March 9, 2022

Value is back.
After nearly a decade of extreme underperformance versus growth stocks, overdue value stocks are flipping the script.

The dominance of growth stocks over the last eight years has been about as lopsided as the relative performance has been over the last 100 years.

But things are changing. Inflation is back. And rising interest rates are sure to follow. This economic recovery is shaping up to a lot different that the last one. This recovery is shaping up to be much better for value stocks. In fact, the role reversal is already underway. Value stocks are already outperforming growth stocks by about 15% so far this year. And it is likely just the beginning.

In this issue, I highlight one of the most dominant technology companies in the world. It is one that has stumbled lately and given way to the competition. But the stock is cheap, wallowing near the four-year low, with limited downside. It is also poised ahead of a likely renewed growth phase. The timing could be just right.

This Month’s Featured Stock

A Diamond in the Rough
Value is back. After having been banished for nearly a decade to the mean streets of relative underperformance, a new era is emerging for value stocks.

Stocks can be divided into two broad categories, growth and value. Growth stocks are those of companies that are anticipated to grow earnings at a rate signfiicantly above the market or industry averages. These are stocks the tend to increase in value rather than pay a high income.

A value stock trades at a price percieved to be below what fundamental characteristics such as reputation, earnings outlook, assets, dividends and cash flow justify. Common charateristics are high dividend yield and low valuation metrics, such as price/book and price/earnings ratios.

Each type tends to outperform the other in different market enviroments and types of recoveries. Growth stocks tend to outperform in periods of strong economic growth with low intererst rates. Value stocks have generally done better in slower growth or more uncertain markets.

Through the decades each type of stocks has had periods or relative outperformance and underperformance. Certain market phases tend to favor one or the other. Also, recoveries with different characteristics affect which type performs better. Up until ten years or so ago, the historical performance of growth and value had been roughly equal over the long term. But growth kicked value’s butt over the last decade.

As you can see from the chart, growth stocks, as measured by the iShares S&P 500 Growth ETF (IVW), delivered about triple the return of iShares S&P 500 Value ETF (IVE) over the last ten years, as of the end of last year. That’s about as lopsided as the relative performance has been over the last 100 years.

But things are changing. Inflation is back. And rising interest rates are sure to follow. This economic recovery is shaping up to be a lot different than the last one, at least in the post-pandemic recovery phase. Of course, we will still be in a technological revolution. But the torrid outperformance of that sector is likely to decrease.

The dominance of one type of stock has always given way, eventually, to a reversal in the past. And growth stocks are just coming off a long period of unprecedented dominance. Value stocks are long overdue to perform better. And the process may be beginning.

As you can see from the year-to-date chart, the situation is reversing so far this year. Of course, it’s still early. But a nearly 13% performance differential in a short time is a big change. Growth stocks are struggling as rising interest rates and inflation reduce growth expectations. And inflation and rising interest rates are likely to persist at least through the rest of the year.

In this issue, I highlight one of the most dominant technology companies in the world. It is one that has stumbled lately and given way to the competition. But the stock is cheap, wallowing near the four-year low, with limited downside. It is also poised ahead of a likely renewed growth phase. The timing could be just right.

What to Do Now
I have to break out the ugly stick for this month. It’s getting bad. As of Monday’s close, the S&P 500 is down over 12% YTD and the NASDAQ is 18% lower for this year and in bear market territory, down more than 20% from the November high.

The Russia situation is getting worse as negative economic impacts are mounting.

The U.S. just announced it will ban Russian oil imports, which accounts for about 7.9% of petroleum imports. It puts further pressure on prices, and oil has risen to a 14-year high of 125 per barrel with no end in sight. Wheat prices are soaring as well because Russia and Ukraine apparently account for a huge share of global wheat production.

And Europe is talking about banning Russian energy imports as well. Russia accounts for a huge 30% share of Europe’s oil and 40% of natural gas. Such a ban would have an enormous impact on global prices. Things could get a lot worse.

