Cabot Stock of the Month Issue: November 9, 2023

Market Review

The markets had a very good week, and so far, we are also seeing momentum in the first couple of trading days this week. These upward moves have taken the Dow Jones Industrial Average to just about where we started at the beginning of 2023.

Last month, inflation edged up to 3.7%, from 3.67%, and the unemployment rate also slightly increased, to 3.9%. The Federal Reserve—for two continuous decisions—kept the Fed Funds rate steady.

The economy continues to show strength. Productivity is up and so are factory orders. Job openings are steady, at 9.6 million.

Housing is loping along, with September single‐family housing starts coming in at a rate of 963,000, 3.2% above the revised August figure of 933,000. Existing home prices have continued to rise for the last seven months, as you can see in the chart below.

Growth stocks are still the market leaders, with large-cap (+27.73%), mid-cap (+8.92%), and small-cap growth (+1.47%) up so far in 2023.

Sector-wise, Communication Services (+40.78%), Technology (+38.03%), and Consumer Discretionary (+24.05%) are 2023’s winning sectors. And the losers were Utilities (-7.23%), Energy (-4.03%), and Consumer Staples (-3.18%).

Here at Cabot, we like this positive movement, but are still watching for additional breakouts before we are gung-ho!

Feature Recommendation - United Healthcare: A Force to Be Reckoned with in the Health Insurance Industry

Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a fixed-income and dividend expert. This has been a month of volatility, and although I’m thrilled to see last week’s upward momentum in the markets, I also like to keep some steady, dividend-paying choices in our portfolio. So, naturally, I turned to Tom to see which companies he was excited about in this environment.

Tom picked UnitedHealth Group Incorporated (UNH), which has been in his portfolio for about six months. Here’s what he had to say about the company:

“UnitedHealth Group is a Dow Jones component that is America’s largest insurer and one of the world’s largest private health insurers. It’s a goliath with $324 billion in annual revenues that serves 149 million customers in all 50 states and 33 countries. That’s a lot of monthly insurance premiums!

“The group provides services at just about every facet of the healthcare process and the full-scale operation provides a powerful alignment of incentives that helps clients control costs better than competitors, which is a massive issue in the industry.

“The company operates in two primary groups, UnitedHealthcare and its Optum franchises. UnitedHealthcare provides health insurance and benefits to a wide range including large national employers, public sector employers, mid-sized employers, and small businesses and individuals. It also provides health insurance for Medicare and supplements as well as employers globally.

“The Optum franchise provides direct health care, technology services, and prescription drug solutions. The direct health care includes an alliance with 70,000 physicians in local medical groups as well as ambulatory care systems and other chronic treatments. The technology provides data and analytics to manage complex administrative and regulatory issues with hospitals and physicians. It also provides a full spectrum of pharmacy care services.

“Scale is hugely important in this industry. It enables UnitedHealth Group to keep costs down by virtue of volume, have cash for acquisitions, and wield significant power to adjust rates as prices increase. That’s a huge benefit during inflation.

“Although UNH is large in scale, the stock has managed to blow away the returns of the overall market, with nearly twice the return over the past three- and five-year periods, and quadruple the return over the last ten years. UNH has also done this with considerably less volatility than the market, with a beta of just 0.69.

“Few insurers can compete because it does such massive volume and keeps costs low. It’s a highly stable and defensive business operating in a market that grows all by itself as the population ages.

“The fastest-growing segment of the population is 65 and older. Baby Boomers are turning 65 at an average rate of 10,000 per day and will continue to do so for years to come. One-third of the U.S. population is already over 50. The population is older than ever before in history and getting even older still at a rapid pace.

“Aging Boomers will continue to buy their drugs and pharmaceuticals regardless of what happens with inflation or the stupid Fed or the economy. And the massive market for such products is only getting bigger. It’s tough for publicly traded companies because they always must grow earnings somehow. But it’s a whole lot easier for companies that serve a customer base that grows all by itself.

