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Value Investor
Wealth Building Opportunites for the Active Value Investor

April 11, 2023

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Yet Another Commentary on Jamie Dimon’s Letter?

As widely reported, Jamie Dimon, the 23-year-and-counting CEO of JPMorgan and its predecessor Bank One, recently penned his annual letter to shareholders. The 43-page tome covered topics ranging from the bank’s “Steadfast Principles Worth Repeating” to “Our Serious Need for More Effective Public Policy and Competent Government” along with some impressive numbers about JPMorgan’s financial, operational and share price performance over the decades.

The financial commentariat has focused primarily on Dimon’s discussion of the current banking industry problems: how “most of the risks were hiding in plain sight,” the complete failure of the regulatory stress tests to identify the interest rate blunder that led to the failure of Silicon Valley Bank and other banks, and how the “current crisis is not yet over.” He brings immense credibility to the matter, given his seat at the head of one of the world’s largest banks, as well as his proven ability to turn around, build and maintain what is arguably the best-run and least-risky bank on the planet.

We read the entire letter (a few times actually, including printing a hard copy and making notes) and found it worthy of our time. And, we generally agree with much of what he wrote about. Yet, we had some additional takeaways that were glossed over in the press that we found illuminating.

First, the immense scale of the bank’s employee base. JPMorgan has over 290,000 employees – putting it in the top-25 of all U.S. companies. This is on par with CVS Health (CVS), which includes the retail pharmacy business and its Aetna insurance operations, and just behind PepsiCo (PEP), which has 315,000 employees. From another perspective, it is comparable to the population of Cincinnati, Ohio (307,000) and Pittsburgh, Pennsylvania (296,000).

Second, its emphasis on advanced technology. The bank has 2,700 employees focused on artificial intelligence (AI), machine learning (ML) and data processing. If the average annual compensation of each of these employees is $150,000, JPMorgan is spending over $400 million a year on advanced tech personnel costs alone. When adding all the equipment and related expenses, the bank is making a huge investment in leading-edge research.

Closely related is JPMorgan’s massive overall technology effort. Its 57,000 technology employee count dwarves that of VMWare (38,000) and Adobe (ADBE) at 26,000. For perspective, Salesforce (CRM) has 76,000 employees and Apple (AAPL) employs 164,000 people. Using the same $150,000 annual compensation metric as before, JPMorgan is spending $8.6 billion a year on technology staffing. And, remember that the bank’s primary business is banking, not technology.

Regulatory costs are the bane of banks, although they are perhaps the salve that reduces the chances of industry-wide crises. JPMorgan employs 10,800 staffers who focus on compliance and risk, as well as 1,400 lawyers. This small army of over 12,000 would place it among the largest law firms in the world. Facing a domestic roster of “more than 10 (regulators) in the United States alone” and likely some multiple of that around the world, as well as a quagmire of laws like the “…Basel III Endgame (called Basel IV by some) — which, incredibly, has been nearly 10 years in the making…” an effort of this scale is clearly warranted.

Our key takeaway: banking is increasing a scale business and the largest banks will continue to gain an edge over smaller banks that simply don’t have the financial wherewithal to make the tech and legal investments. “Risk in banking” is a redundant term, and the growing operational and regulatory risks will exert pressure on smaller and weaker banks. We also see a meaningful risk for JPMorgan once Jamie Dimon departs – can anyone else oversee the bank like he has?

Another key takeaway: the importance of a long holding period and timely share buying. JPMorgan’s financial metrics like earnings have been volatile or flat for many of the past 19 years, but cumulatively impressive over the full period. The share price shows the same traits. At the same time, the valuation as measured by the share price/tangible book value has surged in the past decade from 1.0x to its current 1.8x multiple. Combined, these show that buying shares of a now top-quality company when they are cheap can be immensely rewarding to investors.

For our Citigroup (C) position, we recognize the risks and appreciate the bank’s spending to catch up in tech and compliance. We also find its simplification strategy to be the right one, as it ultimately should make the bank more cost-efficient such that it can use its scale more effectively. Our aim is that our discount-price purchase and the bank’s turnaround produce a JPMorgan-like return.

