With the market still in a downtrend, defense continues to be important.
Cash is the simplest defensive asset, but low-risk stocks, undervalued stocks, dividend-paying stocks and stocks in sectors bucking the downtrend are all worth considering.
My recommendation this week is a well-known automaker with great prospects in the electric vehicle space whose stock is trading 38% off its recent high.
With the inflation rate hitting 7.9% in February, investors have been scrambling to identify ways to play this trend. Energy stocks have been one avenue (we added a third energy stock to the portfolio last week), but another is the electric vehicle industry, which is seeing booming demand as gasoline prices skyrocket. Given my history with Tesla, I’ve been keeping an eye on all the players, both new and old (we booked a 12-month profit of 71% in General Motors in December), and now I like the prospects for Ford, which is trading 38% off its recent high. The stock was originally recommended by Carl Delfeld in Cabot Explorer and here are Carl’s latest thoughts.
It seems quite clear that electric vehicles have passed an inflection point and are here to stay. Global sales last year were 6 million vehicles, double that of 2021, and the market will likely reach 15 million before 2025.
The challenge for investors is how to play the electric vehicle (EV) revolution. The choices are many and fast-moving. The market blows hot and cold based on risk appetites, new technology, oil and rare metal prices, to mention just a few.
No question about it – with markets a bit volatile you can pick up some EV-related stocks at a sharp discount to past prices and future potential. But you may also want to blend a stalwart that offers you a conservative but transformative blend of the old and new and a quality company brand with top-notch experience and management.
This is Ford, a company that also has the full support of the federal government and offers great scale and the potential for speed and accelerated profits. This may be why chairman Bill Ford recently acquired almost 2 million shares of his company for about $20.5 million through the exercise of stock options
I love the expression Ford’s CEO Jim Farley used recently to announce splitting Ford into two parts to jumpstart its electric vehicle (EV) initiative: “We are going all in.” This is in reference to Ford’s decision to separate its fast-growing electric vehicle operations (Ford Model e) from its legacy combustion engine business (Ford Blue) in a historic reorganization of the 118-year-old company.
Ford outlined that it expects to produce two million EVs by 2026 and intends $50 billion in EV investment through 2026. The new Ford Model e unit will scale up the automaker’s EV offerings and develop software and connected-vehicle technology and services for the entire company. Ford Blue will focus on combustion vehicles by cutting costs and simplifying operations.
Ford’s grand ambition according to Farley is “to become a truly great, world-changing company again, and that requires focus.”
Farley has been working closely with Doug Field, the former head of Apple’s EV project, on reviewing Ford’s operational and manufacturing structure to prepare for the company expanding its EV offerings. It’s increased output of the electric Mustang Mach-E and prepared more production capacity for the F-150 Lightning pickup going on sale this spring. The Ford F-150 Lightning is expected to have a starting price of just $40,000 and will have a range of over 300 miles.
Under the new structure, Farley will also assume the role of president of Ford Model e, while Field will be the unit’s chief EV and digital systems officer. Ford’s strategic plan, outlined last May, has positioned the company as an aggressive player in electric vehicles, committing $7 billion for new battery factories in Tennessee and Kentucky.
Think of what has been propelling electric vehicles forward and what will power them into the mainstream across the world. It is a combination of growing political concern over climate change, the need to get air pollution under control in big cities with urban congestion, and breakthroughs in electric vehicle batteries that lower costs and expand range.
Ambitious policy announcements have been critical in stimulating the electric-vehicle rollout in major vehicle markets in recent years. In the United States and around the world, governments support EV sales in different ways, from simple lump sum grants and subsidies to tax breaks to more complex formulas that vary with the type of vehicle or the incomes of buyers.
America is considerably behind both China and Europe in EV sales, production and infrastructure such as battery charging stations, but it is not too late to catch up. I suggest you invest in Ford as a high-quality conservative play on the EV revolution.
|F||Revenue and Earnings|
|Forward P/E: 8.4||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Current P/E: 4.0||($bil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) 13.2%||Latest quarter||37.7||5%||0.26||-24%|
|Debt Ratio: 182%||One quarter ago||35.7||-5%||0.51||-22%|
|Dividend: $0.40||Two quarters ago||26.8||38%||0.13||137%|
|Dividend Yield: 2.5%||Three quarters ago||36.2||6%||0.89||487%|
Current Recommendations and Changes
|Stock||Date Bought||Price Bought||Yield||Price on 3/14/22||Profit||Rating|
|Arista Networks (ANET)||1/4/21||139||0.0%||115||Hold|
|Bristol Myers Squibb (BMY)||11/2/21||59||3.1%||69||Hold|
|Brookfield Infrastructure Partners (BIP)||1/12/21||51||3.6%||60||Hold|
|Cisco Systems (CSCO)||7/27/21||55||2.8%||54||Hold|
|Devon Energy (DVN)||12/28/21||45||7.4%||54||Hold|
|Organon & Co. (OGN)||2/1/22||33||3.4%||33||Buy|
|Pioneer Natural Resources (PXD)||1/25/22||210||2.4%||229||Buy|
|Sensata Technologies (ST)||6/15/21||59||0.0%||52||Buy|
|Stifel Financial (SF)||2/15/22||—||—||—||—||Sold|
|U.S. Bancorp (USB)||9/21/21||57||3.4%||54||Buy|
|Veeco Instruments (VECO)||10/12/21||23||0.0%||27||Hold|
|Verano Holdings (VRNOF)||11/16/21||—||—||—||—||Sold|
The addition of F to the portfolio brings us to 17 stocks, still under our maximum number of 20—and I sincerely think that’s enough in the current market climate. So if none of the other Cabot analysts rate any of these stocks sell next week, I’ll do it on my own, helping guide you to a stronger cash position in preparation for the next market uptrend. Details below.