“Health care is a highly recession-resistant business as people tend not to postpone health issues in any economy. UnitedHealth Group is a large, safe business that provides stability in uncertain markets. Aside from that, it has the massive tailwind of the aging population and an ever-increasing number of customers.

“Enrollments were up 1.2 million last year and are forecast to grow by a million again this year. Because of a solid balance sheet, reliable revenues, and deep pockets, the company is able to grow through acquisitions. It recently acquired a cutting-edge software company that should give it a further advantage in streamlining processes and saving costs.

“UNH currently pays an annualized dividend of $7.06 per share, which translates to a 1.32% yield at the current price. While that’s a subpar yield, the payout is well supported, and the dividend is likely to grow. In fact, the quarterly payout has grown 135% over the past five years, from $0.75 in 2018. Companies that grow their dividend tend to be the best market performers as a group over time.

“In its latest earnings report, UNH missed estimates slightly, due to temporary factors, and revenue grew 8.3% over last year’s quarter. The company also reiterated guidance for 7.5% earnings growth for the full year in 2023. The stock is higher since the report, and everything looks solid going forward. UNH is well-positioned as a defensive company with highly reliable and predictable revenue in an uncertain environment. Its market grows all by itself because of the aging population. Hopefully, the positive momentum will reignite as the market stabilizes.

“Sure, UnitedHealth has the huge tailwind of the aging population, as explained above. But so do many other stocks in the healthcare sector. I chose UNH because it has also been a consistently strong performer. It has significantly outdone its peers as well as most large healthcare stocks of any stripe.

“This is a tough environment in which to invest. No one really knows what will happen with inflation or interest rates or if the economy will stay strong or fall into recession next year. In six months, we could be in a raging bull market or sliding into a recession. And it makes a big difference which scenario transpires in which stock to own.

“Instead of trying to predict the future and placing a bet, let’s stick with what we can be certain about. We know the population is aging at warp speed.

“UNH is never going to be your biggest winner, unless you hold it forever. But it will be a safe port in an impending storm. It will increase earnings during an earnings recession for the overall market. It will provide defense and growth at the same time while never providing a high level of risk. It’s a great pick for the current times. BUY”

As Tom says, UnitedHealth Group, Inc. is an insurance goliath, providing a wide range of healthcare products and services, such as health maintenance organizations (HMOs), point of service plans (POS), preferred provider organizations (PPOs), and managed fee-for-service programs. UNH has contracts with more than 1.6 million physicians and health professionals, as well as 8,000 hospitals across the U.S.

With its recent earnings report, the company raised its full-year 2023 earnings guidance to a range of $24.85 to $25 per share, up from its previous estimates of $24.70 to $25.

Wall Street continues to be intrigued by UNH, boosting their earnings estimates for the company in the past couple of months. UBS upgraded the stock to “Buy” last month and increased its price target for the shares to $640. The Street likes UNH’s steady fundamentals and its timely acquisitions in a fairly dead M&A healthcare space.

And like Tom, I appreciate UNH’s continued dividend increases. As you can see from the following chart, the company has a history of rewarding its shareholders with dividend boosts.

I’m a fan, and I think you would benefit, long-term, by adding these shares to your portfolio. Buy.

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About the Analyst: Tom Hutchinson, Chief Analyst of Cabot Dividend Investor

Tom Hutchinson is a Wall Street veteran with extensive experience in multiple investing and finance disciplines. Tom’s expertise includes specialized areas of mortgage banking, commodity trading, and in a financial advisory capacity for several of the nation’s largest investment banks.

For more than a decade, Tom created and actively managed investment portfolios for private investors, corporate clients, pension plans and 401(k)s. He has a long track record of successfully building wealth and providing a high income while maintaining and growing principal. As a financial writer, Tom’s byline has appeared in The Motley Fool, StreetAuthority, Newsmax and more.

He has written newsletters and articles for several of the nation’s largest online publications, conducted seminars and appeared on several national financial TV programs. For the past 10 years, Tom has authored a highly successful dividend and income portfolio with a stellar track record of success.

