Please ensure Javascript is enabled for purposes of website accessibility
Value Investor
Wealth Building Opportunites for the Active Value Investor
Issues
After years of being either ignored or sold off, value stocks are finally having a moment on Wall Street. The Vanguard S&P 500 Value Index Fund (VOOV) is up 25% in the last five months and is actually outpacing growth titles over the last month. Still, it’s a bull market, and growth stocks are king. How to compete as value investors in a growth-minded market? By seeking growth stocks at value prices.

Today, we do just that, adding a household name that’s been rejuvenated thanks to a shift in industry trends. The stock is up 18% year to date, and yet its shares remain dirt cheap by virtually every measure.

Enjoy!
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the March 2024 issue.

We discuss the similarities between poker and value investing. This past month we moved two stocks from Buy to Sell – Allison Transmission (ALSN) as it reached our price target, and Sensata Technologies (ST) as its management continues to take a path that is not shareholder friendly.

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.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the February 2024 issue.

Spin-offs should be in every value investor’s toolkit. In this issue, we are adding a spin-off, Worthington Enterprises (WOR), to our Buy recommendations roster.

We comment on recent earnings from Comcast (CMCSA) and provide updates on our other recommended stocks.

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.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the January 2024 issue.

We review the stock market’s remarkable performance in 2023 and highlight our recommendations that produced notable gains along with our clunkers. Our view on the 2024 market is that stocks will have an average year, with the Magnificent Seven producing flat/modest returns at best. Readers should keep in mind quotes from Yogi Berra and Warren Buffett when considering market forecasts. Onward to 2024.

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.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the December 2023 issue.

Artificial intelligence-inspired investors are partying like it’s 1999. We’re finding attractive value elsewhere, in discarded industrials like our new Buy recommendation, CNH Industrial (CNHI).
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the November 2023 issue.

We discuss recent earnings from our companies and move shares of Sensata Technologies (ST) from Buy to Hold given the company’s lower overall quality compared to our initial understanding.

We also include some thoughts on the current stock market and how rising interest rates and other factors have led investors to unload shares of most companies and riskier companies in particular.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the October 2023 issue.

We include brief updates from investor day presentations by Philip Morris International (PM) and Sensata (ST), as well as comments on our other recommended names. We also share a view on how streaming services are changing the sports viewing experience, along with a thought on why Comcast (CMCSA) should be fine.

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.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the September 2023 issue.

We do a deep-dive into what ails Citigroup (C) shares and remain steadfast in our conviction.

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.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the July 2023 issue.

Almost like an annual rite of passage, major banks reported their Federal Reserve stress test results last week. All major banks passed, in that their capital levels were in excess of the minimum requirements under the Doomsday Scenario conditions outlined in the test assumptions. We’re not the biggest fans of these tests, for reasons outlined in our monthly letter.

Citigroup remains a riskier bank relative to other majors, but also has a higher return-potential share valuation, plus a 4.5% dividend yield to reward patient investors.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the July 2023 issue.

Almost like an annual rite of passage, major banks reported their Federal Reserve stress test results last week. All major banks passed, in that their capital levels were in excess of the minimum requirements under the Doomsday Scenario conditions outlined in the test assumptions. We’re not the biggest fans of these tests, for reasons outlined in our monthly letter.

Citigroup remains a riskier bank relative to other majors, but also has a higher return-potential share valuation, plus a 4.5% dividend yield to reward patient investors.
Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the June 2023 issue.

The U.S. presidential election, “only” seventeen months away, is shaping up to follow a predictable script. Investors should keep their personal views and their investing process separate.

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.
Thank you for subscribing to the Cabot Value Investor. The new name for the former Cabot Undervalued Stocks Advisor more clearly and broadly describes our mission to serve value-oriented investors. We hope you enjoy reading the May 2023 issue.

Fitting for a value investment newsletter, your chief analyst will be making the pilgrimage to the Berkshire Hathaway Annual Shareholders Meeting this coming weekend.

In this month’s letter, we include our recent new Buy recommendation: NOV, Inc. (NOV). This high quality mid-cap company ($7.3 billion market cap) appears to be in front of an upshift in demand for sophisticated drilling equipment even as its shares trade at a modest valuation.

