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Value Investor
Wealth Building Opportunites for the Active Value Investor

April 6, 2022

The first quarter was kind to our stocks, as they rose, on average, +8.8%, while the broad market fell. We comment on the sources of the gains and any recent news on our recommended stocks.

Market Overview

First Quarter 2022 Review
The first quarter was kind to our Cabot Undervalued Stocks Advisor names. Our stocks, on average, including the 10% profit from ConocoPhillips (COP) sold mid-quarter, rose 8.8%, far surpassing the (4.9%) loss for the S&P 500 in the period. This nearly 14% performance edge is based on price changes only, and would be a bit wider if dividends were included, as our stocks have a 3.3% average yield compared to the S&P 500 at about 1.3%.

This large outperformance over such a brief time period, I can guarantee, will rarely if ever happen again. But sometimes, an accumulation of undervaluation and improving fundamentals in our stocks, combined with an accumulation of overvaluation and maxxed-out fundamentals elsewhere, come together at the same time to produce a shining quarter. As a contrarian investor who has endured long stretches in the wilderness, wondering if banishment was the natural and permanent fate of such a strategy, a few moments near the edge of the spotlight are plenty adequate to remind me that investment fads come and go, but underlying value is forever.

The top performer in the quarter was Arcos Dorados (ARCO), gaining 40%. After its own time in the wilderness, including at one point a 20% decline from our cost, the shares have rebounded as the company’s fundamentals regained their strength. A tailwind from the Brazilian currency contributed no small part to the recent gains. Barrick (GOLD) shares rose 29% and Bristol-Myers Squibb (BMY) shares gained over 15% – similarly combining better fundamentals with some recognition by the market of their undervalued shares. Not every name glowed. Sensata (ST) shares fell 18% as investors offloaded semiconductor stocks in general. We remain confident in Sensata’s business and valuation and remain patient even if other investors lose faith. Cisco Systems (CSCO) fell 12% and Citigroup (C) fell 12%, as the latter’s fundamentals remained weak, and its turnaround horizon was pushed out. Of the 13 stocks on our roster, ten had positive returns.

While we invest with a long-term mindset, we nevertheless pay attention to our periodic results relative to the broad market. This helps us understand broad conditions and trends in the market, yet also forces us to look at companies and stocks that we otherwise might ignore. We may set aside what we find under nearly every stone we turn over, but the very process of turning over the stones expands our knowledge base about new industries and new valuation techniques, and (hopefully) makes us better investors.

Unlike most mutual fund managers, however, who will change their holdings solely to reduce their chances of underperforming over short-term time periods, we buy and sell only to generate strong long-term performance. If we don’t like a stock, we won’t buy it, regardless of whether, like Apple (AAPL), it has a huge 7.1% weighting in the index and is a sizeable driver of the S&P 500’s returns. This is a luxury that few, if any, fund managers can afford.

Will we publish results every quarter? No. But we won’t hide during periods of lousy returns. If fate (or, more likely, a stretch of lame investing ideas) relegates us back to the performance wilderness, we’ll share those numbers, too. Feel free to call us out if we don’t.

What do we see ahead? The market, economy, government deficits, Fed policy, global geopolitics, national politics, commodity prices, interest rates, the pandemic – all are evolving at an accelerated pace. The future has always been unpredictable, but with so many variables changing so quickly and interacting so strongly, the most likely three-to-five-year outcome lurches around as abruptly as the red dot coming out of a laser-pointer held by an excited child. As uncertainty increases, human instinct spurs investors to shorten their time horizons. To focus on the here and now. This should serve value-oriented investors, with a focus on undervaluation, earnings and balance sheets, quite well. But, of course, no guarantees.

Share prices in the table reflect Tuesday (April 5) closing prices. Please note that prices in the discussion below are based on mid-day April 5 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.

