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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week Issue: March 27, 2023

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Stocks have been resilient in the face of a banking meltdown and yet another interest rate hike from the Fed last week. Indeed, all three major indexes are actually up slightly since we last wrote. That kind of resilience was absent in 2022, and further fuels my optimism that 2023 will be a much better year for the market. In fact, the banking crisis – or mini-crisis, if the collapses of Silicon Valley Bank, Silvergate, and Signature Bank, and buyout of Credit Suisse by UBS are the extent of the damage (we’ll see) – may end up being a good thing for stocks, in the intermediate to long term.

The Fed has been the market’s boogeyman for the past year, raising rates at breakneck speed, and seemingly intent on raising them even more after January’s inflation number came in higher than expected. Now, the Fed is indicating there may only be one 25-bp rate hike left this year, with Jerome Powell himself saying that banking collapse is in essence acting as a rate hike in terms of its potential power to slow inflation. They could of course change their tune at any moment, as they have numerous times over the past year (remember when they insisted inflation was “transitory”?), but for now, they appear to have tamped down their hawkish stance.

Still, it’s a good time to invest outside U.S. borders, and as it happens, Cabot Explorer Chief Analyst Carl Delfeld has just recommended a very compelling opportunity for international growth. It’s a Mexican stock with plenty of momentum – up 22% year to date! And it’s a company that’s taking advantage of Mexico’s cheap manufacturing wages.

Here it is, with Carl’s latest thoughts on it.

Kimberly-Clark de Mexico (KCDMY)

According to consultant Alix Partners, Mexico has surpassed China as the lowest-cost country in the world for companies looking to manufacture products for North American markets. Mexico’s wages are now about 25% lower than in China and, coupled with lower taxes and tariffs, this all adds up.

In addition, the Alix partners report showed that across many industries, China’s cost advantage in producing goods and delivering them to Long Beach, California versus an American manufacturer has evaporated.

And higher transportation costs give North America a decisive advantage. Moving goods by sea from America to Asia takes 3-5 weeks. America to Mexico transit time is 1-4 days.

In addition to the cost factor, flexibility, speed of response, and ease of oversight, it all points to North America over China. No wonder American bilateral trade with Mexico has been trending up sharply.

Ironically, these trends have led to even some Chinese companies moving production to Mexico to avoid trade restrictions and capitalize on the trade advantages that come from geographic proximity. We need higher U.S. and Mexican content requirements to stop this manipulation of the system.

U.S. companies are finally realizing that Mexico is a better option than China to manufacture some of the goods for U.S. and Latin American consumer markets. Analysts are calling it “nearshoring,” “in shoring” or “reverse globalization.” The U.S. is already the biggest foreign direct investor in Mexico, accounting for about half of all foreign investment according to State Department sources.

How will all this shake out, and what will American congress members (and U.S. labor groups) think of U.S. multinationals shifting manufacturing from China to Mexico? American firms still export three times as much to Mexico as they do to China. And, Mexico, in turn, sends 79% of its exports back across U.S. borders.

After considering several Mexican ADRs, I have decided that the best way to gain exposure to Mexican economic growth is via Kimberly-Clark de México (KCDMY) which, together with its subsidiaries, manufactures and commercializes disposable products for daily use by consumers in Mexico.

The company also exports its products. Kimberly-Clark de México was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB), was founded as a paper company in Neenah, Wisconsin in 1872.

Now headquartered in Dallas, Texas, Kimberly Clark has operations in 34 countries, and its brands, including five billion-dollar brands, are sold in more than 175 countries.

Its portfolio of brands, including Huggies, Kleenex, Scott, Kotex, Cottonelle, Poise, Depend, Andrex, Pull-Ups, GoodNites, Intimus, Neve, Plenitud, Sweety, Softex, Viva and WypAll, holds #1 or #2 market share positions in about 80 countries.

The Mexican market offers most of Kimberly’s U.S. products, and more:

  • Napkins: Kleenex, Petalo, Suavel, Delsey, Lys.
  • Toilet paper: Kleenex, Petalo, Suavel, Delsey, Vogue, Lys.
  • Diapers: KleenBebe, a brand similar to Huggies. The name is a combination of “kleen” (Kleenex) and “bebe” (Spanish for “baby”).
  • Professional and medical markets.