The situation is making already-out-of-control inflation even worse. February CPI is expected to be about 8%, the highest in 40 years. Given recently rising prices, it won’t be the peak. Inflation is likely to keep getting worse for a while.

Inflation and a tightening Fed were problems the market looked forward to worrying about after the Russia/Ukraine thing went away and stocks rallied. But the crisis is making the next problem worse at the same time.

I don’t know what will happen with this Russia situation. Things could get worse. For that reason, very few stocks are rated a BUY, except for Enterprise Product Partners (EPD) and ONEOK (OKE) which are cheap and benefit from the crisis. Global Ship Lease (GSL) is also still BUY rated because it is a special and unusual situation.

If you woke me up in the middle of the night and filled me with truth serum, I would say that many stock prices are cheap now compared to later in the year. But it isn’t prudent to buy of those stocks when there is no degree of confidence the market won’t get worse. Let’s not try to catch a falling knife.

Of course, this month’s Featured Buy is an exception. The reason for buying Intel (INTC) now, aside from all the reasons explained below, is because the stock is so low already it should have very little downside if the market keeps falling. It instills confidence that the stock barely budged in the ugliness of the past couple weeks.

Monthly Activity
^{February 9th}
Purchased Discover Financial Services (DFS) – $124.85
SOLD ½ Spectrum Brands Holdings – $91.56 (return 13.32%)

February 16^th
SOLD STAG Industrial (STAG) – $39.78 (return 101.32%)
SOLD KKR & Co. (KKR) – $62.20 (return 33.02%)
NextEra Energy (NEE) – Rating change “BUY” to “HOLD”
Xcel Energy (XEL) – Rating change “BUY” to “HOLD”

March 2nd
Visa Inc. (V) – Rating change “BUY” to “HOLD”

March 9th
Discover Financial Services (DFS) – Rating change “BUY” to “HOLD”
Blackrock Enhanced Capital and Income Fund (CII) – Rating change “BUY” to “HOLD”
SELL Spectrum Brands Holdings, Inc (SPB)
BUY Intel (INTC)

FEATURED ACTION

Buy Intel Corporation (INTC)
Intel is an icon of the technology revolution. The company makes chips or processors that are essentially the brains of the computer. It is one of the largest semiconductor companies in the world with $79 billion in annual revenue and holds by far the largest market share of the PC and server processor markets. The company has maintained its position at the forefront of technology by investing heavily in R&D.

But lately is has been getting its butt kicked by the competition, mainly Advanced Micro Devices (AMD) and Nvidia (NVDA). These companies are grabbing market share and have torrid earnings growth. Over the last five years AMD has soared 759% and NVDA is up 883%. The returns are only that low because those stocks have taken a big hit in the recent tech sector selloff.

But Intel’s stock performance has been abysmal. Look at the average annual returns over the past five, three and one-year periods for INTC compared to the semiconductor industry and the S&P 500.
1-year 3-years 5-years

INTC -17.73% -0.85% 8.62%

Semiconductors 16.79% 36.70% 28.27%

S&P 500 12.10% 17.19% 14.50%

The stock had been a strong performer prior to the last five years. What happened? To make a long story short, Intel missed the boat on smartphone chips. Intel is king of the PC (personal computer) chips, but that market is stagnating. The growth has been in mobile devices and smartphones. Competitors cornered that market and Intel was never able to break in.

That’s the technology business. You can’t miss a step. And mobile devices were a big step to miss. It opened the door to competitors and soured investors on Intel’s growth prospects. And there’s been more bad news lately.

In the spring, Intel announced that production problems would delay the rollout of its next generation of chips due problems in the manufacturing process, giving an opportunity to the competition. INTC plunged 10% on the news. Then, in February, Intel reduced 2022 earnings guidance to $3.50 per share from $5.47 in 2021, a decline of 36%. The market didn’t like that either.

