May 2, 2022

The market was hit hard again last week, so all trends are down, and increased caution is advised.
But I’m not selling any stocks this week, mainly because last week I sold four, and today so many of our stocks are sitting at their 200-day moving averages, thanks to last week’s broad selloff, that I see a good possibility for some bounces.

As for the new recommendation, it’s a well-known discount retailer whose stock is cheap.

Details inside.

New Recommendation

Market trends remain down, and while the abundance of bad news tells us there’s got to be a bottom somewhere, I’m not foolish enough to predict that it will be now—though it’s definitely possible! So I continue to recommend a cautious attitude, which means holding cash, and favoring defensive stocks with minimal downside potential—like today’s recommendation. The stock was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and here are Bruce’s latest thoughts.

Big Lots (BIG)
Big Lots is a small-cap ($940 million market cap) discount general merchandise retailer based in Columbus, Ohio. Its 1,431 stores across 47 states generate about $6.1 billion in annual revenues. The company offers an assortment of furniture, hard and soft home goods, apparel, electronics, food and consumables as well as seasonal merchandise. The shares have fallen by nearly 65% from their all-time high reached mid-2021 and currently trade in line with their price of 15 years ago. Investors have discarded the shares of this debt-free and fundamentally stable company, leaving the valuation at an exceptionally low 2.5x EV/EBITDA, with a 3.6% dividend yield. In a difficult stock market and an economy that is straining many consumers’ budgets, Big Lots shares look well-positioned to benefit.

The company serves bargain-oriented and budget-oriented consumers with its evolving selection of highly discounted close-out goods and discounted regularly stocked convenience merchandise. Big Lots benefits from disruption to retailer supply chains, as it buys production over-runs, order cancellations and other problematic merchandise at exceptional discounts and then passes those savings along to its customers. Helping draw in customers is Big Lots’ large and loyal customer base of 22 million Rewards program members, a group that has grown steadily over the past decade.

Big Lots has a relatively steady revenue and profit profile. While its profit margins are relatively narrow, at about 5.5%, it appears to be stable, even with growing cost inflation and other pressures. We acknowledge that the current quarter will likely be weak, as management guided, and that investor expectations for the full year may be incrementally too high.

We would consider management to be capable and attentive to its business, and “good enough” to maintain and incrementally improve the company’s fundamentals. Also, the leadership is shareholder-friendly: in the past three years, Big Lots has repurchased nearly 30% of its shares. While much of this was funded by the sale of its distribution centers, which created an ongoing annual expense, the buybacks were at attractive prices and accretive to shareholders. The $0.30/share quarterly dividend appears sustainable, and management seems committed to running the company in a way that maintains this dividend.

Big Lots’ balance sheet carries only $4 million of debt compared to $54 million in cash. While the balance sheet ebbs and flows with its inventory needs, the company is operated primarily as a debt-free business. This provides Big Lots with considerable financial endurance and flexibility.

We are intrigued enough by the shares’ remarkably low valuation to make this stock a Buy. On conservative fiscal 2022 (ending in January 2023) estimates, the shares currently trade at 2.5x EV/EBITDA and 6.4x per-share earnings. These multiples imply a dour recessionary future for the company. The EV/EBITDA multiple in particular is sharply below an average of perhaps 5x-9x for its peers. Even adjusting for scale and quality, this wide discount for BIG is unwarranted.

In a world where interest rate increases could continue to weigh heavily on stocks, it would seem improbable that the shares would experience much more valuation compression if fundamentals remain respectably stable. But the market has little patience for retail stocks of any kind, and valuation has taken a back seat to other narratives.

The shares’ low valuation may not be reversed immediately. But the company’s fundamental durability and the 3.6% dividend yield provide a considerable margin of safety and pay investors an attractive cash dividend during the wait.

Furthermore, the presence of investor Mill Road Capital (5.1% stake) adds some appeal. We doubt that Mill Road has the financial firepower to execute a buy-out on its own and are also skeptical of its proposal for Big Lots to lever up to do a major share buyback. Nevertheless, the investor has publicly highlighted the company’s deeply discounted shares – a clear positive.

All-in, while BIG shares carry higher risk, the risk/return trade-off appears compelling.

Current Recommendations and Changes

Current Recommendations

The addition of BIG brings the portfolio to 16 stocks, out of a maximum of 20. If the market downtrend continues, I’d like the number of our holdings to shrink further, but given that the market had a washout last week and lots of our stocks are now trading near their 200-day moving averages, I’m going to wait and see if we can get some bounces. Details below.

Changes Since Last Week’s Update
None

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, is the portfolio’s biggest loss today, and thus a candidate for sale; cutting losses short is critical for investment success, especially when dealing with growth stocks. But the stock is currently sitting on its 200-day moving average and Mike is still holding it, so I’ll hold too. In his update last Thursday, Mike wrote, “ANET fell right down to its 200-day line on Tuesday and Wednesday, which also lines up with its January-March lows, before finally catching a bid today. Like most names, the action isn’t pretty, but having held through the downs and ups of recent months and with so much cash on the sideline, we want to give shares every chance possible to hold up. Arista will report earnings next Tuesday (May 2) [after the market close], which will be key, though investors were encouraged by Meta’s (FB) conference call last night, where capital expenditures for Q1 (and guidance for the whole year) came in on track, a sign that demand for Arista’s gear is probably as strong as ever. If you’re craving more cash in your portfolio, trimming some ANET ahead of earnings is an option, but we’re going to hold for now, keep shares on a tight leash and see what comes.” HOLD

