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Value Investor
Wealth Building Opportunites for the Active Value Investor

September 23, 2020

Through most of the summer, investors had become increasingly confident about the strength and direction of the economic recovery, the likelihood of the arrival of several promising Covid vaccines, another round of federal economic stimulus and other favorable indicators.


Years ago, when I was starting junior high school, all of us newbie seventh graders were called “squirrels” by the much more seasoned eighth and ninth graders. The name was apt – we were jumpy and seemed to randomly change directions in the hallways. Unlike in elementary school, we now had to quickly change classrooms and navigate a strange and huge building with several levels and corridors (our former elementary school was small and simple). And, the halls were jammed with a confusing swarm of other students moving in all directions on their way to their classrooms. Like squirrels, we would head in confidence in one direction, then swiftly reverse course upon a sudden fear that we were totally wrong, dash up the stairs, only to realize that we had already been on the right floor a moment ago, stop suddenly to chat with a friend then scurry off to gather some goodies from our lockers right before the bell.

This sounds a lot like the recent stock market.

Through most of the summer, investors had become increasingly confident about the strength and direction of the economic recovery, the likelihood of the arrival of several promising Covid vaccines, another round of federal economic stimulus and other favorable indicators.

Starting on September 2nd, though, investors became a bit squirrely about the highly elevated valuations of many trendy tech stocks after stellar earnings reports weren’t quite strong enough, and so the market jumped out of these stocks, perhaps remembering an investing maxim “that trees don’t grow to the sky.” The Nasdaq slipped into correction territory.

Investors then migrated into undervalued cyclical stocks, on expectations of a continued economic recovery. But this past Monday the markets quickly changed course, selling these stocks (and about everything else including gold) while hustling back to pricey tech stocks.

No doubt, after a warm summer for the stock market, rising skittishness about a second wave, a highly contentious election that increasingly looks to be undecided on election day, the lack of a new stimulus package, and a recovery that perhaps won’t be quite as robust as hoped has led investors to stow away some nuts and berries.

Also, perhaps a big part of what is going on is that there is a dearth of company-specific news. In today’s markets, “newsflow” is a primary driver of near-term stock prices. But, few of our stocks had news that was anything near market-moving, so investors and traders in these stocks could only interpolate (Latin for “polished guessing”) how other news might affect these stocks.

What should investors do in this kind of market? Our approach is to be patient with our stocks. We check the valuations, read any fresh news, understand the macro situation and mostly do very little. We have confidence that our company managements are doing their best to build value for shareholders (otherwise we probably shouldn’t own the stock). Our stocks have low expectations so the downside should be relatively limited. We also make sure we aren’t over-extended in our stock holdings, so we have the ability to endure otherwise painful days like Monday.

Share prices in the table reflect Tuesday (September 22) closing prices. Send questions and comments to




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.

There was essentially no news on the stock this past week (I use this sentence for many names in this week’s note).

GTLS shares slipped about 45 in the past week but remain in the middle of their near-term trading range. The shares have about 17% 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). If the shares were to fall to this level, this would be a buying opportunity, not a selling opportunity, in our view.

The current valuation remains reasonable at 21.7x estimated 2021 earnings of $3.12 and 16.7x estimated 2022 earnings of $4.06. Estimates have stabilized. As the stock moves up, it incrementally becomes less attractive. We are staying with our Buy rating but eyeing a move to Hold as the shares approach our target, unless we see compelling reasons to raise our target. 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.

There was essentially no news on the stock this past week.

After falling sharply in the tech selloff, MKSI shares ticked up about 2% in the past week, but have been ticking up in recent trading along with the Philadelphia Semiconductor Index (SOX). The shares have about 20% upside to our 130 price target.

Traders might want to nibble here. Tech price momentum is notoriously hard to trade but the shares seem to have found a floor of sorts. For longer-term holders of MKSI, at 13.8x estimated 2021 earnings of $7.83, 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.

There was essentially no news on the stock this past week.

PWR shares slipped about 4% in the past week. The stock currently has about 22% upside to our 61 price target.

