The recent (and ongoing?) tech momentum reversal appears to be due to a variety of concerns ranging from doubt about valuations, worries about the pace of the economy’s recovery, the lack of another stimulus package and slowing growth in the Federal Reserve’s asset purchases. SoftBank’s huge call option purchases may have been an inverse catalyst. Their reputation has been so sullied due to their blunders that traders may have seen their optimism as a signal to sell.
We’ll readily admit that we have no idea where the market is headed near-term. The sell-off could be the start of a major unwinding of the bull market, or merely a brief retrenchment as investors take some profits off of the table.
Timing the markets is remarkably difficult. We’ve found our efforts in this regard to be largely unproductive, with our time better spent on finding attractive individual stocks. With individual stocks, however, we do have a timing tool. We use valuation, and more specifically, price targets, to gauge when to get into and out of stocks that have the fundamental traits we like. When we find a lot of attractive stocks, we tend to buy more. Conversely, when we find few attractive stocks, we tend to buy less. The academics and investment consultants would frown upon this strategy, but it generally has been quite profitable for us, and is what most professionals do as well—although it is usually dressed up as a more scientific process.
Most important, we really like the observation that Mike Cintolo, chief analyst of the Cabot Growth Investor and Cabot Top Ten Trader advisories, made at our annual Cabot Wealth Summit last month, about how investors can get either “scared out or worn out” of the markets. Investors should avoid these mistakes by staying the course in times of market volatility, and by holding as much (but no more) in stocks as allows them to still sleep well at night.
Share prices in the table reflect Tuesday (September 8) closing prices. Send questions and comments to Bruce@CabotWealth.com.
TODAY’S PORTFOLIO CHANGES
None
LAST WEEK’S PORTFOLIO CHANGES (September 2 letter)
Molson Coors Beverage Company (TAP) – Moves from Buy to Strong Buy
Voya (VOYA) – Moves from Strong Buy to Buy
GROWTH PORTFOLIO
Chart Industries (GTLS) is a leading global manufacturer of highly-engineered equipment used in the production, transportation, storage and end-use of liquid gases (primarily atmospheric, natural gas, industrial and life sciences gases). Its equipment cools these gases, often to cryogenic temperatures that approach absolute zero. Chart has no direct peers, offering turnkey solutions with a much broader set of products than other industry participants. The company was featured in “Cabot’s 10 Best Stocks to Buy and Hold for 2020.”
The company generates positive free cash flow and is prioritizing reducing its modestly elevated debt from its 2019 cash acquisition of Harsco’s Industrial Air-X-Changers business, as well as continuing its sizeable cost-savings program.
While second-quarter sales growth was flat and adjusted per-share earnings fell about 7% from a year ago, the company reinstated its guidance for above-consensus full-year 2020 earnings. Chart provided encouraging updates on its cost savings programs and described new initiatives and orders in hydrogen-based energy equipment.
GTLS shares have fallen about 8% in the past week. Earlier weakness was due in part to the broad tech sell-off and part probably due to some fading of investor enthusiasm over Chart’s possible role in emerging hydrogen-based fuels and on disappointment over the price it will receive for its cryobiological unit. The shares have about 25% upside to our 79 price target.
We are not big fans of technical analysis. However, an odd maxim that I heard long ago that stuck in my mind – and which has generally been right – says that “all gaps are closed.” This suggests that GTLS stock will fall to the 57 range, which would close the price gap produced on July 23 (following its earnings release).
The current valuation remains reasonable at 20.2x estimated 2021 earnings of $3.12 and 15.5x estimated 2022 earnings of $4.06. Estimates have declined largely due to the pending cryobiological unit sale. The recent price weakness makes the shares incrementally more attractive. BUY
MKS Instruments (MKSI) generates about 49% of its revenues from producing critical components that become part of equipment used to make semiconductors. MKS’ products are generally in the stronger segments of this currently healthy market. While MKSI shares closely track the broad semiconductor indices, the expansion of its Advanced Markets segment, including its 2016 acquisition of Newport Corporation, as well as its 2019 acquisition of semiconductor-related Electro Scientific Industries, may allow its shares to break out. MKS recently promoted 13-year company veteran Dr. John T.C. Lee to CEO.
