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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week Issue: February 21, 2023

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Hawkish Fed speak has returned, dragging stocks down to their lowest point since January. Most of the losses have come in the last three trading sessions, and they haven’t been disastrous – about a 3% pullback in the S&P 500. The intermediate-term trend remains up. But the Federal Reserve – or at least some of its individual members – is sounding increasingly likely to extend their rate hikes beyond 5%. January’s higher-than-expected inflation number (6.4%, vs. an estimated 6.2%), reported last week, did little to dampen Fed members’ hawkish comments. As a result, stocks are in their deepest slump of 2023.

Will it last? We’ll probably know the answer in the next week or two. If the indexes hold above their moving averages, as they’ve done for the past month, then this will be little more than a news-driven speed bump. A dip back below those averages could mean the bear market likely isn’t over yet.

To prepare for the latter possibility, today we’re adding a deep-value stock that’s been a mainstay in Bruce Kaser’s Cabot Undervalued Stocks Advisor portfolio since last summer. It has served his readers well, up 29% in less than six months, and yet it still has plenty of upside according to Bruce. Here are his latest thoughts on it.

Gates Industrial (GTES)

Gates Industrial Corp, plc (GTES) is a specialized producer of industrial drive belts and tubing. While this niche might sound unimpressive, Gates has become a leading global manufacturer through innovation. Its customers depend on heavy-duty vehicles, robots, production and warehouse machines and other equipment to operate without fail, so the belts and hydraulic tubing that power these must be exceptionally reliable. And few buyers would balk at a reasonable price premium on a small-priced part from Gates if it means their million-dollar equipment keeps running. Even in automobiles, which comprise roughly 43% of its revenues, Gates’ belts are nearly industry-standard for their reliability and value. The company 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. Helping provide revenue stability, over 60% of its sales are for replacements.

Based in Denver, Colorado, Gates was founded in 1911 and was owned by private equity firm Blackstone from 2014 until its IPO in 2018 (Blackstone retains a 63% stake today). Gates was poorly run by its prior owners, but during its Blackstone ownership, the company improved its product line-up and quality, operating efficiency, culture and financial performance. Today, its 20% EBITDA margin is on par or above its larger and more diversified peers. The management and board are high-quality. Gates continues to follow a common strategy of companies owned/controlled by reputable private equity firms: generating wide profit margins and high free cash flow conversion (free cash flow relative to adjusted net income). We strongly agree with this strategy.

Recent fourth-quarter 2022 results were encouraging. Gates provided reasonably strong guidance for 2023 that implied steady-to-rising revenues and profits rather than a recessionary decline that many investors had anticipated.

In the quarter, adjusted earnings of $0.25/share fell 19% from a year ago but were about 9% above the consensus estimate of $0.23/share. Core revenues, which exclude currency and acquisition/divestiture effects, rose 16% and were about 5% above estimates. Adjusted EBITDA of $166 million rose 19% and was about 6% above estimates. The adjusted EBITDA margin of 18.6% improved from 17.1% a year ago.

Guidance for 2023 points to 1-5% organic revenue growth and (-1%) to +8% adjusted EPS growth. The midpoints of these ranges are incrementally above the current consensus estimates.

The company said demand remains strong in both the Power Transmission and Fluid Power segments. Pricing is moving ahead of higher costs, and the previous drag from supply chain issues is abating, helping drive higher sales and better profits.

Fourth-quarter free cash flow rose 55% as profits rose and inventory was sold down. While the $329 million in full-year free cash flow was healthy, it fell 19% from a year ago due primarily to weaker profits. Free cash flow conversion fell to 54% from 72% a year ago. Its 2023 guidance is for 100% conversion. Total debt fell about 3%. Leverage remains reasonable at 2.8x EBITDA.

While Gates shares have moved up from the 10.72 price at our initial Buy recommendation last August, we recently raised our price target from 14 to 16, reflecting the company’s improved outlook. The shares trade at an attractive 8.8x cash operating profits and 11.8x per-share earnings – a bargain price that continues to undervalue the company’s long-term fundamental strength.