We also cover earnings reports and provide other relevant updates on our recommended companies.

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.
Updates
Stocks have also been a bit stuck in the mud for the last month or so, partly because investor confidence in the Fed’s interest rate-slashing timetable has waned as inflation has remained stickier than expected. Wednesday’s CPI print didn’t help; March inflation came in at 3.5% year over year, a tad hotter than the 3.4% expected and up from 3.2% in February. The month-over-month increase was 0.4%, higher than the 0.3% bump that was anticipated. Stocks promptly sold off, with all three major indexes down more than 1% in early Wednesday trading.


Eventually, however, inflation will dip below that stubborn 3% threshold, and the Fed will start to cut short-term interest rates. We just don’t know when.
It is with mixed emotions that I am writing my last Cabot Value Investor issue. My nearly four years as part of the Cabot team have been exceptionally rewarding. I have had the opportunity to work with an exceptional research team – who bring talent, dedication and investment results that readily match and likely exceed most Wall Street sell-side and buy-side analysts. Our Cabot analysts, despite their very different investing styles, have helped me become a better investor.
The financial media over the past weekend and in the early days of this week has been full of stories about the upcoming Fed meeting on Wednesday. It’s remarkable how much ink (or electrons) is being spilled in efforts to predict what the Fed will do, and why, along with all of the implications of this or that outcome.
With the completion of the Super Tuesday primaries, the final grid for the 2024 U.S. presidential election appears to be set. While it is always possible that some surprise will lead to a different lineup on one or both cards, our country is now on track for a rematch of Biden v. Trump. The election date of Tuesday, November 5, is less than eight months away.
We’ve all seen the data: Nvidia (NVDA) shares have jumped 59% in this still-young (37 trading days) year and 615% since touching $112 in October 2022. The 171x gain in the past decade – turning a $4,500 purchase into $800,000 – makes Nvidia’s price increase among the largest in market history over such a brief period, and certainly the largest for a company that began its 10-year run at a not-small $11.6 billion market value.
As the stock market soars ever higher, driven in no small part by the Magnificent Seven mega-cap tech stocks, vitriol again is being heaped upon passive investing. This form of investing, more commonly known as indexing, is considered “passive” because it considers no other traits beyond a stock’s weight in an index. There is no work involved in picking such stocks or setting the weighting – the index passively determines these. The opposite, of course, is “active” investing, in which investors work to select which stocks, and how much, to buy and sell. Active investing can involve a lot of activity.

The world of major pharmaceutical stocks can be split into two camps: winners and laggards. Eli Lilly (LLY) is a clear winner, with its successful roll-outs of new treatments led by the immense promise of weight-control drugs like Mounjaro and Zepbound. Lilly’s shares have surged 545% (up 5.5x) in the past five years and are increasingly mentioned as a replacement for Tesla in the “Magnificent Seven.” The shares trade at 47x estimated 2024 EBITDA.
Last week, we wrote about how rising debt and rising interest rates are increasingly weighing on the Federal budget. Our rough math points to interest costs consuming as much as 21% of Federal revenues by 2025. We also added that “This math seems awful. Realistically, how likely is this to play out and what can investors do to mitigate, or even benefit?”
According to credit rating agency Moody’s, debt obligations of the United States federal government are “judged to be of the highest quality, subject to the lowest level of credit risk” and thus are worthy of a “AAA” credit rating.

The other two major credit rating agencies, Standard & Poor’s and Fitch, disagree. These firms place an “AA+” rating on federal debt. For its part, Moody’s is not fully convinced of its AAA rating, as it recently added a “negative” label, implying that the rating is no longer “stable.”
Earnings season has arrived, and with it could be a recalibration of investor expectations for stocks broadly.

The S&P 500 Index seems reasonably priced at 19.5x estimated 2024 earnings. But nearly 30% of the index’s weight comprises Magnificent Seven stocks, whose average multiple is 33x. Estimated earnings growth rates for these Mag Seven stocks, which average 19% for each of the next five years, set a high bar. When high expectations meet less-high reality… well, investors know what can happen to stock prices. And, any wobbling in the largest stocks can send the market broadly lower. As Dennis Gartman, the legendary and now-retired writer of The Gartman Letter, frequently said, “When the generals leave the field, the rest of the army follows.”
It’s been widely noted that the stock market’s sloppy start to 2024 is among the worst in a decade, or longer. Traders and TV commentators carry on about how the first trading day, or week, or month, sets the tone for the entire year. “How goes January, so goes the year” is a frequently bandied saying. It’s enough to make an investor toss in the towel and wait until 2025.

