I am delighted to take the reins of the Cabot Stock of the Week advisory and hope to keep the good times rolling in our portfolio! With the market finally showing signs of life, or at least resilience, much better days lie ahead, and there’s lots of money to be made during the next big thrust.
This week’s new recommendation is the rare stock that’s already having a very good year – and is still undervalued. It’s a stock that was in our Stock of the Week portfolio not long ago and has demonstrated enough strength of late to gain re-entry.
Cabot Stock of the Week Issue: July 18, 2022
“Chris, how would you like to take over one of our flagship publications, from a Cabot legend, in a bear market?”
Those weren’t the exact words Ed Coburn, our President and CEO, used when he asked me to take over Cabot Stock of the Week. But they’re the words I internally asked myself as I contemplated his question. Nevertheless, my response was swift: “Absolutely! (Gulp.)”
Tim Lutts is not someone who is easily replaced. For most of the past couple decades, Tim was Cabot. But, as he wrote to you, our faithful Stock of the Week readers, last week, he has decided to retire from the grind of the investment publishing world after 36 years with Cabot. No one has earned retirement – and more time with grandkids, golf and travel – more than Tim. I’ll miss working with him, and I wish him well.
Who am I? I joined Cabot seven and a half years ago, after Tim hired me following a chance meeting at a contrarian investing conference in my home state of Vermont. I started as a staff analyst, filling various gaps; worked my way up to editor of our website and our Cabot Wealth Daily free newsletter; and, for the past four-plus years, have served as Cabot’s Vice President of Content, a role in which I will continue.
That role made me uniquely suited to taking over Stock of the Week—it’s my job to read and vet every bit of content Cabot puts out, and thus I’m intimately familiar with the stocks our excellent team of analysts are recommending at any given time.
In deference to the “if it ain’t broke, don’t fix it” philosophy – Stock of the Week does boast the highest average return among its current portfolio recommendations of any Cabot advisory, after all – I don’t plan to change much about this newsletter. A new stock every Monday, no matter what, hand-picked from among our many other outstanding advisories. The portfolio will be capped at 20 stocks, so some weeks one perfectly fine stock may need to go (we’re nowhere to close to that now, at only 17 positions with today’s addition). And I’ll continue to be diligent about not keeping losing stocks around for too long, though like Tim I won’t have a hard and fast loss limit.
Now all I have to do is find the next Tesla (TSLA)!
My first recommendation probably won’t be the one. But it’s a safe bet for a bear market that, while signs are improving – last week’s modest sell-off despite inflation hitting yet another new 40-year high was certainly encouraging – isn’t over yet. It’s a stock with which many of you are likely familiar, as it was a Stock of the Week recommendation not too long ago. In fact, Bruce Kaser has continued to recommend it to his Cabot Undervalued Stocks Advisor subscribers long after we sold here, and his patience is paying off, as the stock just climbed to new highs and is up more than 25% this year!
Here are Bruce’s latest thoughts:
Molson Coors (TAP)
Molson Coors Beverage Company (TAP) is one of the world’s largest beverage companies, producing the highly recognized Coors, Molson, Miller and Blue Moon brands of beers as well as numerous local, craft and specialty beers. About two-thirds of its revenues come from the United States, where it holds a 21% market share. Canada-based Molson (founded in 1786) and Colorado-based Coors (founded in 1873) combined in a 2005 merger of equals. After a series of transactions, by 2016 the company had consolidated all of the Molson, Coors, Miller Brewing and other operations under one roof.
Enthusiasm for its post-consolidation prospects drove TAP shares to over 110 in October 2016. However, ongoing market-share weakness and uninspiring revenue and profit growth dampened investor interest. The shares ground lower and then tumbled to as low as 33 in the wake of the pandemic.
Molson Coors is a remarkably steady company. In each of the past three years, the company generated revenues of around $10 billion and cash operating profits of about $2.2 billion. Free cash flow has held steady at close to $1 billion as well. While elevated after the 2016 consolidation, the company’s debt burden has been whittled down to a reasonable 3.1x cash operating profits.
