE for the trailing 12 months for MGE Energy and Hawaiian Electric Industries is 10.2% and 10.7%, respectively. Hawaiian Electric Industries outperformed the industry's ROE of 10.3%.

Outcome

Although these companies are efficiently providing services to customers, Hawaiian Electric Industries, with its positive earnings surprise, efficient debt management, higher dividend yield and superior ROE, is a better stock to add to your portfolio.

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