GTESRevenue and Earnings
Forward P/E: 11.7 Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Trailing P/E: 18.3 (mil) (vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 6.21%Latest quarter89310%0.25-19%
Debt Ratio: 303%One quarter ago8610%0.310%
Dividend: N/ATwo quarters ago907-1%0.32-24%
Dividend Yield: N/AThree quarters ago8931%0.26-21%

Current Recommendations


Date Bought

Price Bought

Price on 2/21/23



Arcos Dorados (ARCO)






BioMarin Pharmaceutical Inc. (BMRN)






Centrus Energy Corp. (LEU)






Chewy (CHWY)






Cisco Systems Inc. (CSCO)






Citigroup (C)






Comcast Corporation (CMCSA)






Corteva, Inc. (CTVA)






Gates Industrial Corporation plc (GTES)






Kinross Gold Corp. (KGC)






Las Vegas Sands (LVS)






Medical Properties Trust, Inc. (MPW)






Novo Nordisk (NVO)






Polestar Automotive (PSNY)






Realty Income (O)






TELUS International (TIXT)






Tesla (TSLA)






Uber Technologies, Inc. (UBER)






Ulta Beauty (ULTA)






WisdomTree Emerging Markets High Dividend Fund (DEM)






Xponential Fitness, Inc. (XPOF)






Changes Since Last Week:

BioMarin Pharmaceutical (BMRN) Moves from BUY to HOLD
Corteva (CTVA) Moves from HOLD to SELL
Kinross Gold (KGC) Moves from BUY to SELL
TELUS International (TIXT) Moves from BUY to SELL

Yes, we have three sells this week. No, that doesn’t mean the sky is falling. As I said in the open, in the grand scheme of things this three-day selloff has done minimal damage. Instead, I’m selling three stocks for two reasons: 1) We had to sell at least one stock to make room for GTES, since we had already reached our 20-stock cap in the portfolio; and 2) while the stocks we’re selling hadn’t taken on big losses, their relative weakness in a strong market means there are likely better opportunities available, which we can now attempt to identify in the coming weeks without having to worry about creating any additional spots.

As for the rest of our stocks, most are acting well, including one that just keeps hitting new all-time highs no matter what the market throws at it…


Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was up slightly this past week but remains in the 8-9 range it’s been in all year. There was no news. We’re still sitting on a nice profit. Good entry point if you haven’t already bought. BUY

BioMarin Pharmaceutical Inc. (BMRN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has come back to earth in February and is trading right around our entry price. Earnings are due out next Monday, February 27, so we’ll hang on to see how those move the needle. But given the recent pullback, let’s downgrade to Hold. MOVE FROM BUY TO HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was up slightly this past week after spiking as high as 47 last Thursday. The nuclear energy company will report earnings tomorrow morning (February 22) before the market open, so we’ll see how that affects the stock. In his latest update, Carl noted that Centrus had “completed construction of advanced uranium enrichment centrifuges, putting Centrus on track to begin in 2023 a first-of-its-kind production of High-Assay, Low-Enriched Uranium in Ohio.” BUY

Chewy (CHWY), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is down sharply in the past week, with most of the losses coming this morning (-6%) on no news. The stock had risen more than 30% year to date prior to the Fed-driven market pullback the last few days, so chances are CHWY’s decline is mostly market-driven. We’re still up more than 18% on the stock in less than two months, so the trajectory remains positive. This could be a nice dip to buy if you have not already done so. BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, finally broke out of its months-long range between 47 and 49 after earnings last Wednesday. The company reported 88 cents per share in earnings, which beat estimates of 86 cents. Revenues also narrowly beat and improved 6.9% year over year. But what may have prompted shares to finally break out was the company’s improved 2023 outlook, with management hiking full-year EPS estimates by five cents. Though the stock has pulled back a bit along with the market the last couple trading days, it’s still trading at its highest point since last May and yet remains 32% below Bruce’s 66 price target. BUY