With 2023’s markets essentially at the starting point of the year, I wanted to get Tom’s opinion on “where do we go from here?” Here is our interview:

Nancy: In a recent update, you mentioned buying into “defensive” industries such as utilities, healthcare, and consumer staples. Would you please give us some details as to why these industries are considered defensive?

Tom: Utilities, Healthcare, and Consumer Staples are considered “defensive” industries simply because they can thrive even in a slow economy or recession. These sectors are “defensive” against economic downturns. After all, people will continue to take their medicine, heat their homes, and buy toilet paper regardless of the state of the economy.

Nancy: With bond yields at pretty high rates, would you be a buyer of bonds and/or bond funds at this time? Why or why not?

Tom: I would buy bonds here. Interest rates are near a 20-year high. Fixed income lends important diversification to a portfolio that has been sorely lacking for the last 15 years, with rates so low. For the first time since forever, you can get a nice rate of interest on investment-grade paper. It’s an opportunity well worth seizing when interest rates may have peaked. Even if rates do move higher from here, there is a high chance rates won’t average higher than this over the next five years, and fixed income is a longer-term investment.

Nancy: The energy sector has been in the doldrums lately. Yet, you have some nice profits booked on both Enterprise Product Partners (EPD) and ONEOK (OKE). Oil prices are on the rise, and the sector seems to be doing a little better, on average. What is your current outlook on the energy sector?

Tom: That’s a tough one. The energy sector goes with energy prices. And energy prices go as the economy goes. If the economy remains strong, energy stocks should do well. If the current high rates do slow the economy in the quarters ahead, the sector will likely take a hit. So, I would regard energy stocks as good for now (especially with the possibility of the conflict escalating in the Middle East) and cautious down the road.

Nancy: REITs have also not been performing well, lately, mostly due to rising interest rates. Your portfolio has a couple of REITs, which seem to be doing OK. Which REIT sectors are you currently attracted to, and which would you avoid?

Tom: In general, I’m bullish on REITs for the intermediate term. REITs have been crushed this year because of rising interest rates. Real Estate is the worst-performing S&P 500 sector in the last three months (down 12.72%). The benchmark Vanguard Real Estate Index Fund (VNQ) is currently selling near the pandemic lows of three years ago. This level of underperformance rarely lasts very long and there is a high chance that REIT prices will be higher in six months or a year from now.

But I would be picky about which REIT sectors to buy. I would stay away from office and commercial REITs and opt more toward specialty REITs in areas like healthcare and technology properties as well as retail REITs in consumer staple properties.

Nancy: Are there any sectors or sub-sectors that you currently see as oversold?

Tom: Utilities, Healthcare, Consumer Staples, and REITs.

Nancy: What are the 3-5 most critical challenges to the growth of the stocks in your portfolio right now?

Tom: Interest rates: The benchmark 10-year rate is near the psychologically important 5% level. Interest rates staying near this high or possibly moving higher is impeding the performance of the more interest rate-sensitive defensive stocks in the portfolio.

Economic slowdown or recession possibility: The economy has been strong but that could change. There is a lag time for high interest rates to negatively affect the economy. These high rates may start to bite in the months ahead. Even if the economy perseveres through the current high rates, it seems like they will move still higher until they do tank the economy. That possibility is holding back the more cyclical stocks.

Geopolitics: There is certainly a possibility that the current situation in the Middle East could escalate into a wider conflict. Bad news on that front could trump everything else and send stocks reeling. While the market hasn’t seemed too worried, I think the risk has held back stronger rallies.

Inflation: This also ties into interest rates. The inflation rate has fallen but is still too high and could reignite at any time, as it did in past decades. As long as inflation remains too high for the Fed, interest rates are likely to remain much higher than in past cycles. It may be that it can’t be tamed without a recession. And neither inflation nor recession are good for stocks.

