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Undervalued Stocks Advisor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Issue: October 5, 2022

Thank you for subscribing to the Cabot Undervalued Stocks Advisor. We hope you enjoy reading the October 2022 issue.

Following the sharp drop in stocks due to fears of a major policy error, we see an opportunity for subscribers to add to their existing positions in many of our recommended names at very attractive prices.

Is a deep recession likely? Perhaps we are instead experiencing an old-fashioned inventory cycle.

Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.

I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.

Cabot Undervalued Stocks Advisor Issue: October 5, 2022

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That Was Close … So, Now What?
Over the past few weeks, and particularly late last week, investors got a taste of real fear – that a policy error could compound the damage already inflicted by relentless inflation, rising interest rates, the surging dollar and a pending economic downturn. That potential policy error came in the form of the British government’s debt-funded tax-cut plan, ineptly announced about two weeks ago. Investors breathed a sigh of relief that the plan was withdrawn. Combined with oversold market conditions, the arrival of the fourth quarter, and some hope that inflation and U.S. Treasury rates will settle in the 4.5% to 5.0% range rather than spiral higher, markets have rebounded.

Many (most?) of our Cabot Undervalued Stocks Advisor stocks have been hammered more than the broad market. Subscribers should add to their existing positions at the unusually low prices. Barring an economic collapse, buying Gates Industrial (GTES) at 8.1x estimated 2023 earnings, Dow (DOW) at 7.9x and Allison Transmission (ALSN) at 5.3x seem like smart opportunistic moves for long-term investors and traders alike. These companies are well-managed, have strong balance sheets, are profitable and provide necessary products that are not subject to obsolescence by Web 3.0 or other secular trends.

Consumer-facing companies like Big Lots (BIG) are struggling with excess inventory problems. What appeared to be permanently elevated demand is fading into lackluster consumer interest that may extend into the holidays. As retailers slow their orders, their suppliers are struggling, as well, as seen in the fall-off of shares of Nike, VFC Corporation and others. Even FedEx and ocean freight companies are feeling the effects. In a seemingly unrelated industry, semiconductors, the same effect is emerging: too much inventory, which is backing up into slower production. Micron and Toshiba have recently announced production cuts, with others to follow (we’ll hear a lot more in upcoming earnings reports). At 8.6x earnings, shares of chip maker Sensata (ST) seem highly attractive.

Investors seem to be worrying that these struggles are a prelude to a deep recession. While this outcome is possible (widely respected investor Stanley Druckenmiller is supportive of this view), we see these forecasts as mostly an extrapolation of the current trend rather than our destiny. What appears more likely is that we are experiencing nothing more than an old-fashioned inventory cycle. In the post-war era, most recessions were produced by the Fed raising interest rates, which slowed industrial production, thus creating an inventory cycle. However, greatly improved inventory management capabilities (and the just-in-time strategy) combined with moderate inflation has led to smoother if not nonexistent inventory cycles since the early 1990s. Few investors today appreciate this fundamental shift.

If what we are seeing is a new, and admittedly massive, inventory cycle, then the downturn will roll through industry after industry but generally be self-correcting. Broad economic statistics like GDP may bounce around between narrowly positive and narrowly negative, but no deep recession would likely occur.

This kind of 5+5 (5% inflation and 5% ten-year Treasury yield), or perhaps 4+4, world would probably be a positive for industrial producers like the ones mentioned above, whose shares look like real bargains. Gold producers like Barrick Gold (GOLD), financials like Citigroup (C) at 6.2x earnings, State Street (STT) at 7.7x and Aviva (AVVIY) at 7.3x, and most of our other recommended stocks including Organon (OGN) at 4.7x would prosper, as well

Share prices in the table reflect Tuesday (October 4) closing prices. Please note that prices in the discussion below are based on mid-day October 4 prices.

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.

Send questions and comments to Bruce@CabotWealth.com.

Today’s Portfolio Changes
None.

Portfolio Changes Since Last Month
None.
A

Growth & Income
Portfolio

Growth & Income Portfolio stocks are generally higher-quality, larger-cap companies that have fallen out of favor. They usually have some combination of attractive earnings growth and an above-average dividend yield. Risk levels tend to be relatively moderate, with reasonable debt levels and modest share valuations.