To help expand its market opportunity, Molson Coors is launching new products in the Above premium and non-beer segments. The company’s new Above premium brands, like Topo Chico Hard Seltzer (the fastest-growing hard seltzer brand in the United States, and co-marketed with Coca-Cola) and Vizzy show tremendous promise. The ZOA energy drink, supported by marketing featuring the actor Dwayne “The Rock” Johnson, is also growing rapidly. As many consumers continue to have plenty of spending power, these segments should benefit. If other consumers trade down from premium beers due to the slowing economy and rising inflation, its core Coors Light and Miller Lite brands are well positioned to capture market share.
The company demonstrated its resilience with healthy 18% revenue growth in the first quarter, as its brands were supported by a pandemic-weakened year-ago period along with strong pricing and solid underlying demand. Profits rebounded as well, even as Molson Coors is boosting its marketing spending to support its new brands. Its cost-control programs added incremental profits while also boosting its operational efficiency, making Molson Coors a higher quality company.
The company’s management is shareholder friendly. After pausing its dividend during the pandemic, Molson Coors reinstated its quarterly payout and then recently raised it to $0.38/share, providing investors with an attractive 2.6% dividend yield.
Molson Coors shares remain undervalued. Based on 2022 estimates, the shares trade at a modest 9.5x EV/EBITDA, well below its peers and most consumer staples stocks.
The company reports second-quarter earnings on August 2. Investors will be watching for Molson Coors’ ability to continue to increase its pricing and volumes, as well as maintain its overall cost and profit guidance in the face of rising marketing spending for the second half of the year. Overall, the shares look attractive.
|Revenue and Earnings
|Forward P/E: 15.1
|Qtrly Rev Growth
|Qtrly EPS Growth
|Current P/E: 11.9
|Profit Margin (latest qtr): 10.1%
|Debt Ratio: 54%
|One quarter ago
|Two quarters ago
|Dividend Yield: 2.6%
|Three quarters ago
|Price on 7/18/22
|Allison Transmission (ALSN)
|Aris Water Solutions (ARIS)
|Brookfield Infrastructure Partners (BIP)
|Cisco Systems (CSCO)
|CVS Health Corporation (CVS)
|Enphase Energy (ENPH)
|Fanuc Corp. (FANUY)
|Molson Coors Beverage Company (TAP)
|Nio, Inc. (NIO)
|ONEOK, Inc (OKE)
|Organon & Co. (OGN)
|Ulta Beauty (ULTA)
Changes Since Last Week’s Update
Organon (OGN) moves from BUY to HOLD
By adding Molson Coors (TAP) back to the portfolio, with no other demotions (though we do have one rating change), we are now up to 17 stocks (of a maximum 20). Whether we go to 18 stocks or higher will depend on what happens to the market in the coming weeks during this pivotal period of Q2 earnings season, Fed rate hikes, and eventually the July inflation number. Organon (OGN) is the one rating change I’ll make in my inaugural issue, as the stock has fallen sharply enough of late to warrant a downgrade to Hold. But there are more stocks in the portfolio that are candidates for upgrades. That is, if the market continues to stabilize, you can expect some of our many Hold-rated stocks to become Buys again.