The stock is currently floundering near the lowest level in more than four years. That’s the bad news. And it’s bad. But the stock is dirt cheap and there is a huge opportunity ahead.

A Renewed Mission
The reason for the dip in this year’s earnings is because Intel will focus on the future by investing a record $27 billion on new products, compared to capital expenditures of $18.7 billion last year and $14.3 billion in 2021. Intel is rolling up its steeves and taking on the competition. The company had been the best in the business on such investments and still has a lot of mojo left. There are some hugely promising growth opportunities.

One opportunity is in gaming. AMD’s earnings have been primarily driven by gaming and crypto mining. The gaming market is currently dominated by AMD, but Intel is already making serious inroads. It also has next-generation chips coming in 2023 and 2024 that are superior to AMD’s next generation. There’s huge growth potential in that market.

Intel has an 85% share of the supercomputer market and a massive share of the data center server market, which is a huge growth business as the number of connected devices continues to accelerate. There is also opportunity in the data center CPU market that is forecast to grow to $21 billion by 2026. Nvidia currently dominates with an 80% market share. But Intel has new technology coming in the next few years that is supposedly superior to Nvidia’s.

Intel is also planning to aggressively expand its foundry business, where chips are manufactured. There is a big push in this country to produce more chips in light of the recent global shortage and to reduce overseas reliance. Intel recently made a $5.4 billion acquisition of foundry company Tower Semiconductor that should close around the end of this year.

Intel is forecasting mid- to high-single-digit growth in 2023 and 2024 and an acceleration to double-digit growth thereafter. Of course, these are estimates. Intel has not executed yet. It is also possible that the company can grow a lot more than current estimates indicate. There are enormous opportunities for growth in these areas.

So, we have a technology icon that sells at a dirt-cheap price and valuation after having been pummeled by a plethora of bad news. The company is also flexing its considerable innovation prowess that made it the best in the world and focusing on high-growth businesses and taking on the competition. It’s cheap ahead of what is likely to be very profitable decade.

But earnings will still shrink this year. Why not wait until the company actually starts executing on that growth and then jump in? Why now? There are a few good reasons.

It’s an ugly market now with this Russia business, and stocks will have to grapple with inflation and a tightening Fed all year. A value stock with a turnaround story isn’t a bad way to go. INTC should also have less downside than most stocks because it is already beaten down. A lot of bad news is already baked into the price.

Plus, by the time investors are convinced of Intel’s future growth the stock will have moved higher already. And technology stocks are probably oversold at this point. And there’s something else.

The stock looks appealing here on a technical basis. Over the last four-plus years, INTC has bounced around and gone nowhere. But looking at the chart you can see that the current price is about as low as it has gone. In fact, every time over that period INTC has fallen to this price a strong rebound followed.

Then there’s the dividend. Intel is one of the rare dividend-paying tech stocks. The dividend is currently $0.365 per quarter and $1.46 annually, which translates to a current yield of 3.05%. That’s a decent dividend in this market. It’s well covered as the company had $30 billion in operating cash flow and dividends were just $5.6 billion. Intel has also growth the payout by an average of about 6% per year over the last ten years.

Security type: Common stock
Industry:Technology (Semiconductors)
Price: 48.07
52-week range: 43.63- 68.49
Yield: 3.04%
Profile: Intel is the world’s largest logic chipmaker and one of the world’s biggest semiconductor companies.

Positives

• The company has an ambitious plan for future growth that could pay off big.
• The price is beaten down near the lowest level in four years at a cheap valuation.
• The R&D and innovative capacity is among the greatest in the world and is currently being vastly underestimated.

Risks

• Fierce competition has gotten the upper hand recently in a rapidly changing industry.
• Growth rates will remain lower than the competition’s because it takes a considerable amount of growth to move the needle on a company with $79 billion in annual revenues.
• The company has been fumbling the ball lately and it remains unproven that it can regain its process.