Stock (Symbol)Date AddedPrice Added10/4/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Cisco Systems (CSCO)11-18-2041.3241.710.9%3.6%66.00Buy
Dow Inc (DOW) *04-01-1953.5046.37-13.3%6.0%60.00Buy
Merck (MRK)12-9-2083.4788.155.6%3.1%99.00Hold
State Street Corp (STT)8-17-2273.9665.26-11.8%3.9%94.00Buy

Current
price
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
CSCO 41.93 3.53 3.810.0%0.0% 11.9 11.0
DOW 46.02 7.31 5.80-1.1%-2.2% 6.3 7.9
MRK 88.31 7.38 7.46-0.1%-0.1% 12.0 11.8
STT 64.77 7.09 8.45-0.4%-0.8% 9.1 7.7

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 rose 3% in the past week and have 57% upside to our 66 price target. The valuation is attractive at 8.2x EV/EBITDA and 11.9x earnings, the shares pay a sustainable 3.6% dividend yield, the balance sheet is very strong, and Cisco holds a key role in the basic plumbing of technology systems even if its growth rate is only modest. BUY

CSCO_CUSA_10-5-22

Dow Inc. (DOW) merged with DuPont to create DowDuPont, then split into three companies in 2019 based on product type. The new Dow is the world’s largest producer of ethylene and polyethylene, the most widely used plastics. Investors undervalue Dow’s hefty cash flows and sturdy balance sheet largely due to its uninspiring secular growth traits, its cyclicality and concern that management will squander its resources. The shares are driven by: 1) commodity plastics prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; 2) volume sold, largely driven by global economic conditions, and 3) ongoing efficiency improvements (a never-ending quest of all commodity companies). We see Dow as having more years of strong profits before capacity increases signal a cyclical peak and expect the company to continue its strong dividend, reduce its pension and debt obligations, repurchase shares slowly and restrain its capital spending. Dow shares are a recommended Buy in our sister publication The Cabot Turnaround Letter.

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

Dow shares rose 5% in the past week and have 30% upside to our newly adjusted 60 price target (same as in The Cabot Turnaround Letter). The quarterly dividend appears readily sustainable and provides an appealing 6.1% yield. The shares trade at a low 4.4x EV/EBITDA multiple. BUY

DOW_CUSA_10-5-22

Merck (MRK) shares are undervalued as investors worry about Keytruda, a blockbuster oncology treatment (about 30% of revenues) that faces generic competition in late 2028. Also, its Januvia diabetes treatment may see generic competition soon, and like all pharmaceuticals, Merck is at risk from government price controls. Yet, Keytruda is an impressive franchise that is growing at a 20% rate and will produce solid cash flow for nearly six more years, providing the company with considerable time to replace the potential revenue loss. Merck’s new CEO, previously the CFO, is accelerating Merck’s acquisition program, which adds return potential and risks to the story. The company is highly profitable and has a solid balance sheet. It spun off its Organon business in June 2021 and we think it will divest its animal health segment sometime in the next five years.

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

Merck shares rose 3% in the past week and have 12% upside to our 99 price target. In a market spooked by recession fears, companies like Merck are less vulnerable to earnings erosion as consumers don’t cut their medications.

The company has a strong commitment to its dividend (3.1% yield) which it backs up with generous free cash flow, although its shift to a more acquisition-driven strategy will slow the pace of dividend increases. While the shares have pulled back, we are retaining our Hold rating as rising interest rates reduce the upside potential value of its shares. HOLD

MRK_CUSA_10-5-22

State Street Corporation (STT) – Based in Boston, State Street is the world’s largest custodian bank, with $38 trillion in assets under custody/administration. About 56% of its revenues are produced from back-, middle- and front-office services including custody, client reporting, electronic trading and full enterprise solutions for investment managers. The balance is produced from investment management fees on ETFs, foreign exchange fees, securities financing fees and net interest income. The industry has combined into four dominant firms due to economies of scale. State Street’s shares are out of favor and unchanged since 2007 due to concerns over its anemic growth and steady pricing pressure from competitors. However, we see State Street as a solid, well-capitalized franchise that provides critical services, with a slow-growth but steady revenue and earnings stream. Our interest in STT shares is that we can buy them at an attractive valuation. We also find the dividend yield appealing.
There was no significant company-specific news in the past week.

State Street shares rose 6% in the past week and have about 45% upside to our 94 price target. The company’s dividend (3.9% yield) is well-supported and backed by management’s strong commitment. BUY

STT_CUSA_10-5-22

Buy Low Opportunities
Portfolio

Buy Low Opportunities Portfolio stocks include a wide range of value opportunities, often with considerable upside. This group may include stocks across the quality and market cap spectrum, including those with relatively high levels of debt and a less-clear earnings outlook. The stocks may not pay a dividend. In all cases, the shares will trade at meaningful discounts to our estimate of fair value.