Portfolio Updates

Tom Hutchinson also provided an update on Qualcomm (QCOM), saying, “The stock has been a dog this year. Even though the overall technology sector is up over 30% YTD, QCOM is up less than 3% for the year. The company derives most revenue from smartphone chips and that market is way down as the cycle ends and the global economy is slower. But sales may have bottomed out. The artificial intelligence boost hasn’t helped QCOM much but that could change as smartphones upgrade for the technology. Meanwhile, QCOM is trading 22% below the 52-week high and 42% below the all-time high.

“It’s a little soon for Qualcomm to benefit from AI upgrades, as they haven’t made their way into smartphones yet.

“Smartphone sales may have bottomed out. The stock sells at a forward P/E ratio of 11, which is cheap considering the cycle and the growth opportunities in the Internet of things and other AI applications. BUY”

In its earnings report, Qualcomm beat both top and bottom-line estimates. Revenue came in at $8.67 billion, handily beating analysts’ estimates of $8.51 billion, although it was down 24% YoY. Adjusted net profit was $2.032 per share, above estimates of $1.91.

Going forward, Qualcomm was upbeat, guiding for sales between $9.1 billion and $9.9 billion with adjusted earnings per share between $2.25 and $2.45. Continue to Buy.

Devon Energy (DVN) now has an average brokerage rating of 1.95 (Strong Buy), based partially on expectations that the company will make another accretive acquisition predicted to increase cash flow. Rumor has it that the company has its eye on Marathon Oil-owned CrownRock. I remain optimistic. Continue to Hold.

Bruce Kaser updated his thoughts on Citigroup (C), saying, “Citi reported a reasonably decent quarter. In its two core businesses (Institutional Client Group and Personal Banking/Wealth Mgt), revenues rose 11% and profits rose 10%. Overall credit costs are rising but remain low and are backed by strong reserves. Deposits ticked lower but remain a minor issue. Non-core results were mixed. Capital is strong with CET1 at 13.5%. Citi remains burdened by excessive regulatory and other costs as well as unproductive capital. The return on equity of 7.7% is about half what it should be, implying that the bank either needs to double its earnings or cut its capital base in half.

“We believe that a combination of both efforts, driven by new and aggressive efficiency improvements and the eventual divestiture of non-core assets will move Citi close enough to a 15% ROE, but this will take yet more time, likely measured in years. Citi’s full-year guidance was uninspiring but not disappointing. The shares trade at less than half of tangible book value of $86.90/share.

“Another way to look at the valuation: using the general rule of thumb that banks trade at a P/TBV that is 10x its return on tangible common equity, Citi shares are pricing in only $3.90/share of earnings. The rough math is that by valuing the shares at 44% of tangible book value, investors are assuming a 4.4% return on tangible common equity of $87/share. [4.4% x 87 = $3.90]. While anything is possible, it would seem exceptionally unlikely that Citi would be stuck at $3.90/share of earnings. No change to our Buy rating.

“In other news, the shares of Citigroup are rallying on the report that the bank may lay off up to 10% of its workforce in its municipal-bond trading and origination business, long a powerhouse in the huge ($4 trillion) U.S. market for state and local debt.”

I agree with Bruce. Continue to buy.

Michael Brush, Chief Analyst of Cabot Cannabis Investor, reported on news of Curaleaf (CURLF), noting, “Cannabis stocks are astonishingly weak following the nomination of Rep. Mike Johnson (R-LA) as House speaker. He has always opposed cannabis legislation. So, the fear is that Secure and Fair Enforcement Regulation (SAFER) Banking Act reform (allowing banks to serve cannabis companies) cannot get out of the House. This is probably true. However, Senate leaders could put the reform in must-pass legislation, and the House may well accept it, given how many current House members have approved the bill in the past.

“The real reason why cannabis stock weakness makes no sense is that it completely ignores progress on rescheduling under the Controlled Substances Act (to Schedule III from Schedule I). This is the big potential catalyst on the horizon. Cannabis experts expect progress by year end. They expect the Drug Enforcement Agency (DEA) publication of a proposed rule following the Department of Health and Human Services (HHS) recommendation to reschedule. I still believe this could happen sooner. Another potential catalyst (much smaller) would be Ohio’s approval of a recreational-use legalization referendum in early November.

