Cabot Stock of the Week Issue: October 31, 2022

Despite modest losses this morning, October has been more treat than trick for the stock market this year, providing at least a temporary tourniquet after stocks had been mostly bleeding out for nine months.

As of this writing, the S&P 500 is up more than 8% in October, while the Nasdaq is up 4% and the Dow is up a whopping 14%. Couple of thoughts regarding those numbers. One: That’s quite the divergence, and it shows that dividend-paying, blue-chip stalwarts like the companies that comprise the Dow are still far more in favor than the growth and tech titles that populate the Nasdaq. And two, those are strong monthly gains, but not all that different from the performance we saw in July. Another pullback is possible, especially in the midst of a very topsy-turvy earnings season in which companies like Amazon, Meta and Microsoft are getting crushed. Thankfully, there have been enough Apples, ExxonMobils and PepsiCos to counterbalance those big-name losses. So far that’s netted some positive movement in the indexes, but with the Fed set to bump interest rates again this week, midterm elections and the latest inflation data due out next week, and the possibility of a recession still lingering, we may not be out of the bear market woods just yet.

With that in mind, I’m adding another measure of safety to our portfolio this week, even as many of our more speculative growth stocks (Centrus Energy (LEU) and Enphase Energy (ENPH), take a bow) have flourished in recent weeks. More specifically, I’m adding a blue-chip value stock with a long track record of success that pays a hefty dividend and has been overly punished by a year’s worth of selling. It’s a stock recently recommended by Cabot Undervalued Stocks Advisor Chief Analyst Bruce Kaser. Here are Bruce’s latest thoughts on it.

Comcast Corporation (CMCSA)

With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television (about 55% of revenues), NBCUniversal (32% of revenues), which includes the Universal movie studios and theme parks, NBC and Telemundo television networks and the Peacock TV streaming service, and Sky media company in Europe (13% of revenues). Comcast also owns the Philadelphia Flyers professional hockey team and a 33% stake in the Hulu streaming service. The Roberts family holds a near-controlling stake in Comcast yet has been a good steward of the firm’s resources.

Comcast shares have tumbled 50% from their late 2021 peak and now trade in line with their mid-2015 price. Investors 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 company that for decades has successfully fended off intense competition while increasing its revenues and profits. Its operational breadth and depth, as well as management’s patience and discipline, have allowed it to understand and adapt to changes in technology and customer preferences. In the recently completed third quarter, revenues rose 5% excluding the one-off boost from the year-ago Tokyo Olympics. And profits rose 6% even when including the effects of higher Olympics profits a year ago. Compared to the pre-pandemic third quarter of 2019, recent revenues and profits were 11% higher. These are hardly the markings of a company on the brink.

The company’s diversified operations have helped provide it with valuable stability. Its slow-and-steady cable business is highly profitable even as it invests in technology upgrades to maintain its edge over competitors. Incremental losses in the number of total customer relationships are being offset by higher pricing and new services. Comcast is expanding its small but promising wireless phone service, supported by attractive pricing, quality performance and (surprisingly) generally well-regarded Xfinity customer service reputation. While losses in the emerging Peacock streaming service remain elevated, the company will likely use its disciplined capital allocation mindset to reshape this unit to at least break-even over the next few years.

NBCUniversal continues to recover from the pandemic. The Universal theme parks recently recorded record-high U.S. profits, while summer hits like Jurassic World: Dominion and Minions: The Rise of Gru have boosted year-to-date Studio profits to above comparable 2019 results.

The company is not without its challenges, of course. The Sky operations remain uninspiring with flat revenues excluding the effects of the weak British pound, but this segment continues to generate respectable profits. Advertising revenues across all of Comcast fell 26% in the third quarter but these comprise about 10% of the company’s total revenues and are likely to rebound with the eventual cyclical upturn.