The longer I am in the investing world, the less I listen to this banter. It all sounds great, and maybe there are some years in which these ultra-short-term trends-as-predictors pan out, but they are so unreliable that they are worthless at best. Even if they had a 100% accuracy rate, why make a bet that this perfect record will continue?
This might be the first time anyone has described singer-songwriter Katy Perry as a sage observer of the stock market. Her song, “Hot and Cold” opens with the lyrics, “You change your mind / like a girl changes clothes.”

This perfectly captures the changes in sentiment in the stock market over the past two months. Going into October, the market was fully locked into the view that elevated inflation would endure, that 10-year Treasury yields were headed above 5% and that there was no hope for small-cap stocks or any group of stocks other than the Magnificent Seven mega-cap tech stocks. Dark days and a hard landing were undoubtedly ahead.
Alerts
We are recommending shares of CNH Industrial (CNHI) as a new Buy. The company is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment for customers around the world and is the #2 ag equipment producer in North America (behind Deere). It also provides related supplies, services and financing.
We are recommending shares of CNH Industrial (CNHI) as a new Buy. The company is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment for customers around the world and is the #2 ag equipment producer in North America (behind Deere). It also provides related supplies, services and financing.
We are moving shares of Molson Coors Beverage Company (TAP) from Buy to Sell. The shares are approaching our 69 price target, with only about 4% upside remaining.
Today we are moving shares of Dow (DOW) from Buy to Sell. As the shares have reached our 60 price target, and with no compelling reason to raise that target, we are moving the shares from Buy to Sell. This change will also be made in the Cabot Turnaround Letter.
Today we are raising our price target on Arcos Dorados (ARCO) from 7.50 to 8.50. The company is recovering from the pandemic and looks well-positioned to expand its franchise and profits while continuing to improve its balance sheet. The shares remain undervalued.
Conoco’s earnings report, released earlier today, displayed the company’s strengths. Fourth-quarter profits of $3.0 billion compared to a $(0.2) billion loss a year ago and were 25% higher than the impressive third-quarter profits of $2.4 billion. Rising oil prices combined with restrained spending helped drive earnings higher.
General Motors has made a remarkable transition from bankruptcy in 2009 to a highly-profitable and innovative contender in the rapidly changing global auto industry, driven by CEO Mary Barra.
With today’s 9% intra-day price drop following a disappointing near-term outlook, Cisco (CSCO) shares look more attractive and we would buy/add to positions here, as the long-term fundamental picture remains healthy.
Our interest in oil and natural gas exploration and production (E&P) companies has been warming up lately. Many of these stocks are beaten down, yet oil prices have remained resilient, leaving producers like ConocoPhillips meaningfully undervalued.
We are initiating coverage of Organon (OGN) with a BUY rating.
With the shares continuing to surge past our recently raised 65 price target, and now being priced at a premium to even our upgraded valuation metrics
Bruce is selling three portfolio stocks.
Strategy
I want to point out a problem that I foresee, potentially on the scale of the technology bubble in 2001 and the housing bubble in 2007. I think we’re going to have an “inverse ETF bubble.”
My stock-picking strategy has been refined over the course of 28 years, and has been quite stable for the last six years. My investment goals are (1) minimize stock market risk, (2) achieve capital gains, with dividends as a welcome addition to total return and (3) outperform the U.S. stock markets.
I was talking with an investor recently about the latest stock market downturn. He was puzzled; if General Motors (GM) is supposedly such a great stock and vastly favored among portfolio managers, why would it fall 30% during a market correction?
Our instincts warn us that stocks reaching all-time highs are invariably overdue to fall. Sometimes yes, sometimes no. We examine two common scenarios involving stocks that are about to rise—or fall—from new high prices.
If professional investment companies are not making their decisions based on the price of the stock, neither should you.