Stock (Symbol)Date AddedPrice Added10/4/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)02-22-2239.9935.99-10.0%2.3%48.00Buy
Arcos Dorados (ARCO)04-28-215.417.8545.1%2.0%8.50Buy
Aviva (AVVIY)03-03-2110.759.30-13.5%6.0%14.00Buy
Barrick Gold (GOLD)03-17-2121.1316.18-23.4%2.5%27.00Buy
BigLots (BIG)04-12-2235.2417.89-49.2%6.7%35.00Hold
Citigroup (C)11-23-2168.1044.32-34.9%4.6%85.00Buy
Gates Industrial Corp (GTES)08-31-2210.7110.53-1.7%0.0%14.00Buy
Molson Coors (TAP)08-05-2036.5349.2934.9%3.1%69.00Buy
Organon (OGN)06-07-2131.4225.66-18.3%4.4%46.00Buy
Sensata Technologies (ST)02-17-2158.5739.99-31.7%1.1%75.00Buy

Current
price
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
ALSN 35.67 5.75 6.680.0%0.0% 6.2 5.3
ARCO 7.69 0.45 0.530.0%0.0% 17.1 14.5
AVVIY 9.27 1.05 1.285.6%5.6% 8.8 7.3
BIG 17.52 (4.55) 0.720.0%0.0% (3.9) 24.3
C 44.28 7.30 7.190.0%-0.6% 6.1 6.2
GOLD 16.29 0.95 0.98-5.8%-3.6% 17.2 16.7
GTES 10.49 1.20 1.30-1.6%-1.5% 8.7 8.1
OGN 25.63 5.00 5.440.0%0.0% 5.1 4.7
ST 39.91 3.35 3.920.0%0.0% 11.9 10.2
TAP 49.46 3.95 4.210.0%0.0% 12.5 11.7

Current price is yesterday’s mid-day price.

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 35% 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. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle. 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.

Allison shares rose 6% in the past week and have 35% upside to our 48 price target. The stock pays an attractive and sustainable 2.4% dividend yield. BUY

ALSN_CUSA_10-5-22

Arcos Dorados (ARCO), which is Spanish for “golden arches,” is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina and Chile. The shares are depressed as investors worry about the pandemic, political/social unrest, inflation and currency devaluations. However, the company has a solid brand, high recurring demand, impressive leadership (including founder/chairman who owns a 38% stake) and successful experience in navigating local conditions, along with a solid balance sheet and free cash flow.

Macro issues have a sizeable impact on the shares’ trading, including local inflation and the Brazilian currency. Since early 2020, the currency has generally stabilized in the 1.00 real = $0.20 range. As the company reports in U.S. dollars, any strength in the local currency would help ARCO shares. Favorably, Latin American currencies have generally held value against the dollar even as the dollar has surged against developed nation currencies.

A near-term driver is the October presidential election. This past week, challenger and former president Luiz Inácio Lula de Silva received 48% of the vote, with incumbent Bolsonaro receiving 43%. As no candidate received a majority, the second round will take place on October 30. The initial round was in some ways an ideal outcome for Arco, as Lula received more votes but not a majority, which will likely moderate his left-leaning approach assuming he wins in the run-off. A win by Bolsonaro may similarly moderate his far-right tendencies. One risk if Bolsonaro loses by a close margin in the run-off is that he might launch a “vote steal” campaign, which could create political chaos and possible violent protests, neither of which would be favorable for Arcos.

ARCO shares rose 11% this past week and have 11% upside to our 8.50 price target. BUY

ARCO_CUSA_10-5-22

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.

Over the past few weeks, Aviva shares fell sharply as local bond and stock prices fell along with the British pound. These prices have stabilized recently with the backtracking of tax cuts and other near-term, market-unfriendly government policies. Aviva shares are rebounding sharply, up 14% from their closing low last week. We look forward to an update on Aviva’s capital position and outlook when it reports interim results in early November.

The boost in the British pound helped lift earnings estimates by about 5.6% in the past week.

Based on management’s estimated dividend for 2023 (which remains credible but is subject to an increase less than the current guidance for a 48% boost compared to the 2022 dividend), the shares offer a generous 9.0% yield. Based on this year’s actual dividend, the shares offer an attractive 6.0% dividend yield.

Aviva shares rose 7% in the past week. The shares have about 51% upside to our 14 price target. BUY

AVVIY_CUSA_10-5-22

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 new and 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 jumped 5% to $1,726/ounce. The 10-year Treasury yield slid to 3.59%. Investors are starting to anticipate the “end-game” when Treasuries will peak at a roughly 4.5% to 5.0% yield to roughly match or slightly exceed the anticipated inflation rate in a year or so. If this scenario pans out, gold and equity prices in general should rise.

The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), fell to 110.67, down about 3% since a week ago. More traders are considering that a coordinated program by major central banks would lead to a halt, at least, of the dollar’s surge. This currency cap would likely boost gold prices.