MKS reported strong second-quarter results and raised its 3Q guidance substantially. The ESI acquisition added incrementally but its full potential has yet to be realized.
With the tech sell-off, MKSI shares have pulled back about 11% over the past week, a bit worse than the 9% Philadelphia Semiconductor Index (SOX) sell-off. MKSI shares are 18% below their recent highs.
We suggest that traders remain on the sidelines, given the unpredictable nature of tech price momentum. For longer-term holders of MKSI, at 13.7x estimated 2021 earnings of $7.84, we consider the shares reasonably undervalued. HOLD
Quanta Services (PWR) is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, with 65% of revenues coming from regulated electric, gas and other utility companies. We view this company as high-quality, well-run and resilient. Quanta achieved record annual revenues, operating income and backlog in 2019, and reported strong second-quarter 2020 results. The company is pursuing a multi-year goal of increasing margins while maintaining low capital intensity. Dividend payouts and share repurchase activity have continued uninterrupted during the pandemic.
PWR shares have mostly held their price during the recent tech sell-down, falling only about 2% in the past week, but flat looking through the September 1 spike. The stock currently has about 18% upside to our 61 price target.
The stock trades at 15.6x estimated 2020 earnings of $3.30 and about 12.8x estimated 2021 earnings of $4.02. For long-term holders, Quanta stock looks well-positioned to continue to prosper, and investors may want to think about adding now that the September 1 spike has burned off. BUY
Tyson Foods (TSN) is one of the world’s largest food companies, with over $42 billion in revenues last year. Beef products generate about 36% of total revenues, while chicken (31%), pork (10%), and prepared/other contribute the remaining revenues. It has the #1 domestic position in beef and chicken with roughly 21% market share in each. Its well-known brands include Tyson, Jimmy Dean, Hillshire Farms, Ball Park, Wright and Aidells. As only 13% of its sales come from outside the United States, Tyson’s long-term growth strategy is to participate in the growing global demand for protein. Second quarter results were strong. The company has more work to do to convince investors that the future is brighter, particularly as it is more of a commodity company (and hence lower margins) compared to its food processor peers.
New CEO Dean Banks (joined Tyson in 2017, officially takes CEO role on October 3) has already made some staffing moves. This past week, the company elevated two company veterans to lead the poultry division.
TSN shares have been resilient in the recent tech sell-off, falling only about 2% in the past week. They have returned to their 58-65 trading range. The stock has 22% upside to our 75 price target.
Tyson currently trades at 12.3x estimated 2020 earnings of $4.99/share and 10.5x estimated 2021 earnings of $5.87, and offers a 2.7% dividend yield. BUY
Universal Electronics (UEIC) is a major producer of universal remote controls that subscription broadcasters (cable and satellite), TV/set top box/audio manufacturers and others provide to their customers. The company pioneered the universal remote, named the ‘One for All’, which was quickly adopted by consumers after its launch in 1986. Since then, the company has expanded into a range of remote control devices for smart homes, safety and security and other residential and commercial applications, driven by its proprietary technology. The company has a global roster of customers, with about 40% of sales produced outside the United States. Comcast is a 10%+ customer and they hold warrants for up to 5% of Universal’s shares.
For UEIC shares to start a sustained move upward, their revenues need to stop declining and turn (even if slightly) positive. While expanding profit margins help, the shares aren’t cheap enough for this to make much of a difference yet.
Stable/rising revenues could come from a recovery in net cable subscriptions, particularly upon the return of live sports (a major driver of new subscriptions) or when in-home installations resume. Another source of revenue growth may come from upgraded products that allow better control of set top boxes that manage a wide range of media including cable, Netflix/etc., and other digital technologies. Also, the company is expanding into Alexa-like home devices which could boost revenue growth.
UEIC shares held roughly flat in the market downturn, falling only about 2% in the past week but having an up day yesterday in an ugly tape. However, the slide generally continues following the ongoing lack of resolution to its revenue growth issues, combined with the tech sell-off. The shares appear to be approaching support at 38. UEIC shares have 17% upside to our 47 price target. We are patient for now with UEIC shares because of the larger opportunity set on the horizon, potential for better results in the third and/or fourth quarter, and the relatively low valuation.
UEIC shares trade at 11.2x estimated 2020 earnings of $3.57 and 9.3x estimated 2021 earnings of 4.31. The estimates appear to have bottomed out. BUY
Voya Financial (VOYA) is a U.S. retirement, investment and insurance company serving 13.8 million individual and institutional customers, with $606 billion in assets under management and administration. The company previously was the U.S. arm of Dutch financial conglomerate ING Group, from which it was spun off in 2013. Voya has several appealing traits. Even though it is well capitalized, it is migrating toward a capital-light model, which should allow it to use some of its excess capital to repurchase shares. Strong earnings and cash flows, lower capital intensity and share repurchases should help boost its share price to our 62 target (26% implied upside).
Voya announced that its pending life insurance sale will be delayed until the fourth quarter. While it has received most of the necessary state and federal approvals, there apparently are a few still outstanding. We believe the sale will be completed and that Voya will receive the expected $1.5 billion in cash proceeds.
Voya shares have declined 4% in the past week, which we believe is mostly due to the market sell-off. Voya does carry a large investment portfolio, but the market’s recent sell-off should have minimal impact on their capital base.
VOYA trades at 12.7x estimated 2020 per-share earnings of $3.86 and 8.2x estimated per-share earnings of $6.02. BUY
GROWTH & INCOME PORTFOLIO
Bristol-Myers Squibb Company (BMY) is a global biopharmaceutical company. Following its controversial acquisition of Celgene for $74 billion in November 2019, the merged company markets a long list of pharmaceuticals, including Revlimid, Eliquis and Opdivo, which treat cardiovascular, oncology and immunological diseases. The company expects revenue and profit growth to come from four areas: sales volume increases from current products, development and launch of new medicines, life cycle management and synergies from the Celgene acquisition. Bristol-Myers’ financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases. Investors will want to be aware that the Celgene deal raised Bristol-Myers’ debt to over $46 billion – a manageable sum yet elevated compared to peers.
Second-quarter results were good enough, with flat revenues but 38% growth in adjusted earnings per share. Bristol-Myers raised their full-year earnings guidance by 6 cents, or about 1%... so small as to be irrelevant but at least it was in the right direction. We think the company will report more respectable results in the third quarter as patients make more visits to their doctors.
Management commentary pointed to improved growth prospects in 2021. While debt remains essentially unchanged since year-end, the cash balance has increased to $22 billion from $16 billion, reflecting strong cash generation. This cash flow is an important part of the Bristol-Myers story.
One emerging but unmeasurable risk cited by some analysts is increased drug price controls if the Democratic Party wins the White House.
We saw that the CEO recently sold about $2.5 million in personal share holdings. This represents less than 3% of his total BMY holdings and we see this recent sale as having essentially zero signal value.
BMY shares have declined about 4% in the past week, reasonable given the market’s weakness but perhaps more than we would have otherwise expected. The shares traded more like biotechs (that were weak) than like pharma (which generally were steady).
The stock trades at a low 7.9x estimated 2021 earnings of $7.44. The generous 3.1% dividend yield is well-covered by the company’s enormous $13.5 billion in free cash flow likely this year. STRONG BUY
Broadcom (AVGO) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. CFO Tom Krause expects to continue paying the dividend and paying down debt in 2020 (none of which is maturing this year), even under poor economic conditions. Share buybacks and M&A activity are on the back burner for now.
The company reported healthy earnings, with revenues increasing 6% from a year ago, fractionally ahead of consensus estimates. Adjusted per-share earnings of $5.40 was about 5% higher than a year ago and about 3% higher than consensus estimates. Its third-quarter guidance was consistent with current estimates. Broadcom is heavily reliant on Apple’s iPhone – the recent delay in the next-generation, 5G iPhone will weigh on its near-term results but should be offset by extra strength in the fourth quarter. The company’s results during the rest of the year should allow it to generate $9 billion in free cash flow, funding both its $5.5 billion in dividends and $4 billion in debt repayment.
AVGO shares are down about 3% over the past week, following a jump to over 375 prior to its earnings report and then a fall-off in the tech sell-down.
Broadcom is an undervalued growth and income stock as well as a useful trading stock. Full-year profits are expected to grow 3% to $22.00 in FY2020 and then by 14% to $25.14 in FY2021. Both estimates increased following third-quarter results. The shares trade at a 15.9x multiple of estimated FY2020 earnings, and pay a 3.7% dividend yield. HOLD
Dow Inc. (DOW) is a commodity chemicals company with manufacturing facilities in 31 countries. In 2017, Dow merged with DuPont to temporarily create DowDuPont, then split into three parts in 2019 based on the newly-combined product lines. Today, Dow is the world’s largest producer of ethylene/polyethylene, which are the world’s most widely-used plastics. Dow is primarily a cash-flow story driven by two forces: 1) petrochemical prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; and 2) ongoing efficiency improvements (a never-ending quest for all commodity companies to maintain their margins).
Dow’s second-quarter earnings report was satisfactory, with revenues down 24% and profits turning negative, reflecting the sluggish economic conditions in the period. Cash flow was strong, and liquidity and the balance sheet remain sturdy. Dow will weather the downturn but its outlook is more subdued than we anticipated.
Dow shares have ticked upward by about 1% over the past week despite the tech sell-off. Investors appear to be incrementally shifting to more cyclical stocks.
The shares trade at a reasonable 17.1x estimated 2022 earnings of $2.80, although this is two years away. Valuation on estimated 2020 earnings of $0.74 is less meaningful as this assumes no recovery.
The high 5.8% dividend yield is particularly appealing for income-oriented investors. It has a small risk of a cut if the economic and commodity cycles remain subdued, although management makes a convincing case that the dividend will be sustained. HOLD
Total S.A. (TOT) based in France, is among the world’s largest integrated energy companies, with a global oil and natural gas production business, one of Europe’s largest oil refining/ petrochemical operations, and a sizeable gasoline retail presence. The company is also expanding somewhat aggressively into renewable and power generation business lines, including its 51% stake in SunPower (SPWR) and its holdings of recent spin-off Maxeon Solar Technologies (MAXN). Overall, the alternative energy initiatives may either be highly profitable or value-destructive.
While low energy prices have hurt Total like all integrated producers, the company’s low production costs (management claims its costs are below $30/barrel), efficient operations and sturdy balance sheet position it well relative to its peers. Also, the company’s production growth profile may still be among the best in the industry despite sharp capital spending reductions. The company maintains its confidence in its ability to pay its dividend as long as oil prices are above $40/barrel. With Brent prices holding at about $42, the high 7.8% dividend yield appears safe for now.
Consensus estimates point to full-year EPS of $1.45 and $2.95 in 2020 and 2021, respectively. The company’s ADRs trade on the NYSE with one TOT share equal to one ordinary share. The P/E multiple of 12.9x estimated 2021 earnings reflects only partial recovery toward normalized earnings of around $4.00. At $4.00 in earnings, the shares trade at about 9.5x. TOT shares remain rangebound but have recovered from some recent weakness. Value, growth and income investors should add to positions below 38. HOLD
BUY LOW OPPORTUNITIES PORTFOLIO
Columbia Sportswear (COLM) produces the highly-recognizable Columbia brand outdoor and active lifestyle apparel and accessories, as well as SOREL, Mountain Hardware, and prAna products. For decades, the company was successfully led by the one-of-a-kind Gert Boyle, who passed away late last year. The Boyle family retains a 36% ownership stake and Gert’s son Timothy Boyle remains at the helm.
Recent financial results were weak but better than consensus estimates. The balance sheet remains sturdy, with $476 million in cash yet a miniscule $3 million (not billion) in total debt.
Columbia’s shares have moved down about 1% this past week. The shares have gained about 10% since our recommendation and have about 13% more upside to our 100 price target.
The shares currently trade at 21.0x estimated 2021 earnings of $4.21. For comparison, the company earned $4.83/share in 2019. The stock has appeal for value investors and for growth investors with patience for what might be a slower recovery than other growth stocks. Traders will find COLM shares appealing given their sensitivity to consumer and economic re-opening trends. BUY
General Motors (GM) under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well-run and (almost) respected auto maker. The company has smartly exited many chronically unprofitable geographies (notably Europe) and trimmed its passenger car roster while boosting its North American market share with increasingly competitive vehicles, particularly light trucks. We consider its electric and autonomous vehicle efforts to be near industry-leading. Its GM Credit operations are well-capitalized but will be tested in the pandemic. The shares will remain volatile based on the pace of the economic re-opening, U.S.-China relations, its successes in improving its relevance to Chinese consumers, and the size of credit losses in its GM Financial unit.
GM reported an encouraging quarter. Despite a 53% decline in revenues, operating profits were nearly break-even and vastly better than consensus estimates. GM aggressively cut its costs yet continues to invest heavily in its electric vehicle programs.
The company’s capable leadership was on display in two announcements this past week. First, GM announced an expansion of its successful partnership with Honda – the two companies will now collaborate by sharing vehicle platforms and propulsion systems on North American models, particularly relating to advanced and next-generation technologies. Second, GM will take an 11% stake in electric truck maker Nikola. This deal will include a contract for GM to build Nikola’s Badger truck. GM will get a seat on Nikola’s board. Perhaps this opens the door for GM to become a contract manufacturer for other electric vehicle makers – a fascinating prospect.
On the Nikola news, GM shares gained 8% yesterday. The stock moved ahead of its June 8th spike to 30.68, and is now only 12% below its year-end price.
Current Wall Street estimates project EPS of $2.56 and $4.47 in 2020 and 2021, respectively. On the 2021 estimate, GM shares trade at a 7.2x multiple. GM remains an attractive cyclical stock for investors and traders. STRONG BUY
Molson Coors Beverage Company (TAP) – The thesis for this company is straightforward – a reasonably stable company whose shares sell at a highly-discounted price.
One of the world’s largest beverage companies, Molson Coors produces the highly-recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its $10 billion in net revenues are produced in the United States, where it holds a 24% share of the beer market.
Investors worry about the company’s lack of meaningful revenue growth, weak post-merger integration and continued margin pressure, along with the more recent weakness from Covid-19 stay-at-home orders that temporarily dried up much of the company’s revenues. Elevated debt also weighs on the shares. However, Molson Coors’ relatively stable revenues and cash flow should recover once the world’s economies more fully re-open. The debt on its investment grade balance sheet is readily serviceable and partly offset by $800 million in cash. Recent financial results have been encouraging. A new CEO is overseeing efforts to improve execution.
We anticipate that the company will resume paying a dividend mid-next year. A $0.35/share quarterly dividend is possible, which would provide a generous 3.7% yield on the current price.
Molson Coors shares have ticked up by about 2% in the past week, perhaps as investors look for bargains as confidence fades in momentum-driven tech stocks. TAP shares have about 56% upside to our 59 price target.
At about 38, the shares trade at a highly discounted 10.5x estimated 2020 earnings of $3.61/share, and about 9.8x estimated 2021 per share earnings of $3.87. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.9x estimates. This is among the lowest valuations in the consumer staples group and well below other brewing companies. For investors looking for a stable company trading at an unreasonably low valuation in a strong momentum-driven market, TAP shares have considerable contrarian appeal. STRONG BUY
ViacomCBS (VIAC) is a major media and entertainment company, owning highly-recognized properties including Nickelodeon, Comedy Central, MTV and BET, the Paramount movie studios, Showtime and all of the CBS-related media assets. The company’s brands are powerful and enduring, typically holding the #1 market shares in the highest-valued demographic groups in the country. ViacomCBS’ reach extends into 180 countries around the world. Viacom and CBS re-merged in late 2019 and are now under the capable leadership of former Viacom CEO Robert Bakish.
Viacom is being overhauled to stabilize its revenues, boost its relevancy for current/future viewing habits and improve its free cash flow. Its challenges include the steady secular shift away from cable TV subscriptions, which is pressuring advertising and subscription revenues. The pandemic-related reductions in major sports are also weighing on VIAC shares. However, ViacomCBS’ extensive reach, strong market position and strategic value to other, much larger media companies, and its low share valuation, make the stock appealing.
Early progress is encouraging, as cash operating profits rose by 8% and were about 27% higher than analysts’ estimates in the second quarter.
VIAC shares continue to tick upward despite the market sell-off, gaining about 4% in the past week. They have now eclipsed their June 2020 spike to 28.51. ViacomCBS shares trade at about 7.2x estimated 2021 EBITDA, which we believe undervalues its impressive leadership and assets.
ViacomCBS shares offer a sustainable 3.3% dividend yield and look attractive here. BUY
SPECIAL SITUATION AND MOVIE STAR PORTFOLIO
Equitable Holdings (EQH) owns two principal businesses: Equitable Financial Life Insurance Co. and a majority (65%) stake in AllianceBernstein Holdings L.P. (AB), a highly respected investment management and research firm.
Acquired by French insurer AXA in 1992, Equitable began its return to independence with its 2018 initial public offering as part of a spin-off. AXA currently owns less than 10% of Equitable. With its new-found independence, Equitable is free to pursue new opportunities.
The company is well-capitalized and has significant liquidity. Its diverse, high-quality investment portfolio is hedged against adverse changes in interest rates and equity markets. While this year’s profits will decline about 9% due to higher mortality costs, they will likely recover sharply next year. Equitable expects to continue delivering a 50-60% payout ratio through dividends and share repurchases. The shares offer a 3.4% dividend yield.
EQH shares have slid about 6% in the past week, likely due to investor worries about the value of its investment portfolio as markets sell off. The shares now trade just below their 20 IPO price, which was a disappointment at the time relative to the 24-27 price range that bankers had targeted. Since then Equitable has arguably become a better company.
Like many insurance companies, investors often value Equitable on a book value basis. On this basis, EQH shares trade at 69% of its $28.68 book value, a considerable discount.
EQH shares are also undervalued on earnings, trading at 4.5x estimated 2020 earnings of $4.42. EHQ shares are appropriate for dividend investors, growth investors and traders. While the shares may trade in sync with the overall stock market, given its investment-driven operations, we see more upside than downside. STRONG BUY
Marathon Petroleum (MPC) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, a majority interest in midstream company MPLX LP, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores.
Following its agreement to sell its Speedway retail gas station chain to the Japanese company Seven & i Holdings, the parent of the 7-Eleven chain for $21 billion in cash, Marathon will be losing a huge source of annual cash flow but also will be shedding as much as 30% of its $32 billion in debt (including debt of its MPLX pipeline subsidiary). Some of the proceeds will likely be returned to shareholders through share repurchases. Also, the company will likely have a leaner cost structure as it is closing two unprofitable refiners and cutting close to $1 billion in operating expenses.
At just above 32, MPC shares have continued to slip, losing 8% in the past week. The shares are not appealing enough to warrant a return to a Buy rating, but the 7.2% dividend yield looks reasonably sustainable.
The shares will continue to trade near-term around the pace of the re-opening of the economy, on oil prices and the currently wide refiner margins.
Wall Street analysts are forecasting a 2020 full-year loss of $(3.08)/share, continuing a trend downwards. Estimates for 2021 earnings also continue to weaken as they reflect the lower post-Speedway earnings power but not necessarily the lower debt, and now are $0.75/share.
Like most energy stocks, MPC offers a useful vehicle for traders: its economics are closely tied to oil prices yet the company has a more stable business, with its refining, MPLX midstream, and retail operations that dampen its volatility and provide more downside protection relative to pure exploration or energy service companies. HOLD