“Despite the potential rescheduling catalyst on the horizon, cannabis stocks have made a complete roundtrip to return to where they traded before news of the HHS recommendation came out. Cannabis stocks are a strong buy in the weakness.

“Curaleaf (CURLF) expects a Toronto Stock Exchange (TSX) decision on its uplisting application around the last week of November, says Boris Jordan, the company’s chair. Jordan believes the uplisting would help create demand for the stock and support the stock price by bringing institutional investors into the shareholder mix. Theoretically, that may happen because large banks could offer shareholder custody services if the company gets listed on a major exchange like the TSX. Jordan also says he will launch a non-deal road show soon to meet with institutional investors ahead of the potential listing. BUY

In its upcoming earnings report, analysts expect Curaleaf to deliver a quarterly loss of $0.06 per share on revenues of $341.37 million, up 0.5% from the year-ago quarter. Continue to Hold.

Tyler Laundon, Chief Analyst for Cabot Early Opportunities and Cabot Small-Cap Confidential, reported on TransMedics Group (TMDX), saying, “TransMedics Group has announced its Q3 fiscal 2023 earnings date is November 6, after the close. This is a tough one as shares could make a significant move one way or the other depending on what management has to say about the integration of the aviation business. We’ve taken partial profits already and will let go of another quarter of the position today at a modest gain, then hold the rest through the event. SELL A QUARTER, HOLD A QUARTER”

Indeed, the company did report, with stellar results! Revenues rose 159%, to $66.4 million. Net loss was $25.4 million, compared to $7.4 million in Q3 2022.

Going forward, the company forecasts its full-year 2023 revenue guidance between $222 million and $230 million, up from $180 million to $190 million.

I’m going with Tyler’s advice; Sell a quarter, Hold a quarter.

Tom Hutchinson also updated his take on Brookfield Infrastructure Partners (BIP), commenting, “It’s a tough market for defensive dividend stocks and BIP is getting clobbered. It’s down 34% in the last three months. Despite strong operational performance, the stock performance just keeps getting worse. Sure, rising interest rates hurt companies like this because they have high relative debt and competing fixed-rate investments become more competitive. But this performance has been too ugly for just that.

“The recent decline is likely a combination of interest rates and increased exposure to technology. Hopefully, the earnings report will remind investors of the steady and predictable income. (This security generates a K-1 form at tax time). BUY”

The company’s earnings report sent the shares up nicely this week. Brookfield Infrastructure grew its funds from operations (FFO) by 7% to $560 million in the third quarter. Brookfield kept pace with inflation by increasing rates and the completion of $1 billion of capital projects in the quarter.

The shares sell for about 8 times FFO, and the company has a 5.66% dividend yield. I see these shares as very undervalued. Continue to Buy.

Bruce Kaser updated his recommendation on NOV, Inc (NOV), noting, “We see the consensus view as overly pessimistic, given the company’s strong position in an industry with improving conditions, backed by capable company leadership and a conservative balance sheet.

“NOV reported adjusted earnings of $0.29/share, up 38% from a year ago but 14% below estimates. Revenues rose 16% and were 3% above estimates. Adjusted EBITDA of $267 million increased 37% and was 6% above estimates. Pricing improvements from stronger demand and from product innovations are boosting results. Order growth outpaced revenue growth. Free cash flow improved but remained sub-par: more revenues are coming from outside of the U.S. where receivables collection timing is slower, and inventories lifted due to catch-up shipments from suppliers. These working capital drains are expected to reverse in coming quarters.

“Management sounded confident that its end markets are turning upward. Stronger international and offshore markets are more than offsetting weak North American land drilling activity. NOV said its margins lag where they should be, so the company is moving to two segments from three. This change could save $75 million a year, or about 1% of revenues. We’re fine with the cost savings but will miss the incremental visibility into the company’s performance.

“All-in, an encouraging quarter for our NOV recommendation.