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Today’s Portfolio Changes

Portfolio changes during the past month

Upcoming Earnings Reports
Thursday, April 14: Citigroup (C)
Thursday, April 21: Dow (DOW)
Monday, April 25: The Coca-Cola Company (KO)
Tuesday, April 26: Sensata Technologies (ST)
Thursday, April 28: Merck & Company (MRK)
Thursday, April 28: Allison Transmission Holdings (ALSN)
Friday, April 29: Bristol-Myers Squibb (BMY)
Friday, April 29: Molson Coors Beverage Company (TAP)

Growth & Income Portfolio


Growth & Income

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.

Growth/Income Portfolio
Stock (Symbol)Date AddedPrice Added4/5/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Bristol-Myers Squibb (BMY)04-01-2054.8274.4335.8%2.9%78.00Buy
Cisco Systems (CSCO)11-18-2041.3254.9232.9%2.8%66.00Buy
Coca-Cola (KO)11-11-2053.5862.4716.6%2.7%64.00Buy
Dow Inc (DOW) *04-01-1953.5063.4918.7%4.4%78.00Buy
Merck (MRK)12-9-2083.4783.720.3%3.3%99.00Buy

Growth/Income Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
BMY 74.83 7.80 8.32-0.1%-0.4% 9.6 9.0
CSCO 55.15 3.44 3.73-0.3%0.0% 16.0 14.8
KO 62.91 2.46 2.640.0%0.0% 25.6 23.8
DOW 63.89 7.04 6.883.1%3.3% 9.1 9.3
MRK 84.82 7.31 7.240.0%0.1% 11.6 11.7

*Note: Current price is yesterday’s mid-day price. CSCO: Estimates are for fiscal years ending in July

Bristol-Myers Squibb Company (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.

The European Commission approved the company’s Opdivo+Yervoy treatments for certain kinds of cancer. The approval adds credibility to management’s strategy.

BMY shares rose 2% in the past week. The shares are approaching the all-time closing high of 76.77 set on July 14, 2016, and have about 4% upside to our 78 price target. Valuation remains modest at 9.6x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.6x EV/EBITDA multiple is below the 9-10x or better multiple of its peers.

The shares have provided investors with a strong, defensive equity position, given the company’s cash-laden balance sheet and strong free cash flow, relative isolation from the effects of inflation and the war in Europe, the shares’ meaningful dividend yield and low valuation.

Assuming an average of $15 billion/year in free cash flow, the shares trade at a 9% free cash flow yield.

Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 2.9% dividend yield that is well-covered by enormous free cash flow make a compelling story. BUY


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 1% in the past week and have 20% upside to our 66 price target. The dividend yield is an attractive 2.8%. BUY


The Coca-Cola Company (KO) is best-known for its iconic soft drinks yet nearly 40% of its revenues come from non-soda beverages across the non-alcoholic spectrum. Its global distribution system reaches nearly every human on the planet. Coca-Cola’s longer-term picture looks bright, but the shares remain undervalued due to concerns over the pandemic, the secular trend away from sugary sodas, and a tax dispute which could cost as much as $12 billion (likely worst-case scenario). The relatively new CEO James Quincey (2017) is reinvigorating the company by narrowing its oversized brand portfolio, boosting its innovation and improving its efficiency, as well as improving its health and environmental image. Coca-Cola’s balance sheet is sturdy, and its growth investing, debt service and dividend are well-covered by free cash flow.

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

KO shares rose 1% in the past week and have about 2% upside remaining to our 64 price target. Given the narrow upside to our target price, we are considering KO shares for a possible ratings change. BUY


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/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.

Industry conditions will likely be strong for a while. Dow remains well-positioned to generate immense free cash flows over the next few years, even as the stock market cares little about cash but rather is focused on the incremental newsflow related to economic growth, energy prices and any industry capacity changes. In the meantime, Dow shareholders can collect a highly sustainable 4.4% dividend yield while waiting for more share buybacks, more balance sheet improvement, more profits and a higher valuation.

