The market remains quite weak, and thus ripe for a major rally at any time. But until we see real strength, continued caution is advised.
And today’s recommendation fits the bill, as it has a solid dividend and the prospect of real growth as the global energy industry adjusts to a world without Russian oil.

As for the portfolio, we’re selling one laggard, which is suffering as consumers cut back on discretionary spending.

Cabot Stock of the Week Issue: May 31, 2022

Market trends remain down, so I continue to recommend a cautious attitude, which means holding cash and favoring defensive stocks. As mentioned previously, conditions are ripe for a rebound, but until we actually see a new uptrend, any aggressive buying is no better than speculation. Today’s recommendation is obviously on the conservative side; it’s a name everyone knows and it pays a solid dividend. But it’s got real growth potential, as the global energy industry adjusts to the new reality of life without Russian oil. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.

Chevron (CVX)
Chevron is one of the world’s largest integrated energy companies, with operations spanning the globe. The company is involved in every facet of the energy industry, but it is heavily skewed toward the upstream segments, oil and gas production and exploration.

But isn’t clean energy the future? It is. And Chevron has a growing presence there as well. But the fact is that we are still perhaps decades away from using primarily alternative energy sources. Energy is the lifeblood of our economy and civilization and for the foreseeable future, oil and gas will be the dominant components of that lifeblood. The U.S. and the world still use fossil fuels for more than 80% of our energy needs and will for some time.

This is a golden time for conventional energy stocks. Global demand is sky-high amidst limited supply. It also helps that energy tends to thrive during times of inflation. In a down year so far for the market, energy is one of only two S&P 500 sectors in positive territory for the year. And the sector isn’t merely positive; it is up almost 60% YTD.

CVX is up more than 50% YTD and has returned 80% over the past year.

But the party isn’t over. Aside from a recession, there really isn’t any catalyst to bring energy prices down for the foreseeable future. And despite the recent stellar performance, CVX still sells at both trailing and forward price/earnings ratios that are miles below those of the market and its five-year average.

Why is it still undervalued? Because energy stocks had a miserable decade prior to the pandemic recovery and inflation. The energy revolution led by fracking made the U.S. the world’s largest producer of oil and gas. The extra supply on the world market crashed prices and the energy sector wallowed in misery as by far the worst-performing S&P sector over the last five- and 10-year periods. There is a lot of ground to make up.

But why Chevron? Chevron in many ways is better than the other large oil companies. The stock fell less than its energy major peers during the pandemic and has risen more in the energy bull market. Chevron spent the bad years getting leaner and meaner. Its cost per dollar of BOE produced has fallen from $18 in 2014 to under $10 today and the company has lower costs and higher margins than its peers. Chevron also has a superior balance sheet and fewer capital expenditures as major projects were completed over the last several years.

There’s also the fact that Chevron is more leveraged to the price of oil than its peers. Chevron is more skewed to the exploration and production side of the industry and has sizable exposure to American shale production. It has a huge and growing presence in the Permian basin, the fastest growing oil producing region in the world.

Then there’s the dividend, which currently yields a solid 3.2%. The dividend should be safe as well. Chevron has a modest payout ratio of under 40% and has raised the payout every year for the last 33 years, including through the financial crisis and the oil price crash from 2014 to 2016.

There’s a good reason the stock is still making new highs. The high demand and price for oil and gas is pumping Chevron’s earnings and revenues. The company expects to grow earnings 100% from last year in 2022 and is easily on pace so far.

Bottom line, Chevron is a big blue-chip energy company and while it doesn’t have the upside potential of other more aggressive energy plays it is also lower risk and is thus a great way for more conservative investors to play inflation and the energy rally.

Current Recommendations

The addition of CVX to the portfolio brings it up to 16 stocks (from a maximum of 20), but the sale of BIG will take it back to 15, and I’m comfortable with that, particularly because so many of these stocks are lower risk. Going forward, I have no idea what the market will do—though I certainly hope it goes up—but by continued careful stock selection, combined with diligent cultivation and pruning of each stock as it deserves, we will continue to grow this healthy portfolio. Details below.