Kimberly-Clark de México (KCDMY) stock is in a strong uptrend alongside strong financials, with the latest report showing a return of equity of 91% and earnings growth that surged 80%. This Mexican subsidiary naturally represents more risk than the parent company – but also more potential.

KCDMY_SPXTR_chart.png

KCDMYRevenue and Earnings
Forward P/E: 20.5Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Trailing P/E: 23.7(mil) (vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 9.67%Latest quarter65615%0.23260%
Debt Ratio: 195%One quarter ago63516%0.1041%
Dividend: $0.44Two quarters ago6429%0.09-6%
Dividend Yield: 4.38%Three quarters ago6337%0.09-29%

Current Recommendations

Stock

Date Bought

Price Bought

Price on 3/27/23

Profit

Rating

Arcos Dorados (ARCO)

9/7/22

7

7

1%

Hold

Centrus Energy Corp. (LEU)

7/26/22

29

32

11%

Sell

Chewy (CHWY)

1/4/23

35

34

-4%

Sell

Cisco Systems Inc. (CSCO)

12/6/22

49

51

4%

Buy

Comcast Corporation (CMCSA)

11/1/22

32

36

14%

Buy

Gates Industrial Corporation plc (GTES)

2/22/23

14

13

-5%

Buy

Kimberly-Clark de Mexico (KCDMY)

NEW

--

10

--%

Buy

Las Vegas Sands (LVS)

1/4/23

51

54

7%

Buy

Eli Lilly and Company (LLY)

3/21/23

331

334

1%

Buy

Microsoft (MSFT)

3/7/23

256

276

8%

Buy

Novo Nordisk (NVO)

12/27/22

133

155

16%

Buy

Realty Income (O)

11/22/22

65

61

-6%

Hold

Tesla (TSLA)

12/29/11

2

192

10556%

Hold

Uber Technologies, Inc. (UBER)

2/14/23

34

30

-11%

Hold

Ulta Beauty (ULTA)

5/10/22

382

518

35%

Buy

Visa (V)

2/28/23

221

222

1%

Buy

Wingstop (WING)

3/14/23

169

183

8%

Buy

WisdomTree Emerging Markets High Dividend Fund (DEM)

10/4/22

34

37

8%

Buy

Xponential Fitness, Inc. (XPOF)

9/27/22

18

29

61%

Buy

Changes Since Last Week:
Arcos Dorados (ARCO) Moves from BUY to HOLD
Centrus Energy (LEU) Moves from HOLD to SELL
Chewy (CHWY) Moves from BUY to SELL
Realty Income (O) Moves from BUY to HOLD

Lots of changes to our portfolio this week, despite the relative market calm. LEU and CHWY are two growth stocks that have lost momentum, with Chewy committing the more egregious sin of failing to add customers in the last year. With Centrus Energy, it’s more a matter of getting caught up in recent selling in the alternative energy sector, which has taken the stock below support. Meanwhile, two of our other stocks, ARCO and O, have dipped a bit too, necessitating downgrades to Hold. We now have 17 stocks in the portfolio.

Most of those 17 stocks are acting well, with MSFT, NVO, TSLA and WING demonstrating particular strength. Let’s get into what’s happening with all our positions.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, keeps falling despite a relatively strong earnings report two weeks ago. For the quarter, earnings per share (26 cents per share) surpassed estimates (23 cents) and were up from 22 cents per share a year ago. Revenues improved 30% in the quarter and were up 36% for full-year 2022. And yet, the stock is down 7.5% and is threatening to break below its 200-day moving average. In fact, the stock has mostly fallen since topping out at 9 in late January. Let’s downgrade this to Hold until it can regain momentum. MOVE FROM BUY TO HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was down another point last week, prompting Carl to recommend selling it. Let’s do the same while we still have a modest gain in the nuclear energy stock, as it’s clear alternative energy stocks’ momentum has fizzled in this uncertain investing environment. At times over the last nine months LEU has been one of our best performers – if not THE best – but it’s no longer performing, having dipped well below its 200-day line. So it’s time to move on. MOVE FROM HOLD TO SELL