Intel Corporation (INTC)
Next ex-div date: May 4, 2022, est.

Portfolio At A Glance, Portfolio Updates and Dividend Calendar

Portfolio at a Glance

Portfolio Updates

High Yield Tier

The investments in our High Yield Tier have been chosen for their high current payouts. These investments will often be riskier or have less capital appreciation potential than those in our other two tiers, but they’re appropriate for investors who want to generate maximum income from their portfolios right now.

Rating change “BUY” to “HOLD”
Blackrock Enhanced Capital and Income Fund (CII – yield 5.9%) – This is a solid income-generating ETF that should do well in flat and choppy markets. But it does move with the overall market in the near term. Right now, this market is highly uncertain while investors grapple with the Russia/Ukraine situation. There could more downside in the weeks ahead and it’s probably not the right time to buy into this market. HOLD

Blackrock Enhanced Capital Income Fund (CII)
Next ex-div date: March 14, 2022

Enterprise Product Partners (EPD – yield 7.3%) – The NADAQ has crossed into bear market territory. The other indexes slipped into correction. But this midstream energy partnership has been on a solid uptrend since late December and is now within kissing distance of the 52-week high. It’s a contrarian stock at a time when those are practically the only stocks working now. The energy sector is up about 37%YTD while everything else is bleeding. Plus, it pays a better than 7% yield to boot. EPD should have further to go as it still sells below the pre-pandemic high with much better earnings. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD)
Next ex-div date: April 28, 2022, est.

Global Ship Lease, Inc. (GSL – yield 3.5%) – The container ship company stock can be volatile. But it is somehow up over 20% YTD in a down market with geopolitical tensions. That’s how good the container ship business is right now. There is a big supply shortage that should last for a while. GSL might really take off when the market stabilizes. I expect more good things out of the stock.

The dividend has been confusing. The company raised the quarterly dividend from 0.25 per share to 0.375. But the increase won’t take place until the next dividend. For now, the yield is just 3.5%. But it will be adjusted upward after this dividend to 5.5%. BUY

Global Ship Lease, Inc. (GSL)
Next ex-div date: May 19, 2022, est.

ONEOK Inc. (OKE – yield 5.5%) – The natural gas and natural gas liquids (NGLs) midstream player just made another new 52-week high on Monday, one of the worst days in over a year for the overall market. The energy rally has sputtered but started again after Russia invaded Ukraine. I don’t know how long this latest surge will last. But OKE is still below the pre-pandemic high while earnings are much higher. It should have a great year. BUY

ONEOK Inc. (OKE)
Next ex-div date: April 28, 2022, est.

Realty Income (O – yield 4.4%) – It’s been a tough year for REITs so far. Although O is down about 10% YTD, it has held up a little better than the sector. Its status as a legendary income stock and monthly dividend stalwart makes it relatively buoyant in markets like this. Looking ahead, O is not cheap and earnings should improve as the new acquisition comes online and boosts profits. As well, value and dividend stocks are likely to be in higher demand on the other side of the pandemic recovery when economic growth slows. HOLD

Realty Income (O)
Next ex-div date: March 30, 2022, est.

Dividend Growth Tier

To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.

AbbVie (ABBV – yield 3.7%) – The biopharmaceutical company stock just made another new high. Sure, the world may be going to Hell in a handbasket, but ABBV doesn’t mind. ABBV is up 22% YTD and 37% since the middle of October. Investors are becoming more confident that AbbVie can overcome the Humira patent expiration in 2023 as the new drugs and the pipeline continue to impress. The stock also still sells at a cheap valuation of less than 11 times forward earnings. The stock will eventually become true to form and level off. But let’s see how high it runs first. HOLD

AbbVie Inc. (ABBV)
Next ex-div date: April 13, 2022

Broadcom Inc. (AVGO – yield 2.9%) – This technology goliath has been floundering along with the rest of the technology sector this year. It’s down 14% YTD. Of course, that’s not so bad considering the tech sector is down 20% so far this year. And there is good news. Broadcom’s earnings trounced expectations yet again with 27% earnings growth and 16% revenue growth year over year. The company also guided to a better than previously expected 20% revenue growth in the first quarter.

