Cabot Stock of the Week Issue: June 20, 2023

The bull market rolls on, with encouraging inflation numbers and the Fed’s first rate-hike pause in 15 months only adding fuel to the buying fire last week. There’s been a normal pullback the last two trading days, but the selling has been muted. Despite technically overbought conditions, this market wants to go up, and it’s no longer just the mega caps and the artificial intelligence sector doing all the work, as evidenced by the many stocks in our portfolio from a variety of sectors now hitting fresh 52-week highs.

But, with the market technically overcooked in the short term, it wouldn’t hurt to add a dash of value to the portfolio, and today we do that in the form of a rather dull U.K. life insurance company that recently underwent a much-needed face-lift. It’s been a favorite of our value stock expert Bruce Kaser’s for quite some time, and today we add it to give the Stock of the Week portfolio two things it needs more of: value and overseas exposure.

Aviva plc (AVVIY)

Aviva, plc (AVVIY) is a London, England-based large-cap ($14 billion market cap) insurance company. With roots dating back to 1696, nearly 325 years ago, the company today specializes in life insurance and investment management products along with general commercial insurance. American investors can buy the American Depositary Shares (ADS), which trade with plenty of liquidity in the United States (1 ADS = 2 ordinary shares).

Long a mediocre company, the frustrated board hired Amanda Blanc as the new CEO in July 2020 with the goal of revitalizing Aviva. Highly respected activist investor Cevian Capital AB took a sizeable 6.5% stake – its steady, behind-the-scenes presence provided valuable pressure on the board to drive change. Under Blanc, the company has re-focused on its core geographic markets (U.K., Ireland, Canada). Its operations elsewhere, primarily in continental Europe and Asia, have been divested. The turnaround plan included improving Aviva’s product competitiveness, rebuilding its financial strength and trimming its bloated costs. Its oversized dividend was cut to a sustainable level, which helped rebuild Aviva’s capital base and restore confidence.

Today, the company’s turnaround is essentially complete. Its capital strength is robust – with its Solvency II cover ratio of 193%, well above its 180% target. Product sales are increasing. In its most recent quarterly trading update, Aviva’s sales of life and health insurance products rose 11%, retirement and annuities sales rose 17% and general insurance premiums increased 11%. Wealth segment asset outflows have been reversed, with first-quarter results showing net inflows of about £2.3 billion, nearly 6% of opening assets.

Its combined operating ratio, a key measure of profitability, was 95.4%, reflecting its ability to raise prices as needed, improved risk selection and the benefits of diversification within its portfolio. Aviva’s baseline controllable costs fell 1% in the first quarter, reflecting its focus on efficiency and a less complex business structure. The company is on track to meet its £750 million cost-reduction target by 2024.

From a shareholder perspective, a key component of the turnaround was an improvement in Aviva’s capital discipline. As its more focused operations are generating excess cash, the company is returning more of that cash to shareholders. Since the start of the turnaround, Aviva has returned over £5 billion in capital to shareholders. For 2023, the company’s guide for £300 million in buybacks, along with its annual dividend of nearly £600 million, would result in nearly £1 billion of additional excess capital being returned to shareholders.

While a much higher quality and lower-volatility company today, Aviva continues to face risks common to all insurance companies, including possible pricing and claims costs difficulties and the ever-present risk of capital market volatility.

The shares trade at a reasonable 7.0x estimated 2023 per share earnings and 1.2x tangible book value. Based on the guided annual payout of about $0.84/ADS, investors receive a dividend yield of about 8%. We see this dividend as being highly sustainable. When combined with the buyback program, the total shareholder yield will likely exceed 10%.

Aviva shares offer investors a slow-and-steady, undervalued investment that has a generous and sustainable payout. As a European company traded primarily in London, the shares provide American investors with a degree of global diversification – a potentially valuable feature with the S&P 500 currently dominated by expensive mega-cap technology stocks. We have a $14 long-term price target on the ADS, approximately 38% above the current price.

Current Recommendations

Changes Since Last Week: UnitedHealth Group (UNH) Moves from Buy to Sell

Last week we reached peak 20-stock capacity, so this week something needed to go. Fortunately, UNH made our job easy, as its headline-making retreat after ominous comments from one of its executives at a Goldman Sachs conference last week sent share spiraling downward. In a portfolio where roughly half the stocks are hitting or just coming down from 52-week highs, UNH stood out like a sore thumb. Alas, we’ll have to do it all over again next week, with the addition of Aviva keeping our portfolio at its 20 cap.