Chewy (CHWY), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has plummeted since reporting earnings last Wednesday, falling from 39 to 33. What went wrong? Put simply, the online pet supply retailer isn’t gaining new customers, with the number of active users dipping to 20.4 million in the fourth quarter, down from 20.7 million in the fourth quarter of 2021. That prompted an analyst downgrade from Deutsche Bank, as Lee Horowitz predicts customer growth will be “tepid at best” moving forward. So, that sent shares spiraling downward even further. When a retailer is losing customers rather than gaining them – and its share price slips accordingly – it’s time to move on. Let’s sell this one too, at a modest loss. MOVE FROM BUY TO SELL

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, held firm at 50 despite some ups and downs. In his latest update, Bruce wrote, “Cisco Systems (CSCO) 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.

“There was no significant company-specific news in the past week.

“CSCO shares … have 30% upside to our 66 price target. The valuation is attractive at 9.5x EV/EBITDA and 13.5x earnings per share. The 3.1% dividend yield adds to the appeal of this stock.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, was flat at 36 this week. In his latest update, Bruce wrote, “With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled as worry about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

“However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, generous dividend and sizeable share buybacks.

“There was no significant company-specific news in the past week.

“Comcast shares … have 15% upside to our 42 price target. The shares offer an attractive 3.2% dividend yield. Given the decline in the shares, we are restoring our Buy rating.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was flat in its first week in the portfolio. Here’s what Tom had to say about the stock in his latest update: “After a stellar 2022 where it returned 34% in a bear market, LLY is having a tough time this year, although it has been moving higher lately. LLY is notoriously bouncy and tends to pull back after every surge. Despite the recent earnings stumble, this company still grew earnings 12.7% in 2022 and is expected to grow earnings by an average of 22% per year over the next five years. It also has two drugs that are potential mega-blockbusters in the pipeline that could be approved in the next year.“ BUY

Gates Industrial Corp. (GTES), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, keeps holding steady at 13. In his latest update, Bruce wrote, “Gates is a specialized producer of industrial drive belts and tubing. While this niche might sound unimpressive, Gates has become a leading global manufacturer by producing premium and innovative products. 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. 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. Helping provide revenue stability, over 60% of its sales are for replacements. Gates 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.

“The company produces wide EBITDA margins, has a reasonable debt balance and generates considerable free cash flow. The management is high quality. In 2014, private equity firm Blackstone acquired Gates and significantly improved its product lineup and quality, operating efficiency, culture and financial performance. Gates completed its IPO in 2018, with Blackstone retaining a 63% stake today.

“There was no significant company-specific news in the past week.