Share prices in the table reflect Monday, April 10 closing prices. Please note that prices in the discussion below are based on mid-day April 10 prices.

Scheduling note: With the arrival of spring vacation for our kids next week, we will be on a lighter publication schedule. The April 18 update will be brief (to include earnings). We’ll continue to monitor all of the holdings and provide any Alerts if necessary.

Note to new subscribers: You can find additional color on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Undervalued Stocks Advisor on the Cabot website.

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Today’s Portfolio Changes

Last Week’s Portfolio Changes

Upcoming earnings reports
Friday, April 14: Citigroup (C)
Monday, April 24: Sensata Technologies (ST)
Wednesday, April 27: Allison Transmission (ALSN), Comcast (CMCSA)
Tuesday, May 2: Molson Coors Beverage Company (TAP)
Wednesday, May 3: Barrick Gold (GOLD)
Thursday, May 4: Gates Industrial (GTES)


Cisco Systems (CSCO) 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.

There was no significant company-specific news in the past week.

CSCO shares slipped 2% in the week and have 29% upside to our 66 price target. The valuation is attractive at 9.7x EV/EBITDA and 13.6x earnings per share. The 3.1% dividend yield adds to the appeal of this stock. BUY

Comcast Corporation (CMCSA) With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worries about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, generous dividend and sizeable share buybacks.

There was no significant company-specific news in the past week.

Comcast shares were flat in the past week and have 10% upside to our 42 price target. The shares offer an attractive 3.0% dividend yield. Last month, given the decline in the shares, we restored our Buy rating. BUY


Allison Transmission Holdings, Inc. (ALSN) Allison Transmission is a midcap manufacturer of vehicle transmissions. While many investors view this company as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world, Allison actually produces no car or light truck transmissions. Rather, it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its EBITDA margin is sharply higher than its competitors and on par with many specialty manufacturers. And, it is a leading producer and innovator in electric axles which all electric trucks will require. The company generates considerable free cash flow and has a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years.

There was no significant company-specific news in the past week.

ALSN shares fell 3% in the past week, have 23% upside to our 54 price target and offer a 2.1% dividend yield. BUY

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc, hired as CEO in July 2020, is revitalizing Aviva’s core U.K., Ireland and Canada operations following her divestiture of other global businesses. The company now has excess capital which it is returning to shareholders as likely hefty dividends following a sizeable share repurchase program. We expect that activist investor Cevian Capital, which holds a 5.2% stake, will keep pressuring the company to maintain shareholder-friendly actions.

There was no significant company-specific news in the past week.

Aviva shares rose 3% this past week and have 35% upside to our 14 price target. Based on management’s guidance for the 2023 dividend, the shares offer a generous 7.8% yield. On a combined basis, the dividend and buyback provide more than a 10% return to shareholders. BUY

Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest-quality gold mining companies. About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%). Barrick will continue to improve its operating performance (led by its highly capable CEO), generate strong free cash flow at current gold prices, and return much of that free cash flow to investors while making minor but sensible acquisitions. Also, Barrick shares offer optionality – if the unusual economic and fiscal conditions drive up the price of gold, Barrick’s shares will rise with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work – it offers extra upside. Barrick’s balance sheet has nearly zero debt net of cash. Major risks include the possibility of a decline in gold prices, production problems at its mines, a major acquisition and/or an expropriation of one or more of its mines.

There was no significant company-specific news in the past week.

Over the past week, commodity gold was essentially flat at $2,001/ounce, likely due to concerns about a weakening economy balancing concerns about more Fed rate hikes.

This past week, the 10-year Treasury yield ticked higher to 3.42%. The U.S. Dollar Index (the dollar and gold usually move in opposite directions) edged fractionally higher to 102.78.

Investors and commentators offer a wide range of outlooks for the economy, interest rates and inflation. We have our views but hold these as more of a general framework than a high-conviction posture. Investing in gold-related equities is a long-term decision – investors shouldn’t allow near-term weakness to deter their resolve.