Changes Since Last Week’s Update
Devon Energy (DVN) to Hold
Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, continues to hold at support at 120. In his update last Thursday, Mike wrote, “When we look back on the reasons for buying and then holding ANET in recent months, we saw a relatively early-stage stock (big coming-out party occurred just in November of last year) that was being driven by the first signs of a multi-year upcycle in demand for its high-speed networking wares, especially from giant cloud operators—which in turn would lead not just to accelerating growth but also to a lot of certainty, too, given the massive orders the big boys were placing. And, really, we think all of that has held up pretty well: While we’ll never say a 25%-plus correction is pleasant, Arista has held up well given the growth stock destruction, and its two recent tests of the 40-week line have found support. But similar to the overall market, we see the stock as approaching a key point. If ANET can hold up around here and pick up steam should the market rally, it would go a long way toward confirming that the stock should be among the leaders of the next upmove. Alternatively, a decisive dip under the recent lows would more or less lump the stock in with so many of the other names that have cracked. Having held through the downturn and bottom-building process so far, we’re happy to give shares a chance; while it’s not the type of name to double in a month, deep down we do think shares can put on a good show if the market gets moving, with the rapid/reliable growth story attracting more big buyers. If you’ve followed along with us, continue to sit tight.” HOLD
Bristol-Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, continues to climb! In fact, it’s just topped its high of last year. In his update last week, Bruce wrote, “BMY shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry. The likely worst-case scenario is flat revenues over the next 3-5 years. Bristol should continue to generate vast free cash flow, has a solid, investment-grade balance sheet, and trades at a sizeable discount to its peers.
“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 8.2x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.” HOLD
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been treading water in recent weeks, setting up for a renewal of its uptrend. In his update last week, Tom wrote, “This technology goliath has been floundering along with the rest of the technology sector this year. It’s down 14% YTD. Of course, that’s not so bad considering the tech sector is down 20% so far this year. And there is good news. Broadcom’s earnings trounced expectations yet again with 27% earnings growth and 16% revenue growth year over year. The company also guided to a better than previously expected 20% revenue growth in the first quarter. AVGO jumped 3% on the news but the rally was short-lived as tech stocks came under pressure again. While the current external environment for the market and the sector is awful, Broadcom’s business is thriving and will likely even accelerate going forward. Patience should pay off and the stock should jump when the market stabilizes.” 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 update last week, Tom wrote, “There is really nothing new to say about BIP. And that’s the beauty of this defensive infrastructure partnership. 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. 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, has been up and down since our July recommendation but has made little net progress yet, which just means it’s a better buy now! 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.
“Cisco said about a quarter of its employees in Ukraine have left the country, but the balance remain and Cisco said it is providing a range of cash, telecom and other support to them. CSCO shares have 20% upside to our 66 price target. The dividend yield is an attractive 2.8%.” HOLD
Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high last week, and has fallen sharply today as energy stocks give back some of their recent gains. In his update last Thursday, Mike wrote, “When we originally bought DVN back in May of last year, energy stocks were doing pretty well, but sentiment-wise, the group was definitely not loved and still thought of as boom-bust, with the prospects of the explorers very much determined by the price of oil. Ten months later, the sector is super-hot, the cash flow/CapEx controls/low production growth stories are much more widely known and accepted (at least among the institutional crowd) and, when it comes to the price of oil itself, the news could hardly be better, with the Russian invasion and corresponding sanctions throwing the energy market into chaos. Said another way, at this point, a lot of good news and expectations have likely been priced into DVN and the group as a whole, which raises near-term risk. Combined with the fact that DVN had grown to a massive portion of our overall portfolio (just shy of 20%, nearly double that of a “normal” initial position), we thought it was best to feed a few of the ducks (buyers) while they were quacking—thus, on Tuesday’s special bulletin, we sold half our shares. A couple of other points: When it comes to the dividend, we won’t get the $1 payout on the half we sold, though we don’t see that as some huge chunk of change given that DVN itself moves around a dollar every few hours these days. (The dividend itself was always nice, but what counted more was what that payout did for investor perception—namely, increasing it, and thus driving the stock much higher.) Second, big picture, we think DVN can head higher over time, so we’re willing to give our (still-sizable) remaining stake room to maneuver. We’ll have to see if Devon and others keep their promises to keep CapEx in check in order to boost production, but we certainly don’t think the major cash flow story is set to change in any meaningful way, and the group was out of favor for so long (2014-2020) that the odds favor the next correction will find support. Long story short, we held through many dips and survived many tests during the past 10 months, and now that oil and gas is the talk of the town, we think it makes sense to book partial profits, while sitting tight with the rest of our position and seeing how things play out.” I’ll downgrade to Hold. HOLD