It could be a tougher decision next week, as few of our stocks are showing much weakness, and several of them look plain unstoppable as the market winds have turned bullish. Here’s the latest with all our stocks.

Updates

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, is going south while the rest of the market is going north. Shares are down 5.5% since peaking near 48 two weeks ago. But as Tom pointed out in his latest update, “BIPC is still around the higher levels of the recent range. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The stock had been suffering from the lull in defensive stocks, but it won’t stay down for long. A pullback from the recent spike higher is typical for this stock. But it is getting cheaper ahead of a promising second half of the year.” We just recommended the stock last month, so I’ll keep it at Buy for now. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, went through the roof last week before cooling off in the last couple trading days. Net-net, it’s had a positive week, up to 66 from 65 but down from a closing price close to 70 last Thursday. The latest catalyst, as Carl noted in his update last week, is that “BYD sold a record 240,220 vehicles in May, up 109% vs. a year earlier. Among personal vehicles, Battery Electric Vehicle (BEV) sales hit 119,603, slightly exceeding plug-in hybrids at 119,489.” We are now up 17% on this stock in less than two months. The sharp pullback in the last couple trading days is a buying opportunity in what I think could be our next major long-term winner. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, remains in a range between 39-41. There was no recent news. Shares have 13% upside to Bruce’s 46 price target. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, had a solid first week in the portfolio, jumping to 37 from 36. The company is a new leader in the field of third-party ad verification services, allowing companies to see whether their ads are being shown in environments suitable to their brands. Revenues and EBITDA are expected to grow more than 20% this year, and the stock has recently broken out. Buy on dips. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, keeps hitting new all-time highs! Now up to 453 a share, the stock is up 37% since we added it to the portfolio exactly three months ago. If you bought then, it might make sense to sell a few shares – perhaps a quarter of your position – with the stock at such elevated levels. Otherwise, buy on dips. As Tom wrote in his latest issue, “It’s hanging tough around the high because the market still loves it. The pharma superstar has two potential mega-blockbuster drugs up for approval later this year or early next as well as solidly growing earnings for the foreseeable future.” BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, continues to recover, up about 7.5% since a late-May bottom. There’s been no news that moves the needle in the cannabis sector, with momentum toward passing the SAFE Banking Act seemingly stalled, but Green Thumb – the largest U.S. cannabis company – still looks like a bargain. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, just broke to new 52-week highs! There was no news – the move was likely in sympathy with the market rally. Two weeks ago, we were debating whether to downgrade the stock to hold as it was bumping up against multi-month lows. Now shares are at their highest point in more than five years. KCDMY is the Mexican version of Kimberly-Clark, a producer of paper-based goods. It’s a play on Mexico’s 25% manufacturing discount to China and the U.S. And right now, the trend is definitely up. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, briefly broke out of its 57-58 range before pulling back the last couple days. Still, shares of this casino operator appear on the cusp of a more meaningful breakout and are clearly benefitting from China’s reopening (most of its casinos are based in Macau), as analysts expect 138% revenue growth this year. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, resumed its rise after a down week, hitting new 52-week highs at 348 before pulling back the last couple trading days. The stock continues to benefit from its leadership position in the ever-intensifying and increasingly profitable artificial intelligence arms race, thanks to ChapGPT and Bing. And the flight to mega-cap tech stocks in the first half of the year has helped as well. Either way, MSFT is a clear market leader at the moment and is up more than 32% since we added it in late March. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up about 2% since we last wrote and has bounced nicely since finding support at 157. In his latest update, Carl wrote, “Novo sells injectable semaglutide as Wegovy for obesity treatment and as Ozempic for diabetes. It also has an oral version and is testing a lower 2.4-milligram oral dose. Novo’s obesity drugs are seen as more effective than new competitors, but Novo will have to continue to innovate to keep its lead.” Trading at the low end of its recent range, the stock is a Buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, recovered quite nicely in its second week in the portfolio, hitting new 52-week highs near 570 after bulldozing its way through previous resistance at 556. There was no news. Its expanding artificial intelligence presence has been a driving force. The company’s new partnership with Nvidia to develop generative AI for corporations – namely their IT departments, customer service branches and human resources – has been the biggest catalyst for growth. It also has a tie-in with Microsoft Azure’s OpenAI service. All this AI-related growth is why we added NOW to the portfolio earlier this month, and this past week rewarded us for that faith. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been on a steady rise this month and is hitting new 52-week highs in the mid-28s. Si-Bone is a small-cap MedTech company that specializes in implants that solve issues of the SI joint and pelvis. Its addressable markets are worth about $3.7 billion. So far, over 80,000 procedures have been completed by more than 3,000 surgeons. The first quarter of 2023 was impressive. Revenue jumped 46% to $32.7 million, beating by $3.6 million. EPS of -$0.41 improved by 24%. The company had 950 active surgeons (+40%) in the U.S. and 3,500 procedures in the quarter (+48%). BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, briefly broke to new 52-week highs near 160 before pulling back this morning. The stock has now nearly doubled in 2023, but still trades at less than half its February 2021 highs (364). The latest catalyst is that the streaming audio giant just signed former Daily Show host Trevor Noah to a new podcast deal, adding to an impressive podcast stable that already included the likes of Joe Rogan and Bill Simmons, though a potential deal with Prince Harry and Meghan Markle just collapsed. But the Noah addition is a coup. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just keeps rising, up another 8% in the last week. Last week, news of Ford and GM agreeing to a deal that will permit drivers of its EVs to use Tesla’s Supercharger network was a tailwind for shares; this week, Tesla opened up its network to Rivian as well. Wedbush analyst Dan Ives estimates that the Ford and GM deals alone could generate an additional $6 billion in revenue for Tesla over the next few years – and that doesn’t take into account the Rivian deal. TSLA stock has now more than doubled this year, so it couldn’t hurt to sell a few shares, depending on when you bought. Otherwise, it’s a Buy, as the stock has gone nowhere but up for more than a month. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is up slightly since we last wrote, pulling back from new highs in the mid-43s today. In his latest update, Mike wrote, “While it won’t be the fastest horse out there, we filled out our position in Uber last week and continue to think the company’s consistent, rapid improvement in the bottom line (EBITDA), combined with its steady growth in both rideshares and delivery, has big investors confident Uber will meet, if not exceed, its lofty 2024 goals ($5 billion in EBITDA and huge free cash flow). A potential sale or spinoff of its freight business would be another plus, and while economic concerns will always be here (big drop in travel or jobs could crimp rideshares, etc.), competition has been lessening, which is always a good thing. A drop back into the mid-30s would be iffy and suggest the Q1 earnings blastoff may be failing, but having hit new highs earlier this week, the path of least resistance is up.” BUY

UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is the easy choice for a Sell today. Shares of the health insurance giant fell off a cliff last week after a company executive revealed that it’s seeing a major uptick in seniors undergoing elective surgeries years delayed by the pandemic. The result will be increased costs for major insurers like UnitedHealth, which doesn’t bode well for the company’s bottom line this year. Wall Street started to bail on the stock in droves, so we will too, with a modest loss in the 6-7% range. MOVE FROM BUY TO SELL

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, has been waffling in the 220s for more than a month. There’s been no news, though the declining chances of a recession and a stubbornly resilient economy could certainly portend better quarters ahead than expected for this payments processor. A breakout is likely coming soon – we’ll see if it’s to the upside. HOLD

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding firm in the 188-190 range. Considering the market strength of late, the recent performance has been a bit uninspiring, which is why we downgraded WING to Hold last week. In his latest update, Mike wrote, “We’re doing our best to give Wingstop some rope, as the long-term growth story is very much intact and, after the move of recent months, the recent pullback isn’t outrageous. (The fact that we took partial profits a while back also helps.) That said, the stock is on a tight leash—it’s dipped below its 50-day line, volume is picking up a bit and, after breaking to new all-time highs after earnings, WING has pulled back to its prior highs. We do think the odds favor the stock eventually resuming its overall uptrend, but we don’t want to hold the stock much further down, especially with many other names acting well. Right here, we’re holding on, but if all’s well, we’d expect buyers to begin stepping up soon.” HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, finally broke above 40 for the first time in more than a year before pulling back to its traditional 37-39 range. Still, momentum has picked up in June, and the fund is up more than 10% year to date. 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, seemed to be on a fast track back above 30 per share before hitting a brick wall the last couple trading days on no news. Still, shares of the fitness studio chain are well clear of their late-May bottom in the high 24s. We’ll keep an eye on it. A dip below that 24 support might have us reconsidering its place in the portfolio, but it’s worth hanging on to until that happens, especially since it looks like there are buyers out there. HOLD

The next Cabot Stock of the Week issue will be published on June 26, 2023.