Barrick shares rose 3% in the past week and have 39% upside to our 27 price target. BUY

Big Lots (BIG) – Big Lots is a discount general merchandise retailer based in Columbus, Ohio, with 1,431 stores across 47 states. Its stores offer an assortment of furniture, hard and soft home goods, apparel, electronics, food and consumables as well as seasonal merchandise. Our initial case for Big Lots rested with its loyal and growing base of 22 million rewards members, its appeal to bargain-seeking customers, the relatively stable (albeit low) cash operating profit margin, its positive free cash flow, debt-free balance sheet and low share valuation. Our thesis was deeply rattled by the company’s surprisingly large inventory glut, now resolved, but which leaves the company with a hefty and permanent $300 million debt burden.

Big Lots shares remain high-risk due to the new debt balance, weak fundamentals and the possibility of a suspension or reduction of the dividend. Sentiment in the shares is very weak – investors unwilling or unable to sustain further losses in the shares should sell now, as sentiment could weaken further and drive the shares lower.

Regarding the dividend, Big Lots now has every incentive to eliminate it. Investors clearly are not convinced that it will be maintained, given the company’s likely weak profits for at least the current fiscal year. And, eliminating the $35 million in cash payouts would help the company retire its $300 million debt as well as ease future seasonal borrowings.

There was no significant company-specific news in the past week.

Big Lots shares were flat this past week and have 124% upside to our revised 25 price target. The shares offer an 11% dividend yield, although, as noted, investors should not rely on this dividend being sustained. We continue to hold onto Big Lots’ shares as we believe the company will ultimately rebuild about half of its prior earnings base. The shares’ highly discounted valuation provides a reasonable valuation cushion, even as investor sentiment continues to push the shares lower. HOLD

Citigroup (C) Citi is one of the world’s largest banks, with over $2.4 trillion in assets. The bank’s weak compliance and risk-management culture led to Citi’s disastrous and humiliating experience in the 2009 global financial crisis, which required an enormous government bailout. The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser.

This past week, the yield spread between the 90-day T-bill and the 10-year Treasury bond, which approximates the drivers behind Citi’s net interest margin, widened to negative 153 basis points (100 basis points in one percentage point). Many commentators use the spread between the 2-year Treasury and the 10-year Treasury as an indicator of “inversion” of the yield curve. To us, the 2-year Treasury is too far out on the maturity curve to accurately reflect the cost of short-term money, so we use a much better measure of short-term money – the 90-day T-bill.

Until inflation relents to a 2% pace for perhaps six months, we see little chance for the Fed to declare “mission accomplished.” The recent CPI and other reports suggest that the six-month clock hasn’t yet started.

Citigroup reports earnings on Friday, with a consensus earnings estimate of $1.67/share. Along with watching the overall earnings results, we will focus on the bank’s deposit flows, the market value of its securities portfolio relative to its capital strength, its net interest margin (how much will it compress as it pays up for deposits), and its credit loss metrics and outlook.

Citi shares were flat in the past week and have 83% upside to our 85 price target. Citigroup investors enjoy a 4.4% dividend yield.

When comparing Citi shares with a U.S. 10-year Treasury bond, Citi offers a higher yield and considerably more upside potential (about 83% according to our work vs. 0% for the Treasury bond). Clearly, the Citi share price and dividend payout carry considerably more risk than the Treasury bond, but at the current valuation, Citi shares would seem to have a remarkably better risk/return trade-off. BUY

Gates Industrial Corp, plc (GTES) – Gates is a specialized producer of industrial drive belts and tubing. While this niche might sound unimpressive, Gates has become a leading global manufacturer by producing premium and innovative products. Its customers depend on heavy-duty vehicles, robots, production and warehouse machines and other equipment to operate without fail, so the belts and hydraulic tubing that power these must be exceptionally reliable. Few buyers would balk at a reasonable price premium on a small-priced part from Gates if it means their million-dollar equipment keeps running. Even in automobiles, which comprise roughly 43% of its revenues, Gates’ belts are nearly industry-standard for their reliability and value. Helping provide revenue stability, over 60% of its sales are for replacements. Gates is well-positioned to prosper in an electric vehicle world, as its average content per EV, which require water pumps and other thermal management components for the battery and inverters, is likely to be considerably higher than its average content per gas-powered vehicle.