Any wavering by the Fed in its now-strident rate hike campaign would also likely result in gold rebounding sharply. Until this happens, gold will probably remain out of favor. Investing in gold-related equities is a long-term decision – investors shouldn’t allow near-term weakness to deter their resolve.

Barrick shares surged 16% in the past week and have about 66% upside to our 27 price target. Our resolve with Barrick shares remains undaunted through the recent sell-off. BUY

GOLD_CUSA_10-5-22

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 dismal first-quarter results although second-quarter results, while dismal, were better than the market’s dour consensus. The company needs to offload its still-bloated inventory at sharp discounts while also now loading the company with what is probably permanent debt.

We are retaining our HOLD rating for now: investor expectations are sufficiently depressed to provide some downside cushion, while management should be able to extract itself from the worst of the inventory problem over the next few quarters. Nevertheless, the Big Lots investment is now high-risk due to the new debt balance, the lost value from the inventory glut and the likelihood of a suspension of the dividend.

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

Big Lots shares fell 4% this past week. We reiterate our view that Big Lots shareholders who are not willing or able to sustain further losses in the shares should sell now. There is no reasonably definable floor to a stock like Big Lots when fundamentals and valuation are ignored while investors reduce their risk exposure.

The stock has 100% upside to our $35 price target. The shares offer a 6.8% dividend yield, although, as noted, investors should not rely on this dividend being sustained. HOLD

BIG_CUSA_10-5-22

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.

With the exceptional volatility in financial markets, investors worry that a Lehman-like crisis, perhaps triggered by a collapse of Swiss-based Credit Suisse, will threaten Citi’s financial stability. Our view is that it is quite reasonable to expect some type of financial accident, but that major banks, including Citi, have tamped down their risk and bolstered their capital to such a large extent over the past decade that they are highly unlikely to suffer a cataclysmic collapse in such a situation.

This past week, the yield spread between the 90-day T-bill and the 10-year Treasury note, which approximates the drivers behind Citi’s net interest margin, narrowed back to 0.27% after spiking last week. The current spread is still near the low end of its range over the past 40 years, with a 2.00 percentage point spread being a rough average. If spreads were to return to a two-point spread, bank profits would likely surge, assuming that other sources of profits including credit quality remained unchanged.

Citi shares trade at 55% of tangible book value and 6.2x estimated 2023 earnings. The remarkably low valuations assume an unrealistically dim future for Citi.

Citi shares rose 4% in the past week and have about 92% upside to our 85 price target. Citigroup investors enjoy a 4.6% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program once it reaches its new target capital ratio and if a slowing/stalling economy doesn’t meaningfully increase its credit costs. BUY

C_CUSA_10-5-22

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 rose 7% in the past week and have about 33% upside to our 14 price target. BUY

GTES_CUSA_10-5-22

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 4% in the past week and have about 40% 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 8.3x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 3.1% dividend yield only adds to the appeal. BUY

TAP_CUSA_10-5-22

Organon & Company (OGN) 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. At our initial recommendation, the stock traded at a highly attractive 4x earnings.

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

OGN shares rose 6% in the past week and have about 79% upside to our 46 price target (using the same target as the Cabot Turnaround Letter). The shares continue to trade at a remarkably low valuation while offering an attractive 4.4% dividend yield. BUY

OGN_CUSA_10-5-22

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.

Overall, the Sensata investment remains sharply underwater as its revenue growth is challenged by new economic cycle pressures on top of the post-pandemic supply chain issues. The company is well-positioned for the post-recession, electric vehicle environment, but investors will have to wait for perhaps a year for that to arrive. The shares are still worth holding onto given their now-low valuation and ability to financially endure the downturn.

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

ST shares rose 6% in the past week and have about 88% upside to our 75 price target. Our price target looks optimistic in light of the broad market sell-off, but we will keep it for now, even as it may take longer for the shares to reach it. BUY

ST_CUSA_10-5-22

Disclosure: The chief analyst of the Cabot Undervalued Stocks Advisor personally holds shares of every recommended security, except for “New Buy” recommendations. The chief analyst may purchase or sell recommended securities but not before the fourth day after any changes in recommendation ratings has been emailed to subscribers. “New Buy” recommendations will be purchased by the chief analyst as soon as practical following the fourth day after the newsletter issue has been emailed to subscribers.

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.


The next Cabot Undervalued Stocks Advisor issue will be published on November 2, 2022.

About the Analyst

Bruce Kaser

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.

Previously, he led the event-driven small/midcap strategy for Ironwood Investment Management and was Senior Portfolio Manager with RBC Global Asset Management where he co-managed the $1 billion value/core equity platform for over a decade. He earned his MBA degree in finance and international business from the University of Chicago and earned a Bachelor of Science in finance, with honors, from Miami University (Ohio).

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.