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, has pulled back moderately from its recent high and is now trading at its 25-day moving average. In his update last week, Bruce noted that the company was scheduled to report earnings on Friday, with the consensus earnings estimate at $1.89/share, and on Friday the company reported earnings of $1.96 per share, so all is good. Bruce also wrote, “Valuation remains reasonable compared to its peers and the company seems to be executing on its strategy while also maintaining a solid financial posture, so we are inclined to let the stock at least reach our price target of 78 before deciding on what changes to make to the rating. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has pulled back to its 200-day moving average, but long-term prospects remain bright. In his update last week, Tom wrote, “It continues to be a tough market for technology and AVGO is now down over 17% from the 52-week high. This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. It will have its day in the sun again and patience should be rewarded.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, closed at a record high two weeks ago but is down sharply since and nearing its 200-day moving average, which basically puts it back in line with its normal slow uptrend. In his update last week, Tom wrote, “You know the market is getting ugly when BIP sells off. Recent selling has taken everything down. Even a defensive company with bankable and growing earnings with a strong dividend hasn’t been safe. But when fear eventually wanes investors should gravitate back to stocks like this. And earnings should grow above trend because of a recent acquisition in the energy space. (This security generates a K-1 form at tax time)” HOLD

Cameco (CCJ), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is the world’s second-largest uranium producer, and attractive today as the world turns away from Russian energy sources and toward green energy in particular to combat climate change. This year, the firm sees production up a whopping 75%, with another 56% increase by 2024. The stock has been trending up—and faster than the broad market—since the March 2020 bottom, and is attractive here, having pulled back 23% from its high of three weeks ago and nearing its 200-day moving average. BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, may be the portfolio’s weakest stock, but Bruce remains confident in his judgement. In his update last week, he 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 28% upside to our 66 price target. The dividend yield is an attractive 3.0%.” HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer and featured here two weeks ago, is another stock that has fallen to its 200-day moving average. The company is growing, but cheap. In his update last week, Carl wrote, “In its last quarter, total revenues grew 11% to $73 billion and earnings of $2.42 a share were 17% ahead of consensus estimates. The company also paid down close to $8 billion of debt and paid out $650 million to shareholders through dividends. CVS stock sells for about 17 times forward earnings – versus 22 times for the S&P 500.” BUY

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, remains below all its moving averages so the stock is definitely not strong. On the other hand, Carl says it’s a great bargain. In his update last week, he wrote, “F shares were down a point and change this week despite the company beginning production of the highly anticipated F-150 Lightning, its first all-electric pickup truck. Production is happening at the Rouge Electric Vehicle Center, within the historic Rouge Complex in Michigan, which is where founder Henry Ford perfected the moving assembly line.

Ford CEO Jim Farley was front and center and highlighted that all Ford pickups are produced in America while touting the importance of President Biden’s recent visit. Farley noted, ‘We’re going to go after pickup trucks, commercial vans, and Mustangs that will have that Detroit swagger.’ By 2030, it expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Trading at less than four times trailing earnings, this is perhaps the best value of the leading EV makers so I encourage you to buy if you have not already done so.” BUY

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, bottomed at 44 in February and March and is testing that level again today. In his update last week, Tom wrote, “It’s been a lousy market for technology stocks. But Intel has a key downside buffer. It has been beaten to a pulp already. It has marvelous prospects for growth over the next few years. In the meantime, it pays a great dividend and has limited downside. Plus, technology stocks are getting oversold and could rally in the months ahead. I like INTC in this market.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was the unusual stock that rallied last week as the broad market was falling apart. In his update last week, Bruce wrote, “Organon was recently spun off from Merck. It 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. OGN shares have about 44% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.5% 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 trading just under its 200-day moving average, so looks like a fine buy here. And it yields 3.3%! BUY

Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities, 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. After peaking at 57 in November, the stock corrected down to 21 in February, and it’s been building a base since then. Last week’s market weakness saw the stock fall to nearly 20, but the volume was not serious, so I’m still treating this like a base—while waiting for first-quarter results to be released May 5. BUY

TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, came public last June, peaked at 85 in September, pulled back to the 30 area in January and February (where we recommended it)—and has pulled back to that level once again. The company delivers IT services centered on customer care, content moderation/security, and data labeling and annotation services, growing with clients by taking on incremental work volumes as their businesses scale up. Over the past four quarters, TaskUs has grown earnings an average of 137% from the same quarter in the previous year, yet the young stock’s PE ratio is just 23. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is another stock trading near its 200-day moving average. I’ve got it on a long-term hold, thinking that while the automobile aspect of the business may be overvalued, the company has great, underappreciated growth potential in the energy business—but if you don’t own it yet and you want some, this looks like a decent entry point. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been ping-ponging between 190 and 235 since last October, essentially trendless. In his update last week, Tom wrote, “V took a hit on global growth fear from Fed tightening. Then it started to recover before getting knocked back again this past week due to concerns about China growth. But the international business is picking up strongly as Covid restrictions have largely been removed. Visa reported earnings yesterday that confirmed that fact. The company soundly beat estimates and grew earnings by more than 30% from last year’s quarter. It reported high transaction volumes and a huge boost in international business as travel returns and the profitable cross-border transactions soar.” HOLD

The next Cabot Stock of the Week issue will be published on May 9, 2022.