The first half of 2022 came to a close last week, and the numbers weren’t pretty; the S&P 500 fell 20%, the Dow was lower by 15% and the Nasdaq declined by 30%. How the second half of the year will play out is anyone’s guess. However, until stocks show any real signs of sustained momentum, I will continue to keep the portfolio diversified, and will lean defensive with our options selling strategy

Thank you for subscribing to the Cabot Undervalued Stocks Advisor . We hope you enjoy reading the July 2022 issue.

Investors are facing two forecasts that wouldn’t seem to be possible at the same time: pending recession and stable/rising earnings estimates. We look at how our cyclical stocks have been beaten down even as their earnings estimates remain largely steady.



It has been a quiet month for new recommendations and ratings changes as we patiently wait for great opportunities.



Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.



I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.



Thanks!

We’ve moved into the second half of the year, but the overall picture is still the same for the stock market—there are some positives out there, but we’re still stuck in a downtrend—all indexes and growth funds are below key intermediate- and longer-term moving averages, and the fact that we’re seeing lots of stocks still hitting 52-week lows every day (even on big up days) tells us the broad market remains on the outs. All in all, it’s important to keep your eyes open and to stay flexible; the market can turn up at any time given that it’s looking months into the future, but as we’ve been writing for months, we have to see strength develop first, so defense remains the name of the game.



This week’s list is a hodgepodge of ideas, from big, steady-Eddies to smaller up-and-comers that want to get moving if the market can stabilize. Our Top Pick is an off-the-bottom name whose RP line has turned strong and whose growth is rapid and should accelerate.

We remain in a confirmed bear market, so caution is still appropriate.
But there’s always something interesting to consider buying, and this week’s recommendation is a young stock with a good story, which involves helping the oil and gas industries use water more efficiently.


As for the current portfolio, which is 25% in cash, there’s one Sell.


Details in the issue.

We are up to five positions in our Income Wheel Portfolio and finally approaching a diversified mix of stocks. However, I wouldn’t mind adding at least one or two more to the portfolio over the coming weeks.

Now my focus is on finding a few shorter-term trades using a jade lizard and possibly selling a put or two. If all goes as planned and the market cooperates, expect to see at least one, if not two, shorter-term trades next week.

Volatility continues to rule the roost.

And this past week it seems as though the bears, after a brief hiatus, made an appearance, pushing the S&P 500 ETF (SPY) lower by 3.3%.



Since last week’s issue we added another trade, this time an iron condor in IWM. Volatility picked up a little bit towards the latter part of the week, so we decided to add an iron condor to the mix to take advantage of the inflated volatility. I discuss the trade in greater detail in the Weekly Trade Discussion.

I’m going to keep it rather short this week as we are moving through the final week of the earnings doldrums. And I can’t be happier. Next week offers up little to nothing in the way of earnings trades as we enter one of the slowest weeks for announcements on the calendar. But the following week is a completely different story as the big banks kick off earnings season.

The first half of the year is in the books, and it was a doozy, but we’re glad we’ve been able to sidestep a good chunk of the historic damage. Now the focus is on what’s next, and it’s important to respect the evidence today (we’re remaining highly defensive) but also stay flexible; we have seen some relative strength in some growth areas and we’re open to whatever comes. In the near-term, we’d like to put a little of our giant cash hoard (89%!) to work, but want to see the market stabilize a bit more first.

Thank you for subscribing to the Cabot Turnaround Letter. We hope you enjoy reading the July 2022 issue.



As we approach the mid-point of the calendar year, we provide our traditional mid-year update for the stock market and high-yield bond market. Our commentary on stocks reviews what sectors worked (only one), what sectors and stocks stood out as the weakest, how the value vs. growth shift has played out so far, and what helped developed markets outside the United States limit the depth of their selloffs. We also discuss the state of two key drivers of future stock market performance, the role of the two “Easts,” and offer some advice on what not to do in this market, as well as a suggestion about what value investors might want to do.



