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Stock of the Week
The Best Stock to Buy Now

January 31, 2022

With the market in a downtrend—though possibly ready for a rally—the prudent course is to continue to focus on strong sectors (like energy) and cheap stocks, which is what we’re doing with today’s recommendation.

As for the current portfolio, we’re down to 15 stocks, from a maximum of 20, and selling none of them today.

Details inside.

New Recommendation

With the broad market still weak, selectivity has become increasingly important—if you’re buying at all. Holding some cash is a good idea. But if you are buying, your best bets are sectors that are strong, like energy, and stocks that are simply plain cheap, and thus have minimal downside risk. That’s the category today’s recommendation fits in. It was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and here are Bruce’s latest thoughts.

Organon & Co. (OGN)
Organon is a United States-based global pharmaceutical company with sales of $6.3 billion. About 80% of its sales are produced outside of the United States. Founded in the Netherlands in 1923, the company was spun off from Merck in June, 2021. Organon is a member of the S&P 500.

The company has three segments. Established Brands (68% of revenues) is a collection of nearly 50 mostly off-patent cardiovascular, respiratory and other therapies. Women’s Health (23%) includes contraceptives and fertility products. The Biosimilars segment (9%) includes five approved treatments for autoimmune, arthritis and other diseases through a joint venture with Samsung Bioepis. Biosimilars are FDA-approved alternatives to patented biological drugs, which, unlike chemical pharmaceuticals, are created from living cells.

Shares of Organon have fallen sharply since their debut at around 38. Investors worry about patent-related revenue erosion in the Established Brands segment and the 2025-2027 patent expiration for its Nexplanon women’s health product (11% of total sales). Recent sales of Nexplanon have been underwhelming as well. Also, revenues from the Chinese hospital channel may continue to be pressured by government buying programs. The market sees many years of flat revenue growth and flat or negative earnings growth for Organon.

While acknowledging the revenue risks, we have a more optimistic view of Organon’s future. The marquee Nexplanon product is a highly valuable franchise, with solid 10% growth potential for years. There is a strong possibility that it can extend its patent to as late as 2030. Its complex production process could easily ward off generic competitors afterwards. And, because it is implanted under the skin, women may be hesitant to opt for a discount version. Organon’s fertility treatments are well positioned to grow, particularly in China. The Biosimilars segment offers double-digit growth potential: the industry is in its early innings, Organon has a solid portfolio, and the company has plans for new launches every 1-2 years, including a Humira biosimilar this year in international markets.

While revenue losses in the Established Brands are inevitable, most of the risks are behind it, as only $250 million in revenues, or about 6% of total company revenues, face patent expiration over the next four years. And, the highly diversified product roster minimizes the impact from any single treatment or country. Similarly, much of the pricing pressure from China’s Volume Based Procurement (VBP) program has been absorbed, as about 80% of the company’s portfolio will have full exposure to VBP by the end of this year. Finally, 40% of the company’s China revenues are produced through the retail channel, which is growing quickly and isn’t as vulnerable to VBP pressures.

Organon’s management team has deep leadership, operating and financial experience. The CEO, Kevin Ali, led Merck’s international business. The CFO previously was Allergan’s and Catalent’s chief financial officer. Other senior executives and the board of directors bring valuable capabilities as well. Given that the company’s products were neglected within Merck’s enormous operations, there are plenty of opportunities for this management team to rejuvenate Organon’s business.

Strategically, we see the company making smart yet modest-sized acquisitions to expand its Women’s Health business, as this is its primary focus. We would not be entirely surprised if Organon divested its Established Brands segment in a few years, as discarding this perceived albatross would be a significant share price booster.

The company’s robust $1.3 billion in annual free cash flow is more than adequate to trim the modestly elevated $9.5 billion in debt (which funded a $9 billion dividend back to Merck) while also supporting the acquisition program.

Like all turnarounds, OGN shares carry risk. Yet, the shares’ discounted valuation, at 7.5x estimated 2022 EBITDA and 5.4x estimated 2022 earnings, more than adequately reflects this. With improved revenue visibility (we model only 2% cumulative 3-year growth), incrementally wider margins from better oversight, plus the value of interim free cash flows, the shares have considerable upside potential. Additionally, Organon pays an attractive and sustainable $0.28/share quarter dividend that produces a 3.6% yield.