A major appeal of Comcast is that it generates immense free cash flow – a strength that is likely to endure. Cash flow from operations look resilient and the company is able to maintain its competitive edge while restraining its capital spending to about 11-12% of revenues. This free cash flow is not only plenty to support its reasonable debt level (which carries a low and fixed rate of interest), but also supports a generous dividend (recently raised by 8%) and sizeable share buybacks. Comcast has repurchased 6% of its shares in the past five quarters. In September, the company doubled its buyback program to $20 billion, strongly suggesting buybacks will continue.

Despite its strengths and quality, Comcast shares trade at an overly discounted 6.1x cash operating profits (EBITDA) and 7.9x earnings and offer a 3.6% dividend yield. Investors searching for solid and enduring value at a very fair price need look no further than Comcast.

Current Recommendations

Changes Since Last Week’s Update
None

There are no changes to the portfolio today – this truly is a Happy Halloween! It was tempting to upgrade a couple of our Holds after some very strong performance in the last week-plus, but most of them have Q3 earnings coming out very soon, so it’s best to wait. With the addition of Comcast (CMCSA), we are now up to 14 stocks in the portfolio. That somehow feels like a far cry from the mere 12 we were recommending a few weeks ago and is a reflection of a nice bounce-back month for stocks. Let’s hope November can pick up where October left off.

Here’s the latest on all our stocks.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has had a good couple of trading days, bringing us back to roughly even on this position. Recent market strength certainly helped, as did a strong earnings report by McDonald’s—Arcos is the largest independent McDonald’s franchisee in the world. Arcos itself won’t report earnings until November 16. In the meantime, the stock has about 14% of upside to Bruce’s 8.50 price target. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, had a good week, jumping from 34 to 36 ahead of earnings this Wednesday, November 2. Perhaps that bodes well for the company’s third-quarter results. In his latest update, Tom wrote, “This once buoyant and positive YTD performer has been clobbered in the latest round of market selling. Interest rates spiked and defensive dividend-paying companies got creamed as fixed-rate alternatives became more attractive. BIP plunged 23% in a month. Therein lies the opportunity.

“Interest rates may not stay at current levels when the increasingly expected recession hits. Brookfield should also benefit from recent acquisitions and its exposure to midstream natural gas. There is huge demand for liquified natural gas in Europe and Asia. As a result, North American natural gas production should remain strong even in a recession. BIP pays a solid dividend backed by recession-resistant earnings that should be on the rise.” HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was up from 42 to 47 this week, its highest point since September. There was no company-specific news. This stock continues to be our top recent performer, up more than 60% since we added it to the Stock of the Week portfolio in late July. In his latest update, Carl wrote, “This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million.

“Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. Centrus stock is still trading way off its 52-week high and at less than four times earnings, so LEU remains a strong buy.” As for us, let’s keep it at Hold until after earnings are released in mid-November, just to be safe. HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was our biggest winner this past week, gaining a whopping 20% after a strong Q3 earnings report. Sales were up 81% year over year, while earnings per share improved 108%(!), both of which handily topped estimates. Renewable energy stocks are certainly having a moment, which is why our portfolio is littered with them. Right now, those investments are paying off: ENPH is up 35% since it was added in late June. Given the huge run-up in the last week, let’s keep it at Hold for now. But feel free to buy on dips if you don’t already own it. HOLD

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, held firm ahead of earnings this Wednesday, November 2. In his latest update, Michael wrote, “Green Thumb was the third-largest cannabis company in the U.S. in the second quarter but will likely fall to fourth after Cresco’s acquisition of Columbia. Yet it has been the most profitable multistate operator of all the big ones, based on its consistent record of profitability over the past eight quarters – a sign of good management. Second-quarter revenues were up 15% from the previous year to $154 million, while earnings per share were $0.10, unchanged from a year ago. Revenue growth was driven mainly by increased retail sales in New Jersey as the legal market opened, increased retail sales in Illinois, 19 new locations opened since last year, and increased traffic in most of the company’s 77 stores. Green Thumb manufactures and distributes a portfolio of branded cannabis products including &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a national retail cannabis store called RISE. Green Thumb is expanding its medical footprint in Florida through a lease agreement with convenience store chain Circle K. Green Thumb trades at a price-to-sales ratio of 2.64, which seems reasonable given its 15% year-over-year sales growth. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries, says Stifel’s Andrew Carter, who has a buy rating on the stock. Illinois will increase its store footprint by more than 2.5 times. Considerable upside exists in New Jersey as product offerings expand in the second half of this year. A positive here is that Green Thumb is founder-run. Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power.” BUY