Our call last year to avoid high-yield bonds, cousins of sorts to turnaround stocks, was spot-on. We walk through the effects of inflation on the two components of high bond yield prices, provide some historical perspective on yield spreads, and describe how only two of the three ingredients for a bankruptcy cycle are in place. We also suggest that while high-yield bonds are more attractive today than a year ago, it is still a time to be selective.



Our feature recommendation this month is ESAB Corporation (ESAB). This high-quality company was recently spun off from Colfax Corporation and checks nearly all of our boxes for an appealing turnaround stock, yet it is being overlooked as investors migrate to familiar stocks.



We note our recent ratings change of Marathon Oil (MRO) from Buy to a Sell.

If there is one message I want you to take home from today’s issue, it’s that cannabis stocks are cheap. Really cheap. And they may never be this cheap again.

So if you’ve got some cash sitting around that you want to “risk” in a long-term investment, consider the stocks I’ve rated buy.



In the meantime, our portfolio, which has beaten the index in each of the past four years, is 58% in cash, waiting patiently for the turn.



Full details in the issue.



Yours for wealth and wisdom.

It’s often hard for investors to rationalize, but bad economic news is sometimes “just what the doctor ordered” for the market. And that was the case last week as housing numbers again disappointed, consumer sentiment hit a record low, and perhaps for the first time in months, an inflation-related data point may have cooled off. What this means is it appears the economy is slowing down, which could allow the Federal Reserve to slow down the speed at which it raises interest rates.

Note: Due to the celebration of Independence Day next week, the next issue will be delivered Tuesday, July 5.
The market rallied strongly last week, erasing some of the carnage of the previous two weeks, but the main trend is still down and thus caution is still advised.


This week’s stock is a growth company that serves the solar power industry, and the stock looks attractive now because it’s basically been treading water for 17 months.


As for the current portfolio, which is 25% in cash, there’s one Sell.


Details in the issue

The consensus opinion right now is that the market is strong because it’s looking favorably on the prospects of a clear-cut winner in the upcoming presidential election and that the likelihood of another round of stimulus is going up.

The Explorer portfolio had another positive week, as the market is hostage to enacting another politically difficult stimulus package. Count me as skeptical. Stay-at-home stocks are leading the market while economic-recovery stocks struggle.

We just had a week that I believe is indicative of this market over the next month or so. There seems to be too much headline risk for stocks to make a substantial move higher.

In short, it looks like there will be a tug-o’-war with good news and bad news at least up until the election. I expect the market will continue to bounce around in that time frame. However, there could be great things for the market beyond the election and the pandemic. The forecast is choppiness now, and a bull run later.

In my Cabot Micro-Cap Insider Guide (which you can download on our members page), I describe the three buckets of my recommendations:

We are combining our regular Friday afternoon Members-Only Podcast with any earnings updates. By combining these, you will receive the same research, perspective and analysis as always yet in one easy-to-read email.

The market finished mixed today, with the Dow up 36 points while the Nasdaq was up 159 points and most growth stocks acted well.

The environment for writing calls has deteriorated of late as the market uptrend has been interrupted. A market moving higher increases investors’ willingness to speculate on higher stock prices, and call premiums rise. A choppy market reduces demand and call premiums.

The furious market uptrend since the lows of March has experienced its rudest interruption so far. The S&P 500 got to within a whisker of a correction, falling 9.6% from the high on a closing basis. But it has since recovered nearly half of the downside.

With all of our stocks now having price targets assigned to them, we thought we’d share with you some of our process behind how we set those price targets.

Every so often, I get a question from a subscriber about a price move in one of my micro-cap recommendations. The first thing that I do is check the trading volume.

It’s been another week of mixed stock performance and assorted headlines that collectively give me the sense that, while a lot of investors may be shifting money around, there’s no real consensus yet on what will work and what won’t in the near-term.

In the past 30 days, 15 analysts have increased their EPS estimates for this Canadian bank.

Wall Street expects this P&C insurance carrier to grow at a rate of 20.4% next year.