For now, here’s the latest with each of our pre-existing 16 stocks…
Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, makes footwear from sustainable natural materials and is growing at a good pace. But as with any low-priced stock, its percentage moves can be big, in either direction. Since bottoming at 3.7 in early May, the stock has been in slow-but-steady recovery mode but has made more meaningful progress in the last two weeks and was up more than 5% in early Monday trading. If you haven’t bought yet, you could buy here. HOLD
Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here three weeks ago, is a mid-cap ($3.6 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. In his update last week, Bruce wrote, “Many investors view this company as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. However, Allison produces no car and light truck transmissions, instead it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its 35% EBITDA margin is sharply higher than its competitors and on-par with many specialty manufacturers. And, it is a leading producer and innovator in electric axles which all electric trucks will require. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle. The company generates considerable free cash flow and has a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years.” BUY
Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here two weeks ago, is a Houston, Texas-based company that provides water infrastructure and recycling solutions to oil and gas operators in the Permian Basin. Aris helps the industry slash use of fresh and non-potable water by blending technology, integrated infrastructure and logistics. It helps customers achieve ESG (Environmental, Social and Governance) compliance, something that is increasingly important to oil and gas producers, as well as investors, and its biggest customers are ConocoPhillips (COP), Chevron (CVX), Exxon (XOM), Occidental Petroleum (OXY) and Marathon Oil (MRO), which collectively drive around 70% of revenue. The stock has gotten off to a nice start since we recommended it, up 19%, including a big move Monday morning! Buy now if you haven’t already done so. BUY
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a lower-risk technology stock that has become a good value. In his latest update, Tom wrote, “The selling is overdone and AVGO has strong technical support around where it currently trades. It’s been a technology bloodbath this year and AVGO has not been immune. But the company should continue to post solid earnings growth in the months and years ahead as it benefits from technological advancement in the cloud and as a result of 5G infrastructure. Investors should rediscover this stock at some point. Earnings growth and valuation dictate that this stock should trade a lot higher in the future.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has had a good bounce this month, but remains deeply oversold. In his update last week, Tom wrote, “This defensive infrastructure partnership took a hit along with everything else in June. But it has been solid in the absence of market panic. BIP should be ideally suited for this market over the rest of the year. Its earnings are highly recession resistant, and Brookfield has inflation adjustments built into its contracts. Earnings are growing at a higher-than-normal clip because of the recent midstream energy acquisition and the stock is a very reliable dividend payer. (This security generates a K-1 form at tax time).” HOLD
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is one of the portfolio’s biggest losers, and thus a candidate for sale. But, as Tim noted last week, I’m going to hold on to it for now because Bruce’s methodology is sound, and thus the stock will almost certainly come back, though it will take longer than anticipated. In his update last week, Bruce wrote, “Cisco Systems is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.
“While Cisco shares’ round-trip from our initial recommendation at 41.32 to 64 and back to 41 or so is frustrating, this is not the time to sell the stock. The fundamentals remain reasonably stable and likely to tick back upward, and profits seem likely to improve, as well. The shares will likely come back to life as earnings reports show favorable growth and profit trends, so investors will need some patience. If we have a recession in global tech spending, Cisco would likely feel the downturn but not as severely as other technology companies due to the mission-critical nature of its products and services.
The valuation is attractive at 8.6x EV/EBITDA and 12.9x earnings, the shares pay a sustainable 3.5% dividend yield, the balance sheet is very strong, and Cisco holds a key role in the basic plumbing of technology systems even if its growth rate is only modest. We are keeping our Buy rating.” As for us, we will continue to hold, for now. HOLD
CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, remains above its low of three weeks ago but below its 200-day moving average. In his update last week, Carl wrote, “Shares were largely unchanged this past week and the only news is that Tilak Mandadi will step into the newly created role of chief of data, digital and technology. This is a good value stock for this sort of market because its first-quarter revenue was up nicely and CVS Health’s earnings per share have grown 26% each year, compounded, over the past three years. CVS Health is one of the nation’s leading healthcare companies with almost 10,000 stores, and its core markets grow each year even in a weak economy. CVS stock is still a buy trading at just 11 times forward earnings.” BUY
Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the world’s leading provider of micro inverters, which are needed to transform DC current from solar cells to AC current that can power a house, commercial building or feed into the power grid. Since 2020, the firm has been in the battery business as well, enabling residential customers to store their solar power. And now Enphase is getting into the EV charger market, with a new product likely in early 2023. In Cabot Growth Investor last week, where Mike doesn’t own the stock (because he’s heavily in cash) but is keeping an eye on it, he wrote, “ENPH remains in decent shape, but it also remains all over the place, whipping up and down 30 to 40 points in a matter of days. We want to see it settle down, but overall, we still like this story and the stock’s set of higher lows since January bodes well.” BUY
Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and serve as the “brains” of industrial robots. But the young stock is not heavily supported by institutions yet, so trading is loose. In his update last week, Carl wrote, “Fanuc shares were steady this week. … Fanuc is a high-quality stock that should be firm with its strong balance sheet with a huge stockpile of cash. The Japanese company is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25.” BUY
Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, is one of the top five Chinese EV makers, and the stock is off to a great start for us, as it’s been trending up since early May. In his update last week, Carl wrote, “Shares lost a point this week as Covid restrictions persist where Nio has a factory. Nio reported its second-quarter vehicle deliveries late last week, with quarterly vehicle deliveries up 14% year over year and June deliveries increasing 60%. Some Nio models offer battery upgrades with ranges of 621 miles on a single charge. Nio now has 1,000 battery swap stations that handle 30,000 battery exchanges every day. There are short sellers out there and the SEC and China are still squabbling about Chinese companies like NIO complying with American financial disclosure requirements. I would have a 20% stop-loss in place for this stock while I monitor the situation.” HOLD
ONEOK, Inc. (OKE), our newest addition to the Stock of the Week portfolio and originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up a point in its first week. ONEOK is a large, U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supplies in the Rocky Mountains, midcontinent, and Permian regions in key market centers. The company also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure. In his update last week, Tom wrote, “OKE has bottomed for now. It does trade with the overall energy sector in the near term. But it has defensive earnings that aren’t levered to commodity prices, sells at a compelling valuation and pays a sky-high dividend that is safe. A defensive energy company with a high payout could be the ideal stock in the months ahead.” BUY
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, has had a rough month, falling from 35 to 31 since June 24, and dipping even further below its March highs above 39. With Tim having recommended the stock at 33 back in February, we are now at a small loss on this recommendation. The fact that OGN has been retreating at a time when most other stocks are finally stabilizing doesn’t bode well. So, in our one portfolio change this week, I’m going do downgrade OGN from Buy to Hold. Bruce still rates it a Buy in part because, as he noted in his update last week, shares still “have about 40% upside to our 46 price target” and “continue to trade at a remarkably low valuation while offering an attractive 3.4% dividend yield.” MOVE FROM BUY to HOLD
Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of Covid-related products and transformative M&A. The stock is now above all its moving averages, though it has dipped a couple points since topping out at 53 the first week of July. Still, the intermediate-term trend is up, and the 3.1% dividend yield helps. Earnings are due out next week (July 28) so we’ll see how that affects the shares. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, lost half its value as it fell from last November’s high to its May low, but since then it’s held up well, even while the market has fallen apart, so odds are very good that the bottom has passed. In fact, the stock is up 18% since its late-May nadir. This week could be pivotal in determining whether the recovery continues or stagnates, as the company is scheduled to report second-quarter earnings on Wednesday, July 20 after the close. From a 10,000-foot view, Tesla’s story certainly remains intact as it expands production capabilities in its factories and looks set to remain the global EV industry leader for the foreseeable future. Thus, regardless of what this week’s earnings results look like, I plan on hanging on to TSLA for the long haul, as Tim did. Perhaps if its recent recovery continues, we could bump it back up to a Buy. For now, hold. HOLD
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had an excellent week, reaching the precipice of 400 after dipping as low as 377 last week. It’s still well below its June and April highs, but the recent bounce is encouraging. We’ll keep at hold to see if the rally can last more than just a few days. HOLD
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been building a base at 190 for nearly six months now, but it hasn’t been able to develop a true uptrend yet. In his update last week, Tom wrote, “V got knocked back amidst all this recession talk and the downgrading of global growth projections. But it always seems to bottom in the just under 200 per share range and quickly recovers well before market selling eases. Visa continues to get a huge benefit from the removal of Covid restrictions globally despite slowing global growth. Earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock should be one of the first to reverse course and move higher when the market recovers.” HOLD
The next Cabot Stock of the Week issue will be published on July 25, 2022.
Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.
Chris joined Cabot in 2015, where he previously served as staff analyst, web editor, and Chief Analyst of Cabot Wealth Daily, our free investment advisory, which in 2019 was named “Best Financial/Investing Newsletter or Ezine” at the SIPA (Specialized Information Publishers Association) Awards, with Chris at the helm.
Prior to joining Cabot, Chris was an analyst and assistant managing editor with Wyatt Investment Research. He has been an investment analyst for more than a decade and a professional writer/editor for nearly 20 years, picking up multiple writing awards along the way. His bylines have appeared in Forbes, The Money Show, Time Magazine, U.S. News and World Report and ESPN.com.
Chris lives in Vermont with his wife, two young kids and their golden retriever, Scout. He occasionally sleeps.