“GTES shares were flat in the past week and have 21% upside to our 16 price target.” BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped from 55 to 54 this past week, still above its mid-March bottom at 53. There was no news. Shares of this Macau-centric gaming company – a play on China’s long-delayed post-Covid reopening – are well north of their 200-day moving average and are up 12% year to date, which basically coincides with when we added it to the portfolio (January 4). If you don’t own it yet, the latest mini-dip looks like a buying opportunity. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, just keeps rising! Shares are up 16% year to date and nearly 9% since we added it to the portfolio in early March. MSFT is benefitting from the current flight to mega-cap tech stocks – including Apple (AAPL) and Alphabet (GOOG) – as investors sick of sitting on the sidelines in this bear market seek growth – but “safe” growth. Plus, Microsoft’s leading position in the red-hot artificial intelligence (AI) industry is surely helping, as Microsoft just unveiled the Microsoft 365 AI Copilot, which uses ChatGPT technology to create everything from Word documents to PowerPoint presentations to Excel spreadsheets. The new product prompted a round of analyst rating upgrades, including Mizuho bumping it to 315 a share. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had a great week! The stock zoomed to 154 from 142 on no real news, though the company does plan to increase production of its weight loss drug Wegovy to meet high demand. Also, according to Carl, “one of its most promising products is a potential once-weekly insulin that has produced excellent results in clinical trials.” Lots to like about the company and the stock, as we are now sitting on about a 16% gain in three months. BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, dipped another couple points this week and has now fallen from 68 to 60 in the last two months. In his latest update, Tom wrote, In a rudderless and directionless market, income is king. And this legendary income REIT is the king of income stocks. It has paid 632 consecutive monthly dividends and increased the dividend payment 119 times since its IPO in the 1990s. And the REIT has been growing stronger through acquisitions of late. Earnings grew at 9.2% for 2022, which is above the historical average, and it did it in a challenging year. O has been trending slowly higher since the middle of October, although it has been moving lower lately. O should continue to be an investor favorite in this tough market.” That may well be true for the intermediate to long term, but right now O isn’t performing, so let’s downgrade it to Hold and see if it can get well in the coming weeks.” MOVE FROM BUY TO HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had another good week, and is recovering nicely after some modest selling following its underwhelming Investor Day in late February. The latest catalyst is that first-quarter delivery data, due out in early April, is expected to set a new record at 430,000 deliveries, which would be a 39% improvement over Q1 deliveries in 2022. If delivery numbers come in shy of 430,000, it could send shares tumbling again. But for now, TSLA stock is back to being driven by its numbers, and not what Elon Musk says – undoubtedly a good thing. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has been stuck in a range between 30 and 32 for the past two weeks. Mike sold the stock when it pulled back in early March, but still likes the fundamentals, as he wrote in his latest update: “EBITDA and free cash flow are soaring and should continue to do so for a long time to come as the company increases its lead over the competition (go look at a chart of Lyft (LYFT) for perspective) and focuses on the bottom line. That said, there’s no doubt the stock is struggling here as the name trades with the economically sensitive swath of stocks. We cut our loss a couple of weeks ago and UBER hasn’t done much since—if the stock was able to power ahead on big volume (and the market was lifting), we could give it another look.” As for us, we’ll keep holding unless UBER truly breaks down and falls below its 200-day line at 28. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, rebounded nicely this past week, rising to 518 from 510. The beauty retailer is coming off another stellar earnings report in which earnings per share of $6.68 improved 23% from a year ago and handily beat $5.69 estimates. Revenues increased 18% year over year, as demand for beauty products remains resilient even as inflation continues to take a toll on other segments of the economy. This remains one of our most resilient stocks. BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, inched back up to 222 this week. In his latest update, Tom wrote, V rallied strongly at the beginning of the year with other cyclical stocks. But those stocks have since pulled back and V has remained tough. True, the stock is tied to the performance of the overall market in the near term. And that could get worse before it gets better. But V held up with a -3.4% return in the 2022 bear market and should hold up relatively well again if the market turns south. It should also fly when the market finally starts anticipating the economic bottom and the next recovery.” BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back a bit after gapping up to 187 from 167 in its first week in the portfolio on the heels of a strong earnings report. In his latest update, Mike wrote, “WING isn’t a go-go stock in the best of times, with lots of stops and starts even during its uptrends, so it wasn’t surprising that the stock’s solid earnings gap faded (especially considering that the name had a handful of analyst downgrades during that time). But more important to us is the recent action, with the stock finding support where it ‘should’ (just above its 50-day line) and racing to new closing highs even as the market wobbled—in fact, WING is just a few points below its all-time highs from mid-2021! There’s been nothing new from the company since the Q4 report, but the thesis we’ve been writing about for months—that the underlying growth story is back on track after the boom/bust convulsions caused by the pandemic—is playing out. A drop back below the recent low would be a yellow flag, but we’re obviously optimistic given the action.” BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is a rock. It keeps holding in the 37 to 39 range, unaffected by all the volatility and turbulence virtually everywhere else in the market. 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, is regaining momentum after dipping from 30 to 26 after earnings earlier this month. That dip appears to have been overdone, especially given that the results were quite good, with revenue up 44% and EPS more than tripling year over year. People are returning to gyms in a post-Covid world, and Xponential Fitness is taking full advantage. BUY


The next Cabot Stock of the Week issue will be published on April 3, 2023.

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