Citigroup (C), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, dipped from 51 to 49 and is threatening to break below month-long support as of this morning. And yet, the stock is still up 10% year to date, so there’s no need to fret. In his latest update, Bruce wrote, “This past week, the yield spread between the 90-day T-bill and the 10-year Treasury bond, which approximates the drivers behind Citi’s net interest margin, was essentially flat at negative 104 basis points (100 basis points in one percentage point). Our interpretation is that investors are assuming that the Fed rate hikes and other macro drivers will drag inflation down to sub-5% or less this year. Given that the inflation metrics are flattening out or declining (inflation over the past four or five months has been tame at sub-3%), this assumption seems reasonable.

“An article in the London Financial Times said that the sale of Banamex, Citi’s retail banking business in Mexico, is progressing but will likely yield a price of only $6 billion to $8 billion, much less than the $10 billion recently estimated by many analysts and the $12.5+ billion estimated a year ago. Delays in completing a deal combined with a growing understanding that Citi had underinvested in Banamex have weighed on the likely price.

“Related, the sole bidder, billionaire Germán Larrea, owner of mining company Grupo Mexico, is said to want Citi to retain a stake in Banamex. Larrea’s motivations are said to include keeping Citi engaged with the business and for it to continue to provide support and other services. While retaining a stake would delay Citi’s full exit, it might offer the possibility of a higher valuation in a later IPO.

“Citi shares trade at 62% of tangible book value and 8.7x estimated 2023 earnings. The remarkably low valuations assume an unrealistically dim future for Citi.

“Citi shares … have 70% upside to our 85 price target. Citigroup investors enjoy a 4.0% dividend yield.

“When comparing Citi shares with a U.S. 10-year Treasury bond, Citi offers a higher yield (4.0% vs 3.7%) and considerably more upside potential (nearly 70% according to our work vs. 0% for the Treasury bond). Clearly, the Citi share price and dividend payout carry considerably more risk than the Treasury bond, but at the current valuation, Citi shares would seem to have a remarkably better risk/return trade-off.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, remains in the 38-39 range in the wake of decent enough fourth-quarter earnings. In his latest update, Bruce wrote, “There was no significant company-specific news in the past week. Comcast shares ticked down 1% for the past week and have 10% upside to our 42 price target. The shares have limited upside, but the earnings report was reasonable enough to keep the stock a bit longer. The shares offer an attractive 3% dividend yield.” BUY

Corteva (CTVA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down about 8% since we added this agriculture stock to the portfolio in mid-November. It doesn’t seem to be going anywhere, stuck between 60 and 64 since the first week of the year, so let’s step aside. We had to sell at least one stock this week to make room for Gates Industrial (GTES), and right now CTVA looks like our biggest laggard. MOVE FROM HOLD TO SELL

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, has been on a steady decline for the past month, and last week’s Q4 earnings report only extended the losses. Both sales and earnings topped estimates, but the loss of 8 cents per share surpassed last year’s fourth-quarter loss of 5 cents per share. While revenues were up 75% year over year, the fact is gold prices are headed in the wrong direction – down roughly $100 in the last month – which is creating an uphill battle for gold stocks like KGC. Let’s sell this one too while our losses are minuscule and open up another spot going forward for a company with more growth potential. MOVE FROM BUY TO SELL

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has dipped below 57 support and fell below 56 this morning. Still, the intermediate-term trend for the stock is up, as Mike noted in his latest update: “Las Vegas Sands (LVS) has sagged a smidge during the past couple of weeks, but it’s been very calm about it, easing down to its 25-day line on quiet volume. If the market gets hairy, a dip toward the 50-day line (nearing 53) is possible, or maybe the stock needs more time to catch its breath after the January run. But big picture, everything here is still lined up, with China’s reopening on track, which is likely to help cash flow soar in its Macau properties. A show of strength from here could have us filling out our position, but at this point, we’ll stick with our half-sized stake—though, if you don’t own any, we’re game for grabbing some shares around here.” We’ll keep LVS a Buy as well. BUY