There was no significant company-specific news in the past week. We note the 3%+ uptick in earnings estimates for each of the next two years. The 2022 earnings estimate today is nearly double what it was a year ago, reflecting the enduring strength of the current plastics price recovery.

Dow shares were flat in the past week and have 22% upside to our 78 price target. BUY


Merck (MRK) shares are undervalued as investors worry about Keytruda, a blockbuster oncology treatment (about 30% of revenues) which faces generic competition in late 2028. Also, its Januvia diabetes treatment may see generic competition next year, and like all pharmaceuticals it is at risk from possible government price controls. Yet, Keytruda is an impressive franchise that is growing at a 20% rate and will produce solid cash flow for nearly seven 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 last June 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 4% in the past week and have about 17% upside to our 99 price target. The company has a strong commitment to its dividend (3.3% 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. BUY


Buy Low Opportunities Portfolio

Buy Low Opportunities

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.

Buy Low Opportunities Portfolio
Stock (Symbol)Date AddedPrice Added4/5/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)02-22-2239.9937.81-5.5%2.2%48.00Buy
Arcos Dorados (ARCO)04-28-215.417.8244.5%1.9%8.50Buy
Aviva (AVVIY)03-03-2110.7511.476.7%7.2%14.00Buy
Barrick (GOLD)03-17-2121.1324.4615.8%1.6%27.00Buy
Citigroup (C)11-23-2168.1051.58-24.3%4.0%85.00Buy
Molson Coors (TAP)08-05-2036.5351.3940.7%2.6%69.00Buy
Organon (OGN)06-07-2131.4235.4012.7%3.2%46.00Buy
Sensata Technologies (ST)02-17-2158.5749.34-15.8%75.00Buy

Buy Low Opportunities Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
ALSN 38.14 5.88 7.020.0%0.0% 6.5 5.4
ARCO 7.94 0.33 0.430.0%0.0% 24.0 18.5
AVVIY 11.47 1.15 1.39-2.2%0.0% 9.9 8.3
GOLD 24.87 1.10 1.180.7%4.2% 22.7 21.0
C 51.88 6.75 7.70-4.3%-3.3% 7.7 6.7
TAP 51.99 3.95 4.28-0.3%-0.2% 13.2 12.1
OGN 35.34 5.48 5.680.0%0.0% 6.4 6.2
ST 49.68 3.98 4.58-0.3%-0.4% 12.5 10.8

Allison Transmission Holdings, Inc. (ALSN) – Allison Transmission is a midcap ($6.4 billion market cap) manufacturer of vehicle transmissions. 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. However, Allison produces no car and light truck transmissions, instead 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.

Allison completed a small $23 million acquisition of a specialty off-road vehicle components maker in India. While almost irrelevantly small, the deal highlights the company’s incremental and low-risk approach to acquisitions and its interest in expanding into attractive markets like India.

Allison shares fell 6% in the past week and have 26% upside to our 48 price target. The shares offer an appealing 2.2% dividend yield. BUY


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, as well as political/social unrest, inflation and currency devaluations. However, the company has a solid brand and high recurring demand and is well-positioned to benefit as local economies reopen. The leadership looks highly capable, led by the founder/chairman who owns a 38% stake, and has the experience to successfully navigate the complex local conditions. Debt is reasonable relative to post-recovery earnings, and the company is currently producing positive free cash flow.

Macro issues, including issues in Brazil including its economic conditions (in particular, inflation, running at a 10.5% rate), currency and the chances that a socialist might win this year’s Brazilian presidential elections will continue to move ARCO shares. Brazil is one of the most Covid-vaccinated countries in the world, which reduces pandemic-related demand risks.

The Brazilian currency, the real (BRL), has appreciated about 22% year to date compared to the U.S. dollar. As Arcos’ profits are reported in U.S. dollars, the gain in the local currency is a huge tailwind to Arcos’ shares. From a longer-term perspective, the BRL has depreciated 60% in the past decade compared to the dollar (see BRL chart below). Looking at a stock chart, it would seem that ARCO shares could readily rebound back to their 2012 level of around $25/share. But this is unlikely unless the BRL and other major Latin American currencies recover.