“The price of West Texas Intermediate (WTI) crude oil slipped 4% to $83.88/barrel. Oil prices appear to be quiet and largely unmoved by the Israel-Gaza conflict, but the potential for sharp volatility seems higher with the increasingly complicated game of shifting geopolitical and economic alignments. A major new catalyst, in addition to all of the others, would be export or production cuts from the Middle East should Iran become directly or even explicitly indirectly involved (including if the U.S. restores its sanctions).

“The price of Henry Hub natural gas spiked 21% to $3.58/mmBtu (million BTU), as investors priced in a possibly cold winter. Also, some traders worry about low storage volumes headed into the winter, as well as the possibility of a closure of Israeli offshore gas fields.

“NOV shares were flat in the past week and have 26% upside to our 25 price target. The dividend produces a reasonable 1.0% dividend yield. BUY”

I agree. Continue to Buy.

Carl Delfeld, Chief Analyst of Cabot Explorer, updated his opinion of International Business Machines (IBM), reporting, “Solid demand helped Explorer recommendation IBM (IBM) deliver third-quarter results that were above analysts’ expectations. IBM reported revenue of $14.8 billion, up 4.6%, and adjusted earnings per share came in at $2.20, up 22% year over year and $0.07 ahead of analysts’ average expectations.

“Software revenue was up 6% year over year while transaction processing revenue grew by 5%, and revenue from its hybrid platform and solutions segment rose by 7%. Annual recurring revenue for the software business jumped by 7% to $14 billion. Strategic partnerships drove a big part of this growth, generating 40% of consulting revenue. This portion of consulting revenue is expanding by a double-digit percentage.

“IBM stock trades for roughly 12 times free cash flow guidance, a valuation that doesn’t give the company much credit for its software- and consulting-led turnaround. IBM is capable of consistently pushing revenue and earnings higher thanks to strong demand for hybrid cloud solutions and AI.”

International Business Machines (IBM) shares were up three points to 145 this week after recently reporting solid earnings. Three-quarters of IBM’s revenue comes from software and consulting, and both of those segments produced robust growth during the third quarter. The stock is not particularly expensive, trading at just 12 times free-cash-flow guidance. Buy a Half.”

Investor’s Business Daily reported that, “Early booking data suggests that IBM’s strategy is working and an annual run rate of $1 billion is expected after the firm bested expectations.”

The shares have lately seen some upward momentum but remain undervalued. Buy.

Mike Cintolo, Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader, reported on Noble (NE), commenting, “Fundamentally, there hasn’t been much doubt that the offshore drilling area is in the midst of a sustained upmove—some of that has to do with stubbornly high-ish oil prices, but most of it is structural, with supply waning in a big way during the multi-year bust cycle and with big oil majors looking for reliable, low-cost output. Noble’s Q3 report, released Tuesday evening, was reflective of that: Revenue was up a whopping 128% from a year ago and up 9% from the prior quarter, with EBITDA up 50% from the June quarter (!) and earnings of 87 cents per share topping by three cents.

“Not surprisingly, utilization continues to increase, with the 16 floaters having a huge 92% utilization rate last quarter, and while the non-deepwater fleet (jackups) was only 61% utilized, that was up from 59% in the prior quarter. In Q3, CapEx was a bit elevated and led to only 21 cents of free cash flow in the quarter, but that’s not going to last—the writing is on the wall for much higher earnings and cash flow, with management saying re-contracting going ahead should be at very solid rates (this will be on top of the solid $4.7 billion backlog) and, partly as a result, they lifted the dividend by a third (now 40 cents per share quarterly, yield of 3.2%).

“Shares aren’t out completely of the woods, but NE has reacted very well to its report, racing back above its 50-day line today. We’re going to stay on Hold tonight, but the action is obviously encouraging, and if it can hold or build on the move, we’ll likely restore our Buy rating (and possibly even add back some shares). HOLD”

The company sees full-year 2023 ending with higher revenue than previously expected, now $2.5 to $2.6 billion (previously $2.35 to $2.55 billion) and Adjusted EBITDA to a range of $775 to $825 million (previously $725 to $825 million). Continue to Hold.