Changes Since Last Week’s Update
Big Lots (BIG) to Sell
Bristol Myers Squibb (BMY) to Hold

Big Lots (BIG), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, operates 1,431 stores across 47 states and generates about $6.1 billion in annual revenues. But the company’s first-quarter report, released last Friday morning, was disappointing, as it revealed that revenues were down 15% from the prior year as consumers cut back on purchases to spend more on gasoline and other “necessary” goods. Bruce has not commented on the results yet, and I don’t know if he’ll stick with the stock or re-evaluate and let it go, but I’m going to cut it from the portfolio now, reasoning that it’s our biggest loss, and that the stock’s trend is clearly down. SELL

Bristol-Myers Squibb (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, hit a new high just last Thursday, but trading since then has taken the stock down below its 50-day moving average. In his update last week, Bruce wrote, “Berkshire Hathaway sold the balance of its stake in Bristol-Myers in the first quarter of 2022. We appreciate their attention to value. As BMY is now trading just above our 78 price target, we are inclined to be a bit patient before selling. As such, we are moving the shares to Hold.” I’ll move to Hold too, reminding you that Mike Cintolo recently had the stock featured in Cabot Top Ten Trader. Mike still has the stock, with a suggested stop at 73.5. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell hard last week as news broke that the company would be acquiring software company VMware (VMW) for $60 billion—but it rallied later on as investors digested the news along with Broadcom’s first-quarter results, and is now back above its 200-day moving average, so all seems well. I’ll relay Tom’s thoughts on the deal and the results next week. HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell through its 200-day moving average three weeks ago but is back above it now. In his update last week, Tom wrote, “Earnings were solid for this bankable infrastructure asset owner. It operates a very defensive and reliable business that generates a nice dividend. BIP had been a star of the dismal year so far but it recently pulled back more than 10% from the high. However, it has been moving higher again lately. I expect solid performance going forward. BIP should continue to prove resilient if there is further market downside and perform well on the other side of the selling as well. (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, gapped down big two weeks ago after the company reported first-quarter results, but it’s rallied since. In his update last week, Bruce wrote, “The company is usually very reliable with its guidance, so the selloff reflected more surprise than any meaningful shift in fundamentals, especially as the company’s order book and supply issues seem to be affecting its results. Investors nonetheless worry that a tech spend recession is on the way, which would reduce volumes and prices for Cisco.

“In the quarter, adjusted earnings of $0.87/share rose 5% from a year ago and were a penny above the consensus estimate. Revenues were flat compared to a year ago and were 4% below the consensus estimate. Fourth-quarter guidance implies a decline in revenues and profits.

“The company blamed the Ukraine war, China’s Covid lockdowns and supply chain issues for the weaker revenues and said that these issues will extend into the fourth quarter. Profit margins and thus operating profits will be dragged down as well. However, the company said that underlying demand remains strong and pointed to the 8% increase in new product orders and the 150% higher backlog compared to a year ago. Perhaps just as telling is that Cisco is able to push through price increases – our view is that customers have little negotiating power and perhaps little motivation to push back on price increases if they need the gear.

“So, we are stuck with a stock that has fully round-tripped from our initial recommendation at 41.32 to 64 and back to 43 or so. While 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. 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 8.7x 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. CSCO shares have 53% upside to our 66 price target.” HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, fell through its 200-day moving average two weeks ago but rallied back above it last week. In his update last week, Carl wrote, “CVS shares are demonstrating relative strength, adding five points this past week as the company ranks #1 among its peers in the Investor’s Business Daily’s Retail-Drug Stores industry group. CVS Health is one of the nation’s leading healthcare companies, with almost 10,000 stores, and is viewed in a different category than retail companies such as Target and Walmart whose stocks have suffered as of late. Nearly 70% of Americans live within three miles of a CVS and it has more than 102 million pharmacy plan members. CVS stock remains a conservative buy as it is still undervalued.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week, 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. In his update last week, Carl wrote, “Fanuc is building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts of smartphones. CSLA estimates Fanuc’s U.S. market share at 50% and in China about 20%. Exports account for 90% of Fanuc’s sales.

