Please ensure Javascript is enabled for purposes of website accessibility
Value Investor
Wealth Building Opportunites for the Active Value Investor

August 10, 2022

Investors seem to have abandoned commodity gold and the shares of gold miners like Barrick Gold. The commodity gold price has slipped 11% from its recent peak of $2,043/ounce while Barrick’s shares have tumbled 37% since reaching nearly $26/share earlier this year.

Wither Gold (and Barrick Gold shares)?
Investors seem to have abandoned commodity gold and the shares of gold miners like Barrick Gold. The commodity gold price has slipped 11% from its recent peak of $2,043/ounce while Barrick’s shares have tumbled 37% since reaching nearly $26/share earlier this year. One statistic released by the government’s Commodity Futures Trading Commission shows that the net position (whether traders are bullish or bearish based on their holdings) for gold traders dipped into negative territory for the first time in over three years.

One of the most difficult challenges that investors have with value stocks is to hang onto them when the share price goes down. If the underlying value is there, however, then the day-to-day share price is just a sentiment indicator. This is the case with Barrick today.

Fundamentally, Barrick is strong, with a solid balance sheet, capable management and good mines. While there is a risk that some of their mines get nicked by corrupt governments in shaky countries, Barrick has generally been able to keep the financial impact to a minimum. Barrick reported reasonable results earlier this week, helping to support the case that the company is fundamentally solid. And, at just over 16/share, the stock discounts a fairly dour future.

Commodity gold has been hit by the strong dollar and rising interest rates. These are two of the drivers of gold prices, and both are moving in the wrong direction (pressuring gold). What we see, though, is that gold has remained remarkably resilient even in the face of these pressures.

Any relenting by the Fed on its campaign to rein in inflation would likely push gold substantially higher. This might not happen in the immediate future, but it would appear inevitable despite the Fed’s tough talk.

What was a more abstract issue but now is more tangible is the Taiwan situation. While it is impossible to predict the likelihood or timing of outright military hostilities, both metrics appear to be moving in the wrong direction (more likely and nearer, rather than less likely and further away). A conflict could result in sizeable losses for the U.S. military (even with a repulsion of an attack on the island) or an inability to fully repel an attack. A recent article in Bloomberg describing the outcomes of various war game scenarios isn’t particularly encouraging. Any such negative outcome would seemingly be a huge positive for gold, partly if it results in a loss of confidence in the U.S. dollar.

With Barrick, we are left with a solid company whose shares are out-of-favor and undervalued. For reference, the last time Barrick traded at this price, commodity gold traded at $1,250/ounce or so.

I personally own Barrick shares and am keeping my position and the Buy rating. Patience, however, is required.

Share prices in the table reflect Tuesday (August 9) closing prices. Please note that prices in the discussion below are based on mid-day August 9 prices.

Note to new subscribers: You can find additional color on our thesis, recent earnings reports and other news on recommended companies in prior editions of the Cabot Undervalued Stocks Advisor, particularly the monthly edition, on the Cabot website.

Send questions and comments to

Today’s Portfolio Changes

Last Week’s Portfolio Changes

Upcoming earnings reports
Wednesday, August 10: Aviva plc (AVVIY)
Wednesday, August 10: Arcos Dorados (ARCO)
Wednesday, August 17: Cisco Systems (CSCO)

Growth/Income Portfolio
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.

While Cisco shares’ round-trip from our initial recommendation at 41.32 to 64 and back to around 43 is frustrating, this is not the time to sell the stock. The fundamentals remain reasonably stable and likely to tick back upward, and profits seem likely to improve, as well. The shares will likely come back to life as earnings reports show favorable growth and profit trends, so investors will need some patience. If we have a recession in global tech spending, Cisco would likely feel the downturn but not as severely as other technology companies due to the mission-critical nature of its products and services.

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

CSCO shares were flat in the past week and have 47% upside to our 66 price target. The valuation is attractive at 9.2x EV/EBITDA and 13.3x earnings, the shares pay a sustainable 3.4% 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

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 CEO James Quincey (since 2017) is reinvigorating the company by narrowing its over-sized 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.

On July 26, Coca-Cola reported a solid quarter – a “beat and raise” in Street parlance. The company raised its full-year organic revenue growth guidance to +12-13% from +7-8%, as it sees continued strength in demand and pricing. Coke also raised its guidance for comparable currency-neutral earnings per share growth to +14-15% from +8-10% due to the higher revenues. The company is participating in the global post-pandemic volume recovery as consumers shift to out-of-home activities including travel, while also being able to raise its prices to help offset cost inflation.