OGNRevenue and Earnings
Forward P/E: NAQtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 5.4($bil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 19.3%Latest quarter1.60-1%1.67-30%
Debt Ratio: NAOne quarter ago1.605%1.73-32%
Dividend: $1.12Two quarters ago1.51-15%1.78-43%
Dividend Yield: 3.6%Three quarters ago2.40-32%1.66-48%

Current Recommendations and Changes

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 1/31/22ProfitRating
Arista Networks (ANET)1/4/211390.0%124Hold
Bristol Myers Squibb (BMY)11/2/21593.0%65Buy
Broadcom (AVGO)2/23/214652.5%586Hold
Brookfield Infrastructure Partners (BIP)1/12/21513.3%59Hold
Cisco Systems (CSCO)7/27/21552.7%56Hold
Devon Energy (DVN)12/28/21450.9%51Buy
Marvell Technology (MRVL)8/10/21Sold
MP Materials Corp (MP)1/11/22Sold
Oracle (ORCL)1/19/22851.6%81Buy
Organon & Co. (OGN)New4.0%32Buy
Pioneer Natural Resources (PXD)1/25/222100.6%219Buy
Sensata Technologies (ST)6/15/21590.0%57Buy
Tesla (TSLA)12/29/1160.0%937Hold
U.S. Bancorp (USB)9/21/21573.2%58Buy
Veeco Instruments (VECO)10/12/21230.0%27Buy
Verano Holdings (VRNOF)11/16/21130.0%11Buy
Visa (V)12/14/212110.7%226Buy
WillScotMobile (WSC)12/7/21Sold

With the portfolio down to 15 stocks from a maximum of 20, and leaning more toward value and away from growth, it’s nice to see we have no obvious stinkers today—and thus nothing will be sold. Going forward, of course it’s possible that the market will weaken further, but for now we’ll stick with what we have and see if the market wants to rally.

Changes Since Last Week’s Update

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor has been stable over the past week, and continues to sit in the 120 area, which marks both the top of its gap up after the third-quarter report at the start of November and right where it found support at the start of December. In his update last week, Mike wrote, “ANET has been caught up in the tsunami of selling like everything else, and if the stock doesn’t bounce soon, we might have to throw it overboard. But at 21% off its peak, it’s about as good as you’ll find out there among growth stocks, likely because big investors still see a reliable 30%-ish growth year coming as demand from hyperscale cloud players picks up steam. Of course, it’s always possible the market may be sniffing out a big decline in technology-related CapEx—after a boom the past few years (and especially after the virus forced many to work from home), purchases of software and such may level out for a bit. Still, part of the attraction with Arista is that (a) demand for its wares already leveled out the prior couple of years, so a new upcycle in orders has just gotten underway, and underscoring that is (b) the fact that these huge cloud firms are ordering equipment months ahead of time (a rarity in the industry) to make sure they have the supply they need, adding clarity to Arista’s outlook. As with most stocks, earnings will be key—Arista will release its quarterly report on February 14, with analysts looking for sales to rise 21% and earnings of 73 cents per share (up 18%). Far more important will be the outlook for 2022, which management has already guided toward accelerating growth. If you’re craving cash, we’re not opposed to trimming some ANET on any bounce, but given our large cash position [more than 60%], we’ll just hold on and see how things develop.” HOLD

Bristol-Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, rebounded nicely last week and is now trading at its January highs. In his update last week, Bruce wrote, “BMY shares have about 26% upside to our 78 price target. Valuation remains low at 7.9x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 7.7x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers. Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 3.5% dividend yield that is well-covered by enormous free cash flow make a compelling story.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has corrected sharply with the market since the start of the year, coming right down to its 200-day moving average a week ago. And that triggered a new wave of buying! In his update last week, Tom wrote, “This legendary technology company stock did not hold up well during the recent tech sector weakness. It plunged over 20% since early January and gave back most of the recent surge since October. It’s up big so far today though. There isn’t an internal operational reason for the plunge. Technology is reeling from the prospect of higher interest rates and lower growth rates. But investors never sour on technology for too long. It’s where all the growth is. I still like this stock for 2022.” 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. In his latest update, Tom wrote, “BIP has been on an uptrend since the market bottom in March of 2020, albeit a slow and sometimes choppy one. It still looks solid, and earnings should be strong, reflecting the new acquisition. BIP was very resilient when the market was ugly. It’s a great stock to own in a more volatile market. (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, hit a new high at the end of December and has now pulled back to its 200-day moving average. In his update last week, Bruce wrote, “Cisco 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. CSCO shares have 19% upside to our 66 price target and offer a 2.7% dividend yield.” HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high last Thursday, and has pulled back minimally since. In his update last week, Mike wrote, “DVN remains one the best-performing stocks in what is probably the top sector in the market. Shares did take a stumble as the selling pressures spread late last week and on Monday (a downgrade from one investment house didn’t help the cause), but after tagging its 50-day line, shares have rocketed back to new highs on big volume (Monday’s volume was the second largest of the past 12 months!)—that’s classic action and tells you big investors are taking advantage of shakeouts and pullbacks to build positions. Interestingly, Devon did update its 2022 outlook earlier this month—at $65 oil and $3.75 natural gas, the firm sees around $5 per share in free cash flow this year, while at $75 oil that figure reaches ~$6.30 and at $85 oil it’s north of $7.50. Those figures are actually down a smidge from its outlook in November (possibly because of cost inflation? Just a guess), but in no way does it change the overall story here—even in the middle case, DVN would likely be paying out a minimum of $3.30 per share in dividends, with a few percent of outstanding shares repurchased on the open market, too. The firm’s quarterly report (due February 15) could be a catalyst; given that prices were up in Q4 vs. Q3, it’s possible the dividend tally will be greater than last quarter’s, and we wouldn’t be surprised if the company hiked its so-called base dividend (currently ‘only’ 44 cents per share, per year) or committed to returning a higher percentage of its cash flow in dividends (currently up to 50% for Devon, but some peers like Pioneer are at 75%), both of which could entice buyers. As for the stock, another wobble or two is certainly possible after the recent spike, with the market or a dip in oil possible culprits, but until proven otherwise, we think DVN’s uptrend has further to go. We’ll stay on Buy, but if you don’t own any, aim for weakness to enter.” BUY