Chart courtesy of XE, part of Euronet Worldwide.

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

ARCO shares fell 3% in the past week and have 7% upside to our recently increased 8.50 price target. BUY


Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc was hired as the new CEO in July 2020 to revitalize Aviva’s laggard prospects. She divested operations around the world to re-focus the company on its core geographic markets (U.K., Ireland, Canada), and is improving Aviva’s product competitiveness, rebuilding its financial strength and trimming its bloated costs. Aviva’s dividend has been reduced to a more predictable and sustainable level with a modest upward trajectory. Excess cash balances are being directed toward debt reduction and potentially sizeable special dividends and share repurchases.

Much of our interest in Aviva is based on its plans for returning its excess capital to shareholders, including share repurchases and dividends. These distributions could be substantial. We also look for incremental shareholder-friendly pressure from highly regarded European activist investor Cevian Capital, which holds a 5.2% stake.

The company named Charlotte Jones as chief financial officer. Jones joined from RSA Insurance where she was CFO. She also has prior experience as a deputy group CFO at Deutsche Bank and as a senior finance executive at Jupiter Fund Management (a publicly traded U.K. investment firm). She appears well-qualified for the Aviva role.

Aviva shares fell 4% in the past week and have about 22% upside to our 14 price target. The projected dividend, which would produce a generous 7.2% yield, looks fully sustainable. BUY


Barrick (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.

Over the past week, commodity gold ticked higher to $1,933/ounce, remaining just above its $1,700 to $1,900 trading range. The 10-year Treasury yield ticked up to 2.54%. The spread between this yield and inflation remains exceptionally wide at 5.4 percentage points compared to a long-term average spread of perhaps one to two percentage points, strongly suggesting many more interest rate hikes ahead. The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), rose to 99.26, in-line with its pre-pandemic level. Part of the dollar strength comes at the expense of the Japanese yen, which slumped nearly 8% in only a few weeks and is the topic of much debate among currency watchers.

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

Barrick shares rose 1% over the past week and have about 9% upside to our 27 price target. The price target is based on 7.5x estimated steady-state EBITDA and a modest premium to our estimate of $25/share of net asset value. BUY


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.

The bank said it would pause its underwriting of SPACs due to increased scrutiny of these vehicles by the U.S. government. SPAC deals have been a sizeable source of profits for the bank, although most investors today have already assumed that this business is fading away. Nevertheless, this step adds yet another small weight on Citi shares.

Citi also said that it will exit its consumer banking business in Bahrain as part of its exit from unprofitable or nonstrategic businesses. It will retain its corporate/institutional business there.

Citi shares fell 8% over the past week and have about 64% upside to our 85 price target. The flattened yield curve and concerns about a recession continue to weigh on the shares.

The valuation remains attractive at 66% of tangible book value and 7.7x estimated 2022 earnings. Estimates continue to slip following the disappointing Investor Day outlook, such that the valuation isn’t improving much despite the lower share price. This stock may have some of the earmarks of a value trap, but we believe the underlying earning power and asset value remain solid despite the steady erosion of near-term earnings estimates.

As long as the bank can execute its turnaround, the shares remain highly discounted. Investors have largely lost patience with Citibank. We are holding tight to the shares as our confidence remains sturdy and the shares remain overly discounted on a price/book basis as well as on an earnings basis.

Citigroup investors enjoy a 3.9% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program. 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 slipped 4% in the past week and have about 33% 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 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.6% dividend only adds to the appeal. BUY


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 were flat in the past week and have about 30% 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 3.2% dividend yield. 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 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.

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

ST shares fell 7% in the past week and have about 51% upside to our 75 price target. BUY


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.

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.

The next Cabot Undervalued Stocks Advisor issue will be published on May 4, 2022.