Just a brief update today, mainly to discuss this morning’s sharp drop in the stock that we added to the portfolio last week.

In the past 30 days, four analysts have boosted their EPS estimates for this insurance company.

This contract research company beat earnings estimates by $0.32 last quarter.

he overall evidence remains mostly positive, though after a heady rebound, the indexes and many growth stocks are correcting and consolidating.

On Friday three of our stocks closed above our short strike price for full profits.

This Consumer Defensive company beat analysts’ EPS estimates by $0.13 last quarter.

Acme United Corporation (ACU)
From SmallCap Informer

For more than 150 years, Acme United Corporation has supplied innovative cutting, measuring, first aid, and sharpening products to the school, home, office, arts and crafts, hardware,
sporting goods, fishing tools, and industrial markets. Its top brands include First Aid
Only, PhysiciansCare, Pac-Kit, Spill Magic, Westcott, Clauss, Camillus, Cuda, and DMT.

The company’s diversified end markets provide exposure to both hobbyists and industrial facilities. Growing concerns about industrial health safety is driving interest in many of Acme
United’s products. Its safety solutions include component kits that are often required by industrial safety regulations and can be restocked using its SafetyHub app. The kits focus on different needs, such as first aid, eye washes, or medications, and the app can deliver push messages about refills and maintain an OSHA compliance log.

The company is diversified globally, with operations in the U.S., Canada, Europe, and Asia.

Management sees several drivers for Acme United’s growth. New first aid programs being put into place at large industrial, food service, and other distributors should drive growth, along with an expanding refill business. The company’s widening product line should increase cross-selling
opportunities, as well.

Acquisitions are part of the company’s growth strategy, enabled by a strong balance sheet and good cash flow. In January 2020, Acme United acquired First Aid Central, a Canadian supplier of first aid kits, refills, and safety products for a broad range of customers. This acquisition expanded the company’s distribution capabilities, product offerings, and online presence.

The COVID-19 pandemic caused an uptick in Acme United’s sales a wide array of products including fishing tools, hunting knives, craft scissors, sharpening tools, first aid, and safety products. Increasing awareness of the need for safe workplaces should benefit the company as the nation returns to work.

In the second quarter ended June 30, 2020, sales grew 9.5% and EPS grew 19.5% over Q2 2019. In the first half of 2020, EPS reached $1.28, up 27% over 2019 first half performance and closing in already on the 2019 full FY EPS of $1.60. Analysts expect EPS to reach $1.92 for the full year, a healthy increase over 2019.

We project future annual average growth of EPS and sales to be around 10% a year, plus dividends. Acme has increased dividends every year in the last decade.

Acme United’s stock is currently selling a P/E ratio of 12.0, just below our revised
average P/E ratio of 12.4. We think the stock can sell for a P/E ratio of 15.7, which would
take the price as high as $47.
This Consumer Defensive company beat analysts’ EPS estimates by $0.13 last quarter.

We are raising our price target on shares of Jeld-Wen (JELD) to 28 from 25.

Our covered call ideas for the October expiration cycle are on their way to yielding us another solid month of profits ranging from 7.88% to 17.41%.

This payment solutions company is expected to grow at triple-digit rates in the next five years.

Chart is an interesting company, for sure, and we would be happy to buy again at much lower prices.

A few Cabot Options Trader subscribers have asked me about ways to protect gains in their portfolios, so I thought I would write to everyone with a couple of strategies using options to hedge your portfolio.

A subscriber recently asked me if I keep a journal of my trades. Many traders keep journals so they can look back at their trades and evaluate what they did right and what they did wrong.

Want to know how the big institutional investors use options? Here is an example of how one trader spent $132 million on three technology stocks.

Options trading has its own vernacular. To know how to do it, you need to know what every options term means. Here are some of the basics.

Our Cabot Top Ten Trader’s market timing system consists of two parts—one based on the action of three select, growth-oriented market indexes, and the other based on the action of the fast-moving stocks Cabot Top Ten features.