Medical Properties Trust (MPW), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is up slightly since we last wrote. The company reports fourth-quarter earnings this Thursday, February 23, so we’ll see what happens there. In his latest update, Tom wrote, This high-paying and recession-resistant hospital REIT has pulled back a little over the past couple of weeks after rallying strongly in January. But the stock still remains in a technical uptrend that began in October. The dividend is safe, and the operational performance of the company is solid. The company reports earnings next week that can hopefully give the stock a boost, as earnings grew by better than 30% last quarter and should be good again this quarter. With a defensive business, this should be a good year.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, hit new all-time highs last week and remarkably remains in roughly the same place despite three straight down days for the market. That’s a real sign of strength, especially with no real company-specific news propping up the stock. NVO has quickly become one of our best performers since we added the blue-chip biopharma stock to our portfolio less than two months ago. BUY

Polestar (PSNY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is not off to the best start in the two weeks since we added it. Shares of the upstart electric car company have fallen about 12% during that time. Let’s keep a close eye on this one. It’s premature to downgrade it just yet – shares are still comfortably above their December lows – but any dip below 5 might prompt us to reconsider. BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, has retreated modestly in the last month, falling from 68 to 65. The company reports earnings today, so we’ll see how that affects the stock. For now, we’ll keep it at Buy. BUY

TELUS International (TIXT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is bumping up against its 50-day moving average after reporting mixed earnings two weeks ago. While we could wait to see if it holds above the 50-day line, Tyler just elected to sell it last week due to the unimpressive nature of its earnings and 2023 guidance, so let’s do the same before it becomes too big a loss. MOVE FROM BUY TO SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, crossed the 200 per share threshold since we last wrote, though it was down a bit this morning along with the market. Still, a 63% return year to date is a remarkable turnaround on the heels of the stock’s worst year ever. Insurance registrations in China fell for a second straight week as the company’s main Chinese EV competitors are ramping up production to meet pent-up demand after the country finally emerges from its arcane zero-Covid policies. Registrations for BYD, Tesla’s top Chinese competitor, were up 18% in the last week; Li Auto, Nio, and Xpeng all saw a 4-5% bump in registrations last week. Tesla’s declined 15%. Something to keep an eye on, but not a major reason for worry yet as Tesla’s registrations were bound to tail off – in China and elsewhere – after a surge in demand following the company’s decision to cut prices on several of its models by as much as 15% in early January. The stock is the healthiest it’s looked since last summer. Because shares are still shy of their 200-day moving average, however, we’ll keep TSLA at Hold. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, had a solid first week in the portfolio, rising from 33 to 34. In his latest update, Mike wrote, “Uber (UBER) was tossed around briefly by a competitor—Lyft (LYFT) imploded after its Q4 release last week, which pulled UBER down a bit on the day we were buying. That’s fine by us, and shares have steadied themselves nicely since last Friday’s dip. A still-strong global economy and uptick in travel are clearly helping business, but in terms of investor perception, it’s likely more important that the top brass is laser-focused on profits and free cash flow, with Uber consistently beating targets of late, too.” BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, resumed its upward trajectory after a week’s hiatus, hitting new highs above 530 before sagging a bit. Our gains are now up to 37%! The beauty retailer still trades at a somewhat modest 21 times forward earnings, with 27% EPS growth expected this year. So there’s theoretically still room to run as long as the company keeps growing. Buy on dips. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps holding in the 37 to 39 range. Our lone ETF offers a high dividend yield and some of the highest-quality emerging market stocks. The fund gives broad exposure with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, recovered some of its losses from the previous week, and still looks quite solid, up 12% year to date and 19% in the last three months. Earnings are due out next Thursday, March 2. BUY

The next Cabot Stock of the Week issue will be published on February 27, 2023.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .