With many people watching the developments on the Ukraine front and the inflation front, my focus is on the broad market’s lows of late January, which serve as a line in the sand that we don’t want to see crossed. And because the market is technically in a downtrend, I continue to focus on lower-risk stocks, and hold a healthy cash position as well.
The only change to the portfolio today is the sale of Oracle (ORCL), which is going the wrong way.
As for the new recommendation, it’s a well-established American brand whose stock has shown great strength recently.
Details inside.
New Recommendation
Though the broad market softened over the past week, all major indexes remain above their late-January lows, so as we go forward, the ability of the market to stay above those lows is key. If the indexes hold up, we’ll resume more aggressive buying, optimistic that the mild correction has done its job. Alternatively, if the indexes fall through those lows, we’ll recognize that the sellers are gaining the upper hand and turn more defensive. But we will continue to recommend one stock per week, chosen via a variety of systems and from a variety of industries—because there’s always something that looks attractive. Today’s recommendation is a long-established household name in the U.S. whose stock peaked way back in 2006—but roared to life recently. The stock was originally recommended by Carl Delfeld in Cabot Early Opportunities and here are Carl’s latest thoughts.
Harley-Davidson (HOG)
That the electric vehicle (EV) movement and revolution has passed the inflection point is hard to refute given that global sales doubled last year to more than 6 million electric vehicles.
Garrett Nelson, an analyst at CFRA Research, estimates that 50 new electric vehicle models are coming to market before 2024. Global electric vehicle sales were up from 2.5% in 2019 to nearly 9% of total auto sales in 2021, according to the International Energy Agency.
Mercedes-Benz sold nearly 100,000 electric cars and vans in 2021, a 90% increase from the previous year. Ford (F) will soon start selling the Lightning, an electric version of the F-150 pickup truck, which has topped U.S. sales charts for decades. It initially planned to make 75,000 a year, but demand has been so strong that the company is racing to double production.
In 18 European countries, including Britain, more than 20% of new cars sold last year were electric, according to Matthias Schmidt, an independent analyst in Berlin. America is lagging, as about 4% of new cars were electric last year in the United States, up from about 2% in 2020. Tesla still dominates, delivering almost a million cars in 2021, up 90% from 2020.
But what about the unfolding story of premium electric motorbike markets?
In 1903, in a small shed in my hometown of Milwaukee, began an enterprise that would grow and spread across the world.
Their innovation and technical creativity on two-wheel vehicles sparked a transportation revolution and an adventure lifestyle that would make Harley-Davidson the most valuable motorcycle brand in the world. Today, the company continues to define motorcycle culture. Now, Harley-Davidson, through its LiveWire electric motorcycle line, is the world leader of this category.
Harley-Davidson stock roared to life recently after the motorcycle maker reported a stunning fourth-quarter profit that saw motorcycle revenue surge 54% as U.S. demand for big bikes returned.
Demand for Harley-Davidson bikes is in an uptrend. This could be the start of a turnaround but Harley now needs to back this up with several consecutive quarters of sales growth. With rebel CEO Jochen Zeitz at the helm, Milwaukee-based Harley has renewed its American brand and focus on the U.S. market.
America is Harley’s biggest, most important market, which is why last year was the first year of implementation of Harley’s five-year roadmap called the Hardwire that doubles down on domestic sales while also pursuing international growth.
Harley-Davidson reported a $0.15 per share adjusted profit for the fourth quarter of 2021, handily beating analysts’ forecasts of a $0.38 per-share loss and a complete turnaround from the $0.68 per-share loss it recorded a year ago.
Harley also announced during the quarter it would be spinning off its LiveWire all-electric motorcycle business into a stand-alone publicly traded company through a reverse merger with special purpose acquisition company (SPAC) AEA-Bridges Impact. I hope this SPAC is priced at a reasonable valuation.
Harley will still own 74% of the new EV bike company.
Meanwhile, H Partners increased its position in the maker of iconic motorcycles to 12.6 million shares. That figure includes 300,000 Harley-Davidson shares purchased daily from January 14 through January 24 at prices ranging from $33.23 to $37.91. H Partners now holds 8.2% of Harley-Davidson’s outstanding stock.
Better still, Harley-Davidson is becoming more profitable as it advances its Hardwire strategic plan. CEO Zeitz is focusing the company’s efforts on its most profitable motorcycles while overseeing a more disciplined expansion into its most important international markets.
Harley-Davidson’s revenue jumped 40% year over year to $1 billion, driven by a 39% rise in motorcycle shipments. The company also enjoyed solid growth in its general merchandise and parts & accessories divisions, which saw revenue increase 46% and 13%, respectively.
Looking forward, management projects that full-year revenue for Harley-Davidson’s motorcycles and related products will rise by 5% to 10% in 2022.
Tim’s note: The story here is very good and the action of the chart in response to the stunning quarterly report—a high-volume blastoff followed by a tight flag pattern consolidation—tells us the buyers are in control of this stock now and higher prices are likely ahead.
HOG | Revenue and Earnings | |||||
Forward P/E: 10.0 | Qtrly Rev | Qtrly Rev Growth | Qtrly EPS | Qtrly EPS Growth | ||
Current P/E: 10.0 | ($bil) | (vs yr-ago-qtr) | ($) | (vs yr-ago-qtr) | ||
Profit Margin (latest qtr) 12.2% | Latest quarter | 1.02 | 40% | 0.15 | 133% | |
Debt Ratio: 344% | One quarter ago | 1.37 | 17% | 1.18 | 12% | |
Dividend: $0.63 | Two quarters ago | 1.53 | 77% | 1.41 | 471% | |
Dividend Yield: 1.5% | Three quarters ago | 1.42 | 10% | 1.69 | 231% |
Current Recommendations and Changes
Current Recommendations
Stock | Date Bought | Price Bought | Yield | Price on 2/22/22 | Profit | Rating |
Arista Networks (ANET) | 1/4/21 | 139 | 0.0% | 123 | Hold | |
Bristol Myers Squibb (BMY) | 11/2/21 | 59 | 3.2% | 68 | Buy | |
Broadcom (AVGO) | 2/23/21 | 465 | 2.8% | 580 | Hold | |
Brookfield Infrastructure Partners (BIP) | 1/12/21 | 51 | 3.6% | 60 | Hold | |
Cisco Systems (CSCO) | 7/27/21 | 55 | 2.7% | 57 | Hold | |
Devon Energy (DVN) | 12/28/21 | 45 | 5.1% | 52 | Buy | |
Harley-Davidson (HOG) | NEW | — | 1.5% | 41 | — | Buy |
Oracle (ORCL) | 1/19/22 | 85 | 1.7% | 75 | Sell | |
Organon & Co. (OGN) | 2/1/22 | 33 | 3.1% | 36 | Buy | |
Pioneer Natural Resources (PXD) | 1/25/22 | 210 | 2.5% | 224 | Buy | |
Sensata Technologies (ST) | 6/15/21 | 59 | 0.0% | 57 | Buy | |
Stifel Financial (SF) | 2/15/22 | 79 | 1.6% | 74 | Buy | |
TaskUs (TASK) | 2/8/22 | 31 | 0.0% | 29 | Buy | |
Tesla (TSLA) | 12/29/11 | 6 | 0.0% | 806 | Hold | |
U.S. Bancorp (USB) | 9/21/21 | 57 | 3.2% | 58 | Buy | |
Veeco Instruments (VECO) | 10/12/21 | 23 | 0.0% | 26 | Buy | |
Verano Holdings (VRNOF) | 11/16/21 | 13 | 0.0% | 12 | Buy | |
Visa (V) | 12/14/21 | 211 | 0.7% | 223 | Buy |
With the market’s January lows in the rearview mirror, we now have a reference point for our stocks, and most of our stocks are holding up above that low—with some even hitting new highs. But one is clearly weak, and that’s Oracle (ORCL), which will now be sold. Details below.
Changes Since Last Week’s Update
Oracle (ORCL) to Sell
Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, continues to sit at support in the 120 area, which is good, all things considered. In his update last week, Mike wrote, “The underlying thesis for Arista continues to play out, with Q4 results and the outlook confirming that business is good and getting better. While there remain some cost pressures due to supply chain issues, just about every number and all the commentary was great: In the quarter, revenues (up 27%) and earnings (up 32%) easily topped expectations, with demand for the so-called Cloud Titans (Arista’s language) rising rapidly (from the conference call: ‘Feedback from our largest customers is consistent. Arista products are easier to work with and have far fewer issues than the competition.’), while the company is also doing great in the enterprise and campus market (campus revenue is small but doubled last year and should double again to $400 million this year). Looking ahead, the firm reiterated its 30% top-line growth target for this year with many years of growth after that (though likely at slower rates). The supply chain stuff is still a headwind, but Wall Street liked what it heard—ANET rose after the report, though it didn’t really change the chart all that much (still in the middle of its consolidation). Even so, we’ll take it, and our overall thoughts haven’t changed: We think ANET is positioned to be a growth stock leader of the next upmove, and the longer it hangs in there, the greater the chance it happens.” HOLD
Bristol-Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, keeps going up! In his update last week, Bruce wrote, “BMY shares have about 15% upside to our 78 price target. Valuation remains low at 8.7x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 7.9x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers. Assuming an average of $15 billion/year in free cash flow, the shares trade at a 10% free cash flow yield.” BUY
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, pulled back a bit last week but remains way above its low of late January (513), which is very encouraging. In his update last week, Tom wrote, “This legendary technology company stock has been all over the place in recent months. It had a big surge in December and then gave it all back and then some during the tech selloff in January. But it has since regained about half of the recent loss. We’ll see where it settles in the near term. But the prospects are strong for the year as Broadcom continues to benefit from the 5G rollout.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, provides a 3.5% yield with little drama, and the chart looks great, with the main trend slowly and steadily up. In his latest update, Tom wrote, “This defensive infrastructure partnership just continues to do its thing regardless of the market trends. It remains near the high and on a long-term, slow and bouncy uptrend. Reliable and growing income and solid dividends never really go out of style. The stock probably would have performed about the same if the market was up 20% so far this year. I expect more of the same going forward, slow and reliable appreciation and income. (This security generates a K1 form at tax time).” HOLD
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, gapped up last Thursday after releasing an excellent fourth-quarter report after the market close on Wednesday. I’ll relay Bruce’s comments next week. Last week, before the report, Bruce wrote, “Cisco is rumored to be in talks to buy software company Splunk (SPLK), a $2.5 billion revenues tech company that helps businesses analyze and secure their data. A deal would be huge – Splunk’s market cap is nearly $19 billion and would require perhaps a 25% premium or more. It would be by far Cisco’s largest acquisition. While strategically the deal might make sense, as it would help Cisco move more decisively into software, it would reinforce our concern that the company is “buying growth” rather than generating it with its own products. In tech, buying growth, particularly in such large chunks, has a mixed history at best. Cisco would not be buying a cheap company – Splunk trades at about 7x revenues and has not yet produced a positive operating profit. Revenue growth isn’t lights-out either at an estimated 18% for this year. By regularly making acquisitions, Cisco is replacing internally generated research with acquired research. A dollar spent on research is expensed so it reduces profits, but a dollar spent on acquisitions isn’t expensed. This strategy artificially boosts the company’s profits and suppresses its valuation multiple. We estimate that Cisco makes $3-4 billion in acquisitions/year – if treated as an expense these costs would reduce the company’s roughly $20 billion in EBITDA by 15-20%. CSCO shares have 22% upside to our 66 price target. The dividend yield is an attractive 2.7%.” HOLD
Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another record high last Thursday before pulling back minimally. In his update on Wednesday, Mike wrote, “Devon reported yet another barnburner of a quarter last night, as the cash flow story continues to crank ahead. In Q4, Devon earned nearly $1.2 billion of free cash flow (after CapEx, before any dividends or share buybacks), and it gave just about all of that back to shareholders—it announced a total dividend (fixed plus variable) of $1.00 per share (ex-dividend date March 10, payable March 31), and it also said that it bought back just over 2% of outstanding shares in Q4 alone. As for details: The fixed dividend was hiked to 16 cents per share (up from 11 cents) and the top brass effectively reloaded the share buyback program, upping it back to $1 billion (after using $589 million to repurchase shares last quarter at an average price of 42). The firm is sticking with its maintenance-type production plan (CapEx relatively flat for 2022; oil growth “up to” 5% for the year) and again aims to return 50% of post-base-dividend free cash flow each quarter. (We’d also say that, at this early stage of earnings reports for oil companies, most are toeing the line on tame production growth, which should be supportive for prices.) Not surprisingly, the projections that the company released in early January still mostly hold—at $75 oil and $4 natural gas, Devon sees around $6.30 per share of free cash flow, while at $85/$4, that figure would be around $7.35 per share. The stock popped today, though on the week it’s actually relatively flat, so we wouldn’t say today was anything decisive. To be fair, DVN has had a big run since its breakout in late September, so realize that the intermediate-term move isn’t in the first inning. Still, there’s been little in the way of sustained selling pressure, while every dip to this point has been met with lots of big-volume buying. Until that changes, we’ll stick with a Buy rating.” BUY