AVGO jumped 3% on the news but the rally was short-lived as tech stocks came under pressure again. While the current external environment for the market and the sector is awful, Broadcom’s business is thriving and will likely even accelerate going forward. Patience should pay off and the stock should jump when the market stabilizes. HOLD

Broadcom Inc. (AVGO)
Next ex-div date: March 21, 2022

Brookfield Infrastructure Partners (BIP – yield 3.6%) – There is really nothing new to say about BIP. And that’s the beauty of this defensive infrastructure partnership. It remains near the high and on a long-term, slow and bouncy uptrend. Reliable and growing income and solid dividends never really go out of style. I expect more of the same going forward, slow and reliable appreciation and income. (This security generates a K1 form at tax time). HOLD

Brookfield Infrastructure Partners (BIP)
Next ex-div date: May 30, 2022, est.

Chevron Corp. (CVX – yield 3.5%) – Oh my goodness. It’s yet another new high. CVX had been trending higher since September. But the rise accelerated into the stratosphere with this Russia thing. CVX is up 27% in the last two weeks and 77% since September. It is an energy major that is more levered to the price of oil than its peers. That’s a good place to be as oil soars to a 14-year high with no end in sight to the price acceleration.

But I’m a little torn. On the one hand, I’m tempted to take some money off the table here and secure these huge profits while it’s hard to see how things can get any better. On the other hand. I hate to interrupt a stock that keeps soaring ever higher every single day. For now, we’ll keep holding on. But be ready to take some profits after this latest epic run starts to peter. HOLD

Chevron Corp. (CVX)
Next ex-div date: May 18, 2022, est.

Rating change “BUY” to “HOLD”

Discover Financial Services (DFS – yield 2.0%) – Unfortunately, the timing on this credit card goliath is terrible. The market is tanking and financial companies, especially international ones, are taking the brunt. DFS was rolling along with the likelihood of accelerating business in the later stage of the recovery. But the bottom fell out this past week while the market got scared and unsure how to price the rising geopolitical tensions. DFS has crashed 23% in March so far.

I still believe the stock will post solid returns for the year as earnings will almost assuredly accelerate. So, I don’t want to sell it here. But it is also too treacherous to buy now while the freefall may not be over. The rating is reduced to HOLD. HOLD

Discover Financial Services (DFS)
Next ex-div date: May 16, 2022, est.

Eli Lilly and Company (LLY – yield 1.6%) – Health care is back in style. There’s something about runaway inflation and war that makes investors appreciate defensive businesses that will continue to thrive no matter what happens. LLY is up about 10% in the past two weeks while the world is crashing and burning.

LLY has been bouncing around in a range. Lately, the bounce is to the upside. The long-term situation is still strong. It still has the likely approval of its potential mega-blockbuster Alzheimer’s drug later this year. It the near term, LLY is a bit of a haven. HOLD

Eli Lilly and Company (LLY)
Next ex-div date: May 14, 2022, est.

Qualcomm Inc. (QCOM – yield 1.7%) – I have to break out the ugly stick again to talk about this chipmaker stock. It tends to hang tough near the high point of the recent range until things get particularly ugly in the market and the sector. And things have been frog ugly of late. QCOM broke through the recent lows into new downward territory this past week. QCOM is down 12% in less than a week.

It may have some support around this level. We’ll see. But I still like the stock longer term. This is a tough time for technology stocks, but QCOM is a standout with huge earnings growth from the 5G rollout and terrific prospects for beyond. I’m watching it closely but it feels like panic to sell it here. HOLD

Qualcomm Inc. (QCOM)
Next ex-div date: June 2, 2022, est.