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

KO shares slipped 1% in the past week and have 9% upside to our 69 price target. Coca-Cola’s fundamentals remain sturdy with respectable revenue, profit and free cash flow growth. Management continues to focus on execution in its core business while generally avoiding any major non-core commitments. HOLD

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.

On July 21, Dow reported good second quarter earnings with third quarter guidance that was basically in line with estimates. But the macro environment (pricing and costs) is shifting from positive toward neutral, and investors worry about a domestic and global recession, so the shares may stay out of favor. However, the company is likely to remain highly profitable, in a solid competitive position, with strong free cash flow and an underleveraged balance sheet.

In the quarter, volumes were flat compared to a year ago. The driver of Dow’s revenue growth and huge profits are the sharply higher prices it receives. But, the pace of price increases decelerated to +16% in the second quarter, from +28% in the first quarter and +39% in the fourth quarter, suggesting that the company’s ability to raise prices may be reaching a limit. Rising raw material and energy costs are also starting to weigh more on profits.

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

The quarterly dividend provides a 5.3% yield, and the shares trade at a low 4.6x EV/EBITDA multiple. Barring a deep recession, collapse in oil prices or a surge in supply, Dow’s fundamental earnings picture seems solid.

Dow shares rose 2% in the past week as recession fears increased. The shares have 49% upside to our 78 price target and offer an attractive and what appears to be sustainable 5.3% dividend yield. 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 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.

On July 28, Merck reported a solid quarter and maintained its full-year 2022 guidance, but didn’t comment on rumors of a possible acquisition of Seagen. We believe Merck will be an active buyer of treatments and companies to fill the lost revenues as Keytruda loses its patent protection in 2028. The earnings guidance range was narrowed but the midpoint of $7.30/share was unchanged. While the changes seem uninspiring at the margin, the guidance calls for an impressive 18-20% revenue growth and 36% earnings growth. For 2022, the consensus earnings estimate of $7.37 is seven cents above the company’s guidance. We expect the company to beat this full-year estimate.

On August 5, Merck released its 10-Q form, showing that the net debt balance continues to tick downwards, and is currently $21.5 billion, compared to $25 billion at year end. Merck appears to be hoarding its cash to preserve its acquisition firepower.

It appears that the Inflation Reduction Act will be signed into law. One component of the Act is the approval for the U.S. Government to negotiate prices for prescription drugs. The negotiations will phase in over a period lasting a decade or more.

Setting aside the potential disincentive for pharma companies to invest in new treatments, if the bill becomes law it would likely have a minimal impact in the next few years on Merck’s revenues. But it creates a cap, of sorts, on the size and pace of potential future revenues from patented treatments. And, it creates a new source of uncertainty: will it open the door to an accelerated pace of pricing constraints, or will it be reversed if Republicans gain control of Congress and the White House at some point? And, will Merck replace this revenue by starting its new treatments at higher prices than it otherwise would, or by raising prices for existing treatments at a faster pace? Regardless of one’s political views, the bill adds a new layer of uncertainty regarding the future cash flows for pharma companies like Merck.

Merck shares rose 3% in the past week and have about 10% upside to our 99 price target. 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

Buy Low Opportunities Portfolio
Allison Transmission Holdings, Inc. (ALSN) – Allison Transmission is a mid-cap ($3.6 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.

On August 3, Allison reported adjusted earnings of $1.26/share, rising 25% from a year ago but falling 20% short of the $1.57 consensus estimate. Some data services showed a consensus of $1.35, and some services adjusted the reported earnings to $1.35. Either way, the company appears to have fallen short of expectations. Revenues rose 10% but were about 4% below estimates. Adjusted EBITDA rose 7%. Overall, a reasonable quarter for this impressive company.

Allison re-iterated its full-year Adjusted EBITDA and Adjusted Free Cash Flow guidance although it incrementally narrowed the range. We view this as a confidence-builder in the full-year outlook, but beyond year-end the outlook is murkier.

The company continues to see healthy demand, particularly in its core North American On-Highway segment (about half of sales) which posted a 13% increase in revenues. All segments but Defense (4% of sales) showed reasonably positive sales growth, as well. Operating profits rose 12%, as higher prices and lower overhead spending more than offset elevated materials costs and higher engineering spending.

Allison’s cash flow remains healthy although weaker than a year ago as the company’s working capital consumed more cash. The balance sheet is strong. As the company continues to repurchase its shares, the share count continues to decline, down 11% from a year ago.

Allison shares fell 7% in the past week due to the below-consensus earnings, and have 27% upside to our 48 price target. The stock pays an attractive and sustainable 2.2% dividend yield to help compensate investors. 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 re-open. 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 related to its economic conditions (in particular inflation, running at an 11.7% rate), currency and the chances that a socialist might win this year’s Brazilian presidential elections, will continue to influence ARCO shares.