The company produces wide EBITDA margins, has a reasonable debt balance and generates considerable free cash flow. The management is high quality. In 2014, private equity firm Blackstone acquired Gates and significantly improved its product line-up and quality, operating efficiency, culture and financial performance. Gates completed its IPO in 2018, with Blackstone retaining a 63% stake today.

There was no significant company-specific news in the past week.

GTES shares fell 6% in the past week and have 23% upside to our 16 price target. BUY

Molson Coors Beverage Company (TAP) is one of the world’s largest beverage companies, producing the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its revenues come from the United States, where it holds a 24% market share. Investors worry about Molson Coors’ lack of revenue growth due to its relatively limited offerings of fast-growing hard seltzers and other trendier beverages. Our thesis for this company is straightforward – a reasonably stable company whose shares sell at an overly discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently reinstated its dividend.

There was no significant company-specific news in the past week.

TAP shares rose 1% in the past week and have 32% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.6x estimated 2023 results, still among the lowest valuations in the consumer staples group and below other brewing companies. BUY

Sensata Technologies (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. 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 safety 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.

Sensata shares were selected as the Cabot Stock of the Week this week.

ST shares fell 6% in the past week and have 62% upside to our 75 price target. Our price target looks optimistic in light of the broad market sell-off and worries over a possible recession (which would slow demand in its automotive and other end-markets), but we will keep it for now, even as it may take longer for the shares to reach it. BUY

Growth/Income Portfolio

Stock (Symbol)Date AddedPrice Added4/10/23Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Cisco Systems (CSCO)11/18/2041.3251.3324.20%3.00%66Buy
Comcast Corp (CMCSA)10/26/2231.538.1821.20%3.00%42Buy

Buy Low Opportunities Portfolio

Stock (Symbol)Date AddedPrice Added4/10/23Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)2/22/2239.9943.849.60%2.10%54Buy
Aviva (AVVIY)3/3/2110.7510.39-3.30%7.00%14Buy
Barrick Gold (GOLD)3/17/2121.1319.42-8.10%2.10%27Buy
BigLots (BIG)4/12/2235.2411.32-67.90%10.60%25HOLD
Citigroup (C)11/23/2168.146.37-31.90%4.40%85Buy
Gates Industrial Corp (GTES)8/31/2210.7113.1322.60%0.00%16Buy
Molson Coors (TAP)8/5/2036.5352.844.50%3.10%69Buy
Sensata Technologies (ST)2/17/2158.5746.29-21.00%1.00%75Buy

Strong Buy – This stock offers an unusually favorable risk/reward trade-off, often one that has been rated as a Buy yet the market has sold aggressively for temporary reasons. We recommend adding to existing positions.
Buy – This stock is worth buying.
Hold – The shares are worth keeping but the risk/return trade-off is not favorable enough for more buying nor unfavorable enough to warrant selling.
Sell – This stock is approaching or has reached our price target, its value has become permanently impaired or changes in its risk or other traits warrant a sale.

Note for stock table: For stocks rated Sell, the current price is the sell date price.

CUSA Valuation and Earnings

Growth/Income Portfolio

2023 EPS
2024 EPS
Change in 2023 EstimateChange in 2024 EstimateP/E 2023P/E 2024
CSCO 51.14 3.76 4.030.0%0.0% 13.6 12.7
CMCSA 38.05 3.64 4.09-0.1%-0.3% 10.4 9.3

Buy Low Opportunities Portfolio

2023 EPS
2024 EPS
Change in 2023 EstimateChange in 2024 EstimateP/E 2023P/E 2024
ALSN 44.06 6.09 6.700.2%0.0% 7.2 6.6
AVVIY 10.37 0.54 0.620.0%0.0% 19.1 16.7
GOLD 19.44 0.80 1.00-1.8%-2.1% 24.3 19.5
BIG 11.17 (4.08) (2.31)0.0%0.0% (2.7) (4.8)
C 46.56 5.88 6.691.6%-1.2% 7.9 7.0
GTES 13.01 1.18 1.36-0.1%-0.1% 11.0 9.6
TAP 52.46 4.07 4.330.0%0.3% 12.9 12.1
ST 46.35 3.76 4.300.0%0.0% 12.3 10.8

Current price is yesterday’s mid-day price.
CSCO: Estimates are for fiscal years ending in July of 2023 and 2024

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.