Oracle (ORCL), originally recommended by Carl Delfeld in Cabot Explorer and featured here two weeks ago, is down 5% since then, and thus a better buy. In his latest update, Carl wrote, “ORCL shares held their ground this week reasonably well. Oracle offers us cloud-computing high growth and margins coupled with a reasonable price. The stock is trading at less than 22 times earnings with a high return of equity. This stock is well suited to the current tough tech stock environment. ORCL is a high-quality stock in a market going in that direction, so I encourage you to buy if you have not already done so.” BUY

Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week just as it was bouncing off its 200-day moving average, is up 5% since then and setting up to break out above its recent high of 222. If your portfolio would benefit from more energy stocks in the sector’s current bullish phase, this is one to consider. 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 just a month ago, but today it’s back down at 55, where the stock has found much support over the past year. In his update last week, Bruce wrote, “ST is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. Sensata announced a new $500 million share repurchase program, which replaces its prior authorization which had $254 million in buybacks remaining. Sensata shares have made no progress in a year, despite the company’s continued strong fundamentals and the shares’ attractive valuation – so this news is encouraging. We would also like the company to reduce its modestly elevated debt burden. Until their earnings report, there is little reason for the shares to fully escape the downturn in nearly all technology shares. The shares have about 31% upside to our 75 price target.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 200-day moving average at 800 last Friday after the company reported fourth-quarter results. Revenues were $17.7 billion, up 65% from the year before, while earnings per share hit a record $2.54, up 218% from the year before, all excellent results. Additionally, gross margin was 30%, higher than any other large automobile company—and it should continue to rise, as costs are driven down via innovative manufacturing techniques at scale and the Austin and Berlin factories ramp up this year. But investors are always looking ahead, and some didn’t care for the announcement that management was delaying work on the Cybertruck due to supply chain challenges. Still, demand continues to exceed supply, which is a problem Ford and GM wish they had. Short term, I think the stock has upside toward its old high of 1243 (though the broad market’s weakness is a depressant), and long term, I still believe it’s a good long-term hold 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, is a slow-moving stock with a good dividend, temporarily trading below its 200-day moving average. In his update last week, Tom wrote, “This regional bank stock had been flourishing. Rising interest rates juice profits as the bank earns more net interest income. The other elements of the business have been strong and high interest rate spreads add the missing piece of the puzzle. But USB has been taken down along with the overall market over the past couple of weeks. The market is falling primarily because of the prospects of rising interest rates. But in markets like this it doesn’t even matter if a stock benefits. Everything falls in the near term. But I still expect a good year for USB.” BUY

Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer was hitting new highs a few weeks ago and now it’s back at the lower end of its uptrending channel. In his update last week, Carl wrote, “VECO shares were firm, losing only one point this week to finish at 27. This high-quality company makes the equipment and technology essential for staying ahead in the chip fabrication game. Veeco is a steady performer with a sterling balance sheet. I recommend that you acquire shares if you have not already done so.” BUY

Verano Holdings (VRNOF), recommended by yours truly in Cabot Marijuana Investor, bottomed with the entire cannabis sector late last year, and has been building an increasingly long (and hopefully strong) base at 10, where it has found support since October. If you’re underinvested in marijuana stocks, you could buy here. BUY

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, gapped up last Friday after the company released an excellent quarterly report. Revenues were $7.1 billion, up 24% from the year before, while eps was $1.81, up 27% from the year before. In his update last week before the earnings report, Tom wrote, “Visa should benefit from the international recovery this year, which has lagged the U.S. recovery. As travel returns, the very profitable cross-border transactions should get a big boost while U.S. business is already booming.” BUY

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