Arcos is expected to report adjusted earnings of $0.14/share on Wednesday.

ARCO shares rose 9% in the past week and have 6% upside to our 8.50 price target. The company reports earnings on Wednesday morning, after our publishing deadline but before the delivery time. With the shares trading so close to our price target, we would normally reduce the rating to HOLD. But, given the timing, this seems pointless. However, we may be changing our rating depending on the report. If so, we will send an alert. 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.

Aviva is expected to report first half 2022 earnings of £0.17/share, or about $0.41/ADR, on Wednesday.

There was no significant company-specific news in the past week. Please note that the ticker symbol for the ADS has reverted back to “AVVIY” following their overly-complicated share buyback transaction.

Aviva shares rose 4% in the past week and have about 41% upside to our 14 price target. Based on management’s estimated dividend for 2023 (which we believe is highly credible), the shares produce a generous 8.3% yield. Based on this year’s actual dividend, the shares offer an attractive 5.6% dividend yield. 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.

On August 2, Barrick reported second-quarter earnings of $0.24/share, down 17% from a year ago but 8% above the $0.22 consensus estimate. Revenues slipped 1% from a year ago as gold volumes sold fell 3% but were mostly offset by the 2% increase in its realized gold price (the price it received, which can vary from the market price). Barrick’s gold production costs rose, which weighed on earnings. The company reiterated its full year gold and copper production guidance. Overall, the Barrick story remains on-track, but rising costs will likely require the company to incrementally lower its earnings guidance for the year.

The balance sheet carries $636 million in cash in excess of its debt. Barrick’s capital spending is rising, partly to expand its mine in the Dominican Republic, which is absorbing much of its incremental free cash flow. The company repurchased $182 million in shares in the quarter and declared a $0.20/share quarterly dividend, which includes the $0.10 regular dividend and a $0.10 performance dividend based on its new payout rules.

Over the past week, commodity gold ticked up 1% to $1,813/ounce, bringing its price back to break-even year-to-date. The 10-year Treasury yield rose to 2.79%.

The US Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), was essentially flat at 106.18. The dollar remains exceptionally strong.

Barrick shares rose another 5% in the past week. Earnings estimates ticked up following the earnings report. The shares have about 66% 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

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 bullish case for Big Lots rests with its loyal and growing base of 22 million rewards members, its appeal to bargain-seeking customers, the relatively stable (albeit low) 5.5% cash operating profit margin, its positive free cash flow, debt-free balance sheet and low share valuation at 3.1x EV/EBITDA and 7.3x per-share earnings based on conservative January 2023 estimates.

Our thesis was deeply rattled by the company’s dismal first-quarter results. Offloading its bloated inventory will require sharp discounts, which will weigh on profits while the $271 million in new borrowing ramps up the risk. 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.

For now, we are holding onto Big Lot shares, likely through their upcoming earnings report which should be released on Friday, August 26. Investors have exceptionally low expectations for Big Lots and for most of the retail industry. Any less negative earnings news could lead to a sharp rally in the shares. Yet, a dour report and guidance/outlook could lead to a step-function decline in the stock price.

Big Lots shares rose another 8% this past week. The shares have 58% upside to our recently reduced 35 price target. We would consider the dividend to be unsustainable and caution that investors should not count on any dividends from Big Lots. 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.

On July 15, Citigroup reported encouraging second-quarter results. Revenues rose 11% and were about 7% above the consensus estimate. Earnings of $2.30/share fell 19% and were about 39% above the consensus estimate. The company maintained its full year revenue and expense guidance. Overall, a good report, particularly compared to the dour investor sentiment. Credit quality remains sturdy as credit losses fell, while CET1 capital level rose to 11.9% from 11.8% a year ago despite sizeable dividends and share repurchases. This capital is supported by loan loss reserves that are a generous 2.4% of funded loans.

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, was essentially unchanged at 0.18%. There are 100 basis points in one percent.

A recession would likely increase Citi’s credit losses, a flatter yield curve would weigh on its net interest margin, and weaker capital markets would mean fewer investment banking revenues.

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

Citi shares trade at 65% of tangible book value. This immense discount, which assumes a dim future for Citi, appears to be misplaced.

Citi shares rose 2% in the past week and about 64% upside to our 85 price target. Citigroup investors enjoy a 3.9% 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

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 re-instated its dividend.

On August 2, the company reported in-line results and guidance, but the shares tumbled as investors worried that slowing industry volumes, and perhaps that Molson’s push into premium brands has come at the wrong moment as consumers start to trade down. The decline in the share price does not diminish our appetite for the stock.

Revenues rose 2.2% excluding currency changes and adjusted earnings fell 25%. The company re-affirmed its full-year revenue, profit and free cash flow guidance. Prices rose 7% but volumes fell 5%. Volumes for the industry as a whole were weak, so it appears that Molson gained share. The company said that it is roughly balanced between premium brands and lower-priced brands – a mix that is more sensible today as many consumers are trading down due to inflation and the weak economy. Profits slipped due to sharply higher materials, transportation and energy costs.

TAP shares rose 3% in the past week and have about 25% 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 9.1x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.8% dividend yield 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.

On August 4, the company reported earnings of $1.25/share, down 27% from a year ago but about 5% higher than the $1.19 consensus estimate. Revenues were down 1% but were about 3% above estimates. Adjusted EBITDA of $512 million fell 18% but was 8% above estimates. Organon is still early in its turnaround as we wait for tangible evidence that the fundamentals are moving in the right direction.

For revenues, the quarter pointed to a slow but steady grind forward. Excluding currency headwinds, volumes looked good with a 5% growth rate. The company fractionally trimmed its full year revenue guidance and took 2 percentage points out of its Adjusted EBITDA margin guidance. The profit cut was due to higher R&D costs from its acquisitions. Overall, the company is making progress.

Sales in the Women’s Health segment ticked up but Biosimilars revenues rose 42%. Established Brands sales rose 4%. Management was optimistic about stronger sales for the core Nexplanon product later this year and for revenues from other new treatments. Organon continues to marginally chip away at its debt.

OGN shares fell 1% in the past week and have about 46% 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 3.6% 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’s second-quarter results were reasonable but weakening end-markets, higher materials costs, higher R&D spending and supply chain disruptions will weigh on profits in upcoming quarters. Financially the company is sound, with healthy but lower free cash flow and a reasonably sturdy balance with modestly elevated debt. Its financial capacity to make acquisitions is now somewhat limited – a positive in our view (but this is an out-of-consensus view) as Sensata would benefit from slowing its pace, especially as the electric vehicle market is changing so quickly.

Overall, the Sensata investment remains sharply under water 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 slipped 1% in the past week and have about 72% 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

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.

Growth/Income Portfolio
Stock (Symbol)Date AddedPrice Added8/9/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Cisco Systems (CSCO)11-18-2041.3244.928.7%3.4%66.00Buy
Coca-Cola (KO)11-11-2053.5863.0517.7%2.7%69.00Hold
Dow Inc (DOW) *04-01-1953.5052.72-1.5%5.3%78.00Buy
Merck (MRK)12-9-2083.4789.527.2%3.1%99.00Hold
Buy Low Opportunities Portfolio
Stock (Symbol)Date AddedPrice Added8/9/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)02-22-2239.9937.49-6.3%2.2%48.00Buy
Arcos Dorados (ARCO)04-28-215.417.9146.2%2.0%8.50Buy
Aviva (AVVIY)03-03-2110.759.95-7.4%5.6%14.00Buy
Barrick Gold (GOLD)03-17-2121.1316.44-22.2%2.4%27.00Buy
BigLots (BIG)04-12-2235.2421.84-38.0%5.5%35.00Hold
Citigroup (C)11-23-2168.1052.09-23.5%3.9%85.00Buy
Molson Coors (TAP)08-05-2036.5355.1350.9%2.8%69.00Buy
Organon (OGN)06-07-2131.4231.39-0.1%3.6%46.00Buy
Sensata Technologies (ST)02-17-2158.5743.51-25.7%1.0%75.00Buy

*Note: DOW price is based on April 1, 2019 closing price following spin-off from DWDP.

Buy – This stock is worth buying.
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.
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
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
CSCO 44.79 3.36 3.540.0%0.0% 13.3 12.7
KO 63.17 2.46 2.610.0%-0.4% 25.7 24.2
DOW 52.43 8.01 6.670.0%0.0% 6.5 7.9
MRK 90.13 7.37 7.460.0%0.1% 12.2 12.1
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 37.92 5.50 6.10-11.9%-13.5% 6.9 6.2
ARCO 8.00 0.51 0.550.0%0.0% 15.7 14.5
AVVIY 9.96 1.03 1.302.4%1.9% 9.7 7.7
GOLD 16.24 1.02 1.071.5%0.0% 16.0 15.2
BIG 22.12 (2.43) 2.260.0%0.0% (9.1) 9.8
C 51.82 7.28 6.940.1%0.0% 7.1 7.5
TAP 55.13 3.95 4.23-1.3%-1.2% 14.0 13.0
OGN 31.46 4.95 5.46-3.3%-1.6% 6.4 5.8
ST 43.72 3.40 4.000.0%0.0% 12.9 10.9

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