Rating change “HOLD” to “SELL”

Spectrum Brands Holdings, Inc. (SPB – yield 1.8%) – We sold half of this position several weeks ago as shares had been very weak in the tough market. SPB then rallied off the recent lows but has turned lower again in this market. I kept half of the position because I like the prospects for the company’s home-centric business. The problem is that SPB has little ability to move counter to the overall market. I don’t trust the current market and SPB is at its mercy.

We still have a profit in this half of the position, and more on the half that was sold at a much higher price a few weeks ago. But we need to take some risk off the table and cut the rest of SPB loose. SELL

Spectrum Brands Holdings (SPB)
Next ex-div date: May 18, 2022, est.

U.S. Bancorp (USB – yield 3.2%) – This regional bank stock continues to flounder. It was bouncing around with the overall market, but the Russia situation has made things worse as interest rates have been moving lower. But this should be a temporary down leg in an otherwise very good environment for USB. The current crisis will likely fade and the next thing up will be rising rates and a still-strong economy. It’s worth sticking with this one because of the favorable backdrop aside from the war. HOLD

U.S. Bancorp (USB)
Next ex-div date: March 30, 2022, est.

Valero Energy Corp. (VLO – yield 4.3%) – Here we go. The refiner stock is up big again. VLO has not participated in the torrid energy rally over the past couple of weeks because profits do not necessarily increase with crude oil prices, but rather the spread between costs and prices for refined product. The spreads had decreased but are sharply rising now. VLO is back to very near the 52-week high and may continue to run for a while, making up for that lost time over the past couple weeks. HOLD

Valero Energy Corp. (VLO)
Next ex-div date: May 2, 2022, est.

Visa Inc. (V – yield 0.7%) – Ditto everything I said about DFS. V is in the crosshairs of the Russia/Ukraine selloff. A geopolitical crisis like this turns investors off to anything international. Although V does most business in the U.S., it has a huge international presence. And that part is the growth story this year. Global business was the next piece of the puzzle for V to enjoy a full strong recovery. And it’s happening. We’ll hold on for now as prospects are still bright for the year. And V could also get a big bounce in the near term. HOLD

Visa Inc. (V)
Next ex-div date: May 10, 2022, est.

Safe Income Tier

The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.

Invesco Preferred ETF (PGX – yield 4.9%) – The ETF has fallen a bit in price over the past several month as rising interest rates and inflation have affected it. Preferred stocks tend to hold up relatively well in those conditions, but they are not immune. We will watch PGX for further weakness going forward. Only half of the position remains but any further weakness from here will likely prompt selling the shares. HOLD

Invesco Preferred ETF (PGX)
Next ex-div date: March 22, 2022, est.

NextEra Energy (NEE – yield 2.0%) – Both NEE and XEL have been on fire over the last couple of weeks. I think they were just waiting for me to downgrade the rating to a HOLD. Both stocks had been reeling in the tough market. But NEE is up almost 10% in the last two weeks. It’s because alternative energy stocks have gotten hot as conventional energy prices soar into the stratosphere with no end in sight. The situation makes clean energy a more attractive alternative. I like the stock longer term anyway. But if it is propelled for more superficial reasons in the short term, so be it. HOLD

NextEra Energy (NEE)
Next ex-div date: May 24, 2022, est.

Xcel Energy (XEL – yield 2.7%) – Ditto about NEE. XEL is up over 10% in the last two weeks as clean energy jumps back into vogue amidst skyrocketing oil and gas prices. XEL is not far from the high of about 2 per share higher and may soar beyond that in this latest run. We’ll see what happens in the near term, but I like the prospects longer term regardless. HOLD

(XEL) Xcel Energy
Next ex-div date: March 14, 2022

Dividend Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.

The next Cabot Dividend Investor issue will be published on April 13, 2022.