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, was up slightly this past week as the gold stock crawls back to its October highs around 4 per share. There was no news, although the company reports third-quarter earnings on November 9. Kinross Gold is a senior mining firm that acquires, explores and develops gold properties in the U.S., Canada, Brazil, Chile, and Mauritania. BUY

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, had a bad week, falling from 17 to 15 after seemingly building momentum the prior two weeks. The stock is still above its October lows in the 14s and has a potential short-term catalyst on the horizon with Q3 earnings due next Wednesday, November 9. But the backtracking at a time when our other renewable energy names – and the market in general – are surging is not a great sign. Let’s keep MNTK at Hold and see if it can get a bump from earnings. A dip below support in the low 14s might have us changing our minds. HOLD

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was up from 86 to 90 ahead of earnings this Wednesday, November 2. ORA is the only publicly traded U.S. geothermal company. Analysts are anticipating 6.8% sales growth but EPS is expected to slip 23%. The company has beaten earnings estimates the last four quarters so we’ll see if Ormat can topple those rather pedestrian expectations this time around. BUY

Rivian (RIVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a good first week in our portfolio, up from 31 to 34. There was no company-specific news, but shares of the upstart electric-vehicle maker likely got a boost from the resurgence in Tesla stock last week (see below). As Tyler wrote last week, “Rivian is a young electric vehicle (EV) company that has the potential to become one of the more successful new entrants in the market. The company is going after some of the biggest and most profitable markets, namely pickup trucks, SUVs and commercial vans.” Q3 earnings are due out November 9. At 34, the stock has loads of upside, trading miles below its all-time high of 172. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was back with a vengeance after several weeks of losses before and after reporting mixed Q3 earnings results in which the company topped EPS estimates but fell short on revenue. Considering both numbers were well ahead of last year’s third quarter – revenues improved 41.6%, while profits nearly doubled – the bounce-back is no surprise. In fact, last week I wrote that the stock had become oversold, and I thought the market would realize it quite soon. Right on cue, TSLA shares have risen 8% in the last week! Some issues remain – problems at new production plants in Germany and Austin, Texas contributed to an overall production shortfall in Q3; also, some investors worry that Elon Musk might be a tad distracted now that he also owns Twitter – but the stock is still down 40% from the all-time highs it hit on this date a year ago. Given how fast it’s still growing, TSLA is a bargain at these levels. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up 19% this past week! There was no real news. Rather, ULTA’s latest surge continues the beauty retailer’s pattern of roaring back to life every time you’re almost ready to count it out (the stock had just fallen 5.5% the previous week). Despite a dizzying number of ups and downs, the overall trajectory looks good, with shares up more than 21% since May and 9% since it was added to the Stock of the Week portfolio. We downgraded to Hold last week on the heels of the stock’s latest skid, and we’ll keep it there and see if it can develop some week-to-week consistency. HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down slightly in the last week. With a 10% dividend yield, this ETF covers 17 different emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries with an emphasis on income and value. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends. In addition, it holds some of the cheapest, quality stocks in the world with an average price-to-earnings ratio of just 5. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down about 1% in the last week, with all the losses coming this morning. The stock remains in its months-long trading range between 17.8 and 21. The company is the largest franchisor of boutique fitness brands in the U.S., with roughly 2,000 studios across 48 states. It also has over 175 studios open in 11 foreign markets and even has studios on cruise ships crossing the world’s oceans. As people return to gyms in the post-Covid era, Xponential Fitness saw revenues improve 66% in the second quarter, is on track for 42% revenue growth in 2022, and expects to turn profitable in the coming quarter. Third-quarter earnings are due out November 10. BUY

The next Cabot Stock of the Week issue will be published on November 7, 2022.