Halliburton (HAL), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, will be volatile, given investors’ focus on the energy sector these days, but long-term prospects for the stock are good. In Cabot Growth Investor this week, Mike wrote, “Commodity stocks are suspect near-term, but we continue to think early-stage ones like HAL can do well for many quarters to come—a couple of weeks of rest or chopping around as the 50-day line (now just above 30) catches up could be interesting.” BUY
Harley-Davidson (HOG), originally recommended by Carl Delfeld in Cabot Early Opportunities and featured here three weeks ago, has a great American brand and is working on building another with its all-electric LiveWire motorcycle division, which will spin off into a SPAC later this year. In his update last week, Carl wrote, “HOG shares retraced last week’s gains to close at 39 as the average Wall Street analyst has a projected upside for the stock over the next year of 30%. This leading motorcycle maker is banking on its LiveWire electric motorcycle to open new markets and recently reported a fourth-quarter profit that saw motorcycle revenue surge 54%.” BUY
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, 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. Two weeks ago the stock was hitting record highs, but today it’s dropping sharply, in sympathy with growth stocks. In his update last week, Bruce wrote, “Organon specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. 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
Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high two weeks ago and has pulled back minimally since. As noted previously, the sector is strong now, but that won’t last forever, so we’ll just ride the trend until it ends. If you haven’t bought, try to get in on a pullback. BUY
Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured two weeks ago, is a Chicago-based restaurant chain that came public last October and is planning on using the proceeds from that offering to expand from its current nine states to many more. Fourth-quarter results were released last Thursday, and in response Tyler, who had originally recommended buying a half position, wrote this: “PTLO moves to BUY SECOND HALF. Management reported Q4 results that missed expectations by a small margin (revenue of $139 million, up 17%) and they talked about the impact of rising protein prices (beef, chicken, etc.), wages and energy costs. Given all this, especially in the current environment, PTLO held up relatively well (shares off the day after but have held support in low 20s). No doubt the company will continue to increase prices to protect margins. And the bigger-picture trends – economy opening up, people want to get out and do things, Portillo’s rolling out expansion plan, etc. – remain intact. PTLO is trading near its post-IPO lows, and this appears to be offering a good entry point for our second half position. But … should PTLO break down below the IPO price of 20 we will likely exit altogether.” 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 it’s down 21% since then and thus a better value. In his update last week, Bruce wrote, “Sensata 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. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. As the sensors’ reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market. ST shares have about 35% upside to our 75 price target.” BUY
TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, provides customer support and customer experience (CX) services to “new economy” companies like Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (META) Instagram, among others. The stock gapped up after the company’s fourth-quarter report was released two weeks ago, and has been relatively stable since. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is trading right on its uptrending 200-day moving average, neither overinflated nor depressed—and that’s fine with me. The company is now raising prices on its cars, citing inflationary costs, but the fact is that with demand exceeding supply, it’s a sensible business move in almost any environment. I remain bullish on TSLA, both for its prospects in the EV industry, where it is the acknowledged leader, and in the nascent distributed electric energy industry, where it has enormous growth potential. HOLD
U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has fallen out of its trading range between 55 and 60, but Tom’s not worried. In his update last week, he wrote, “This regional bank stock continues to flounder. It was bouncing around with the overall market, but the Russia situation has made things worse as interest rates have been moving lower. But this should be a temporary down leg in an otherwise very good environment for USB. The current crisis will likely fade and the next thing up will be rising rates and a still-strong economy. It’s worth sticking with this one because of the favorable backdrop aside from the war.” BUY
Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Early Opportunities, was hitting new highs in early January and now it’s back in the middle of its uptrending channel, looking fine. In his update last week, Carl wrote, “VECO shares as usual held steady, inching up from 26 to 28 based on its market position, strong balance sheet and earnings growth. Veeco recently reported quarterly earnings of $0.43 per share, an earnings increase of 19.4%, and revenue for 2021 was up 28% over 2020. Veeco makes the equipment and technology essential for chip fabrication game, a business with technological and high capital barriers to entry which leads to high margins and return on equity. Veeco is a solid performer but I moved this stock to a hold last week until markets settle down.” HOLD
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has bounced in the week since it plunged (to support at 190) on fears that the war in Ukraine would hurt profits. In his update last week, Tom wrote, “V is in the crosshairs of the Russia/Ukraine selloff. A geopolitical crisis like this turns investors off to anything international. Although V does most business in the U.S., it has a huge international presence. And that part is the growth story this year. Global business was the next piece of the puzzle for V to enjoy a full strong recovery. And it’s happening. We’ll hold on for now as prospects are still bright for the year. And V could also get a big bounce in the near term.” HOLD
The next Cabot Stock of the Week issue will be published on March 21, 2022.