Oracle (ORCL), originally recommended by Carl Delfeld in Cabot Explorer and featured here a month ago, fell through support at 80 last week and thus is below all its moving averages, and trending down. Carl is sticking with the stock, in part because ORCL is currently trading at a forward price-to-earnings ratio of 15 while its industry has an average ratio of 32. But I’m going to sell here because the market environment dictates a substantial cash position, because this is our biggest loser, and because the developing downtrend tells us it could sink farther. SELL
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here three weeks ago, was spun off from Merck in June 2021 and is a member of the S&P 500—but undervalued by the market according to Bruce. In last week’s update, he wrote, “Management and the 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 31% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.2% dividend yield.” BUY
Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here a month ago, closed at a record high last Friday and briefly hit a new high this morning, but then reversed. Energy stocks are obviously strong now, but no one knows how long it will last, so we’ll just ride the trend until it ends. If you haven’t bought, try to get in on a pullback. BUY
Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was at a record high of 65 at the start of the year, but today it’s back down in its trading range between 55 and 65, where the stock has spent much of the past year. In his update last week, Bruce wrote, “On February 1, Sensata reported reasonable fourth-quarter results but forward guidance was below the consensus estimates so the stock was moderately weak on the news. Revenues were held back by weak production at automakers but helped by more content per vehicle as well as growth in industrial demand and from acquisitions. The profit margin contracted modestly due to higher labor and input costs along with higher “mega-trend” investments in electrification and other technologies that will help Sensata participate in faster-growing secular trends. Full-year 2022 guidance was below the consensus but was reasonably encouraging: 8% revenue growth excluding acquisitions and 8% earnings per share growth (although consensus was for 15% earnings growth). Guidance was subdued partly due to an anticipated sluggish 7% growth in global auto production weighed down by China. Sensata continues to generate sizeable free cash flow, has a strong balance sheet and announced a new $500 million share repurchase program – a good move in our view as the shares are undervalued. ST shares have about 29% upside to our 75 price target.” BUY
Stifel Financial (SF), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, is a global wealth management company that has seen 26 straight years of record revenue and should thrive in an environment of rising interest rates. In fact, management is so optimistic that they recently doubled the dividend to 1.5%. The stock pulled back from a record high last week and is an attractive buy here. BUY
TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here two weeks ago, provides customer support and customer experience (CX) services to “new economy” companies. Its client base includes Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (META) Instagram, among others. The stock came public in June at 30, ran up to 85 by September, but fell back down to the 30 area in January as growth stocks retreated and the company was hit by a short attack—and it’s been basing there ever since. I think this basing area presents a good entry point, but if you want to avoid any nasty surprises, you could wait until after the company’s fourth-quarter results are released after the market close on February 28. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 200-day moving average at 800 four weeks ago after the company reported excellent fourth-quarter results, but has returned to that level in the weak market environment. Short-term, I have no idea where the stock might go next (a lot depends on the broad market), but long-term, I still recommend holding for investors with long-term gains. HOLD
U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, sold off a month ago after a disappointing quarterly report, but the stock has bounced right back up again, so technically, it’s still in the trading range between 55 and 60 that’s constrained it since May. In his update last week, Tom wrote, “This regional bank stock has been indecisively bouncing around. It took a hit in the recent down market and is attempting a recovery from there. But I think the environment should be very supportive this year as the economy still grows above trend and interest rates likely rise. There is no good reason for USB to be lower priced now than it was in the fall. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now.” BUY
Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer, was hitting new highs in early January and now it’s back in the middle of its uptrending channel. In his update last week, Carl wrote, “VECO shares gained two points this week due to a vote of confidence in its technology as multiple leading semiconductor manufacturers have placed repeat, multi-system orders for Veeco’s advanced systems. Veeco also came out yesterday with quarterly earnings of $0.43 per share, an earnings surprise of 19.4%. Revenue for 2021 was $583 million, 28% growth over 2020, driven by semiconductor and data storage. This quality company makes the equipment and technology essential for the chip fabrication game, a business with technological and high capital barriers to entry which leads to high margins and return on equity. Veeco has a high-quality balance sheet and I recommend that you acquire shares if you have not already done so.” BUY
Verano Holdings (VRNOF), recommended by yours truly in Cabot SX Cannabis Advisor, bottomed with the entire cannabis sector late last year, and has been building an increasingly long and strong base at 10, where it has found support since October. If you don’t own it yet, you could buy here, but you could also wait for one more chance to buy at 10; you might get lucky! BUY
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has pulled back a bit over the past few weeks, but remains way above its low of late January (196). In his update last week, Tom wrote, “The card company stock has leveled off since getting a big bump on earnings. The stock jumped over 10% on the day of the report and 14% for the week. As anticipated, international business is picking up as are the very profitable cross-border transaction as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022.” BUY
The next Cabot Stock of the Week issue will be published on February 28, 2022.