Tyler also updated IonQ (IONQ), noting, “IonQ is a quantum computing company that’s reached commercial scale, and sales are growing quickly but are still relatively limited. The company has three revenue streams. Most comes from working with clients to develop quantum solutions and prepare their organization to apply the tech in the near future. IonQ also hosts its own Quantum Cloud platform and has partnered with the public cloud providers who provide Quantum Computing-as-a-Service (QCaaS).

“Until this QCaaS revenue stream takes off IonQ is also charging for direct access to quantum computing resources for clients that don’t want to wait in the queue to access them via public cloud. Revenue was $2.1 million in 2021, grew by 430% to $11.1 million in 2022 and is seen up around 72% to $19.1 million this year. That’s actually about 8% slower growth than we expected back in July, but remember that a few deals, and timing, can move the needle a lot here. So, any estimates should be taken with a grain of salt. The projected Q3 earnings date is November 13. BUY HALF”

InvestorPlace recently said, “IONQ is your best bet for maximum exposure to the growth of the quantum computing sector.”

I agree. Continue to Buy.

Bruce Kaser also had an update on Gates Industrial Corp, plc (GTES), saying, “Gates is well-positioned to prosper in an electric vehicle world, as its average content per EV, which require water pumps and other thermal management components for the battery and inverters, is likely to be considerably higher than its average content per gas-powered vehicle.

“The company produces wide EBITDA margins, has a reasonable debt balance and generates considerable free cash flow. The management is high-quality. Gates reports earnings on Friday, November 3, with a consensus estimate of $0.31/share. Gates shares slipped 2% this past week and have 47% upside to our 16 price target. BUY”

Shares were up on Gates Industrial’s earnings report of $0.35 per share, beating analysts’ estimates of $0.32 per share, and higher than earnings of $0.31 per share a year ago. Over the last four quarters, the company has surpassed consensus EPS estimates three times.

Revenues were $872.9 million, compared to $860.7 million last year.

Continue to Buy.

Portfolio

*Aggressive (A), Moderate (M), Conservative (C)

ETF Strategies

Currently, Adaptive Alpha Opportunities ETF (AGOX), Communication Services Select Sector SPDR Fund (XLC), First Trust Water ETF (FIW), iShares Russell Top 200 ETF (IWL), iShares US Energy (IYE), and Vanguard Dividend Appreciation Index Fund (VIG) are showing positive returns.

Our Watch List has three names remaining:

O’s Russell Smallcap Qlty Divd ETF (OUSM)
GX U.S. Infrastructure Development ETF (PAVE)
Vanguard Small Cap Growth Index Fund (VBK)

Healthcare Remains Challenged, but the Insurance Segment Is Expanding

Last year, the healthcare insurance industry grew 0.7%, to $1.3 trillion in the U.S. Between 2017-2022, it rose by 3.6% annually.

This past year has been challenged, with dregs of pressure left over from COVID. But 2024 is expected to be better, based on higher premiums and increased interest rates.

Employers in the U.S. are anticipating that total health benefit cost per employee will increase 5.4% on average. And that’s following cost-cutting in their plans, according to Mercer’s National Survey of Employer-Sponsored Health Plans 2023.

As you can see in the chart below, the portion of the insurance market that has seen rapid escalation is the medical arena.

Consequently, insurers are focusing on strategic plans to rein in costs, improve access, expand virtual care, and at the same time, raise premiums. The chart below details specific areas that insurers are currently reviewing:

Because of the scale of United Healthcare, the company has its fingers on the pulse of virtually every segment of the health insurance business. The company can easily leverage cost controls while offering a wide range of services.

United Healthcare (UNH) is a moderate-risk buy.

Portfolio

*Aggressive (A), Moderate (M), Conservative (C)
**Purchase price reflects a 3-for-1 stock split

The next Cabot Money Club Stock of the Month issue will be published on December 14, 2023.