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Value Investor
Wealth Building Opportunites for the Active Value Investor

copy of 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 Added2/1/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Arcos Dorados (ARCO)04-28-215.416.7725.1%7.50Buy
Aviva (AVVIY)03-03-2110.7511.8410.1%5.2%14.00Buy
Barrick Gold (GOLD)03-17-2121.1319.19-9.2%1.9%27.00Buy
Citigroup (C)11-23-2168.1066.08-3.0%3.1%85.00Buy
ConocoPhillips (COP)9-24-2165.0291.8741.3%2.0%89.00Hold
Molson Coors (TAP)08-05-2036.5347.7130.6%2.9%69.00Buy
Organon (OGN)06-07-2131.4233.125.4%3.4%46.00Buy
Sensata Technologies (ST)02-17-2158.5755.29-5.6%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

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

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 10.1% rate), currency and the chances that a socialist might win next 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.

In advance of its Investor Day on January 26, the company provided strong preliminary fourth-quarter results. Same-store sales compared to two years ago (pre-pandemic) rose 24% and Adjusted EBITDA rose above the prior quarterly record which was set in the fourth quarter of 2019. The company also said it plans to open at least 250 new locations over the next three years – an encouraging indicator of its confidence in its future. Most of the new stores will be in freestanding buildings, as the secular trend for mall-based traffic remains negative. Arcos’ innovative ideas are generating new ways to reach potential customers.

Arcos is presenting at the Credit Suisse 2022 Latin America Investment Conference this week.

ARCO shares rose 13% in the past week to a new 52-week high and have about 13% upside to our 7.50 price target. We remain steady in our conviction in the company’s recovery. 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.

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

Aviva shares rose 1% in the past week. Insurance company stocks are sensitive to financial market gyrations (in both directions) they have leveraged balance sheets with their principal tangible assets being investments and securities. Aviva shares have about 19% upside to our 14 price target. 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 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.

Barrick announced encouraging preliminary production results, saying that it will meet its annual guidance for the third consecutive year. Meeting/exceeding production guidance suggests that the company is functioning well – that the leadership understands its mining operations well enough to gauge their production capabilities and then deliver on its targets. Barrick continues to build credibility with investors by meeting its guidance. That said, Barrick will produce 4.44 million ounces this year, at the very low end of its 4.4 - 4.7-million-ounce guidance range.

The company said its fourth-quarter production costs would be about 4-6% lower than third quarter costs. With stronger production yet lower costs, Barrick’s earnings will likely be strong. The company reports on February 16.

Over the past week, commodity gold slipped 3% to $1,802/ounce. Per-ounce gold prices remain range-bound between $1,700 and $1,900. The 10-year Treasury yield rose to 1.80%. While this yield is just below a post-pandemic high, it is roughly equal to interest rates in late 2019, suggesting that yields could rise a lot more given the 7% inflation rate (compared to maybe 2% in late 2019). The next CPI data release is on February 10. Rarely have we so eagerly awaited this previously mundane statistic.

The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), ticked up to 96.38. The index remains about 3% below its pre-Covid late-2019 level of about 99.

Barrick shares fell 2% this past week and have about 41% 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.

On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.9% dividend yield. Barrick paid an additional $0.42/share in special distributions last year (no clarity on 2022 special dividends), lifting the effective dividend yield to 4.1%. 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.

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

Citi shares rose 3% over the past week and have about 28% upside to our 85 price target. The valuation remains attractive at 84% of tangible book value and 8.6x estimated 2022 earnings. Our set of peer banks currently trade at an average of 2.0x tangible book value and 12.7x estimated 2022 earnings. Citi shares are among the cheapest in the banking sector – a major attraction as expectations are low. As the bank grinds along with its turnaround, the valuation should continue to lift.

Citigroup investors enjoy a 3.1% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program. BUY


ConocoPhillips (COP), based in Houston, Texas, is the world’s largest independent E&P company, with about two-thirds of its production in the United States. Conoco’s shares are depressed, as investors avoid climate-unfriendly companies, have low interest in exposure to volatile and unpredictable oil and gas prices, worry that company management will lose its new-found capital spending discipline, and are concerned that OPEC+ will reopen their spigots, sending oil prices tumbling.

We see resilient oil prices, as demand remains strong, alternatives aren’t yet plentiful enough, supply growth is restrained as shareholders prioritize cash flow rather than capital spending, and as majors seek to reduce their carbon footprint. We like Conoco’s low valuation, investment-grade balance sheet, strong free cash flow, and public commitment to limiting its capital spending to 50% of its annual cash flow. The shares offer a respectable base-level dividend to shareholders that appears rock solid.

Conoco is expected to report $2.18/share in earnings when it reports on February 3.

West Texas Intermediate crude rose 4% from a week ago to $88.19/barrel, while natural gas in the United States is priced at $4.80, up 25% from a week ago. Cold weather across the heavily populated northeastern U.S. and in Europe, and rising military tensions in the Ukraine, continue to pressure natural gas prices.

ConocoPhillips shares rose 5% in the past week and are now above our recently raised 89 price target. As noted in our opening comments, we are moving ConocoPhillips to a Hold rating. HOLD


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 straight-forward – 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 fell 4% in the past week and have about 43% 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 8.2x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.8% 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. Organon was selected as Cabot’s Stock of the Week this week.

OGN shares rose 7% in the past week and have about 40% 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 3.4% 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.

Sensata reported reasonable fourth-quarter results but forward guidance was below the consensus estimates so the stock was moderately weak on the news.

In the quarter, adjusted earnings of $0.87/share rose 2% from a year ago and were about 7% above the consensus estimate. Revenues of $935 million rose 3% from a year ago, but fell 1% after adjusting out revenues from acquisitions and from currency effects. The revenues were about 2% above the consensus.

Revenues were held back by production weakness at automakers but helped by outgrowth (more content per vehicle, including electrification components, such that Sensata revenues grew more than the car industry), growth in industrial demand and acquisitions. The company’s profit margin contracted modestly due to higher labor and input costs along with higher “mega-trend” investments in electrification and other technologies that will help Sensata participate in faster-growing secular trends.

Despite full-year 2022 guidance being weaker than analyst estimates, Sensata anticipates reasonably good growth: revenues would increase by about 8% excluding acquisitions and earning per share would increase by 8% ex-currency. Analysts had previously expected 15% earnings per share growth.

Guidance was subdued partly due to an anticipated sluggish recovery of 7% growth in global auto production weighed down by China. The company also expects growth to stall in industrial demand and heavy/off-road vehicles.

The company continues to generate sizeable amounts of free cash flow while investing in new technologies that are producing meaningful revenues. Sensata’s balance sheet remains healthy and arguably underleveraged, even though the net debt balance increased modestly from a year ago due to its acquisitions and some inventory building. Sensata announced a new $500 million share repurchase program – a good move in our view as the shares are undervalued.

ST shares fell 3% in the past week and have about 33% upside to our 75 price target. BUY


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 March 2, 2022.