“Fanuc’s stock offers investors a solid balance sheet with no debt and $7 billion in cash. Profit margins are high. In summary, Fanuc is a high-quality play on what seems to be an unstoppable trend. Our six-month target for this high-quality, conservative stock is 25.” BUY

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has rallied nicely over the past week, though it remains below both its 50-day and 200-day moving averages, reflecting the great damage that has been done to the technology sector. In his update last week, Tom wrote, “INTC is oversold and undervalued ahead of what are likely to be a strong several years for earnings growth. Things could get a little worse in the near term, but I like the stock very much as a longer-term play.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, nearly touched its old high last week! In his update last week, Bruce wrote, “Organon was recently spun off from Merck. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings. OGN shares have about 23% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.0% dividend yield.” BUY

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 trading above all its moving averages, and it yields 3.0%! 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 last week’s low, and that’s probably enough of a decline—though time will tell. The market doesn’t care for the distraction caused by Elon Musk’s pursuit of Twitter (and certainly sees no synergies between the businesses) but the long-term prospects for Tesla remain great, particularly in the energy business. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here three weeks ago, is killing it! First-quarter results, released last week, saw revenues of $2.34 billion, up 21% from the prior year, and earnings per share of $6.28, up 54%. The stock gapped up on big volume on the results and is trading near its all-time high. 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 looks like it may be starting a new uptrend, as the stock has been up for three consecutive weeks. In his update last week, Tom wrote, “Earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth as the profit boost it gets globally from the removal of Covid restrictions easily outweighed slower global growth or war issues. Profits win in the end. At some point the market will settle down. And V will be poised to start rising again.” HOLD

The next Cabot Stock of the Week issue will be published on June 6, 2022.

Analyst Bio

Timothy Lutts

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.

Timothy is also the chief analyst for Cabot Stock of the Week and chief analyst of Cabot Marijuana Investor.

Under his leadership, Cabot advisories have been honored numerous times by Hulbert Financial Digest, Dow Jones MarketWatch and Timer Digest as the top investment newsletters in the industry.

After working in this business for more than 33 years, Timothy says, “There are 8 things I know.

1. The business of investing can provide great rewards to those who work at it and are willing to learn. Those who refuse to learn will lose money.
2. To succeed as an investor in growth stocks, it’s best to buy when upside potential dwarfs downside potential, to cut losses short, and to let winners run.
3. To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
4. Your greatest enemies are your own emotions and the daily news (generally bad) which distracts you from a long-term focus. Try to ignore them both.
5. On the other hand, use your imagination to consider how great companies might evolve, remembering the power of the unforeseeable and the incalculable. When it began renting DVDs by mail, did anyone imagine Netflix could become a leading producer of content? When it began selling books, did anyone imagine Amazon would eventually sell almost everything?
6. For over two centuries, the long trend of the markets has been up, reflecting the growth of asset values, and I recommend that you invest in synch with that trend. Your greatest ally is time.
7. However, there will always be bull markets and bear markets, and you can use these to your advantage, particularly if you pay close attention to both chart patterns and investor sentiment.
8. Lastly, have faith in the ability of intelligent, innovative men and women to adapt, as they always have, and to solve the problems of the future in ways that are unimaginable to people of today. Invest in these people when you can.

Timothy has appeared on numerous podiums as an investing expert, including Bloomberg TV and the World Money Show, led Investor’s Business Daily discussion groups and been interviewed by Dow Jones MarketWatch,TopStockAnalysts.com, VoiceAmerica.com, AOL Finance and numerous other business news organizations.