The stock trades at 15.0x estimated 2020 earnings of $3.33 and about 12.4x estimated 2021 earnings of $4.04. For long-term holders, Quanta stock looks well positioned to continue to prosper. 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 has 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.

After Asian swine flu was recently discovered in Germany, leading to a recent ban on German hog exports (lower hog supply would be generally favorable for Tyson), last week China announced a ban on poultry imports from OK Foods’ facility in Arkansas. This would be moderately unfavorable to Tyson as it would increase domestic poultry supplies—and it raises the risk of further import restrictions. Earlier this year, China suspended imports from a Tyson poultry facility.

TSN shares fell 9% this past week and are just above their bottom of their 58-65 trading range. The stock has 26% upside to our 75 price target. Tyson currently trades at 11.9x estimated 2020 earnings of $4.99/share and 10.1x estimated 2021 earnings of $5.87, and offers a 2.8% 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.

Last Thursday, the company announced a new share repurchase program in which it could buy up to 300,000 shares through November 5. This provided a brief 11% spike in UEIC’s shares which was partly reversed on subsequent trading days. Net, the shares moved up 5% for the week.

UEIC shares have 25% 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 increasingly low valuation.

UEIC shares trade at 10.5x estimated 2020 earnings of $3.57 and 8.7x estimated 2021 earnings of 4.31. The estimates remain unchanged from last week and 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 (32% implied upside).

There was essentially no news on the stock this past week.

Voya shares declined about 2% in the past week. The market selloff exerted pressure on Voya’s investment portfolio, and thus its book value. However, the company is relatively well-hedged, and the fixed income markets remain sturdy, limiting the effects on Voya’s balance sheet strength.

VOYA trades at 12.4x estimated 2020 per-share earnings of $3.79 and 7.8x estimated per-share earnings of $6.04. The 2020 estimate ticked down from last week but the 2021 estimate ticked up. BUY


Bristol-Myers Squibb Company (BMY) is a New York-based global biopharmaceutical company. In November 2019, the company acquired Celgene for a total value of $80.3 billion, including $35.7 billion in cash and $40.4 billion in stock. We are looking for Bristol-Myers to return to overall revenue growth, both from resilience in their key franchises (Opdivo, Revlimid and Eliquis) as well as from new products currently in their pipeline. We also want to see the company execute on its $2.5 billion cost-cutting program.

As part of the Celgene deal, Bristol-Myers issued contingent value rights (CVRs) whose value depends on whether Bristol-Myers receives FDA approval for three specified drugs by March 2021. The outcome is binary – either the company gets all three approvals on time (yielding $9/CVR in value to investors) or it does not (yielding a total loss for investors). One of the three milestones has been achieved. These CVRs are publicly traded, so anyone can buy them.

While we are investors, we also recognize the merits of speculative bets – and want to understand the payoff ladder to see if the bet is worthwhile. The Bristol-Myers CVR to us is a pure speculation, as we have no realistic way of evaluating the odds of approval. With no way of assessing the odds, we can’t effectively gauge the merits. This follows the logic of the Kelly Criterion (a fascinating and very useful approach).

But, for those with an interest in a high-risk, high-potential-return security, CVR might fit the bill. At the approximately $2.10 price, the payoff is roughly 4.3x in a “win.” If the odds tilted to, say, 10:1, for investors with the ability to readily absorb a full loss, it could look appealing. Each person would want to decide for themselves whether to take this bet. As it is a highly unusual security issued by a major company whose common stock we recommend, we thought we would at least bring it to your attention.

Last Friday, Bristol-Myers announced that it had reached a settlement with India-based Dr. Reddy’s Laboratories in the Revlimid dispute. This is a positive in that it removes an overhang by improving the visibility on the timing of generic competition for Celgene’s top-selling cancer treatment. It also greatly reduces the patent litigation threats against Bristol-Myers regarding Revlimid. This is important, as Revlimid now produces about 30% of Bristol-Myers’ total 2020 revenues. Patent protection for Revlimid was a major concern when investors questioned the high price that Bristol-Myers paid for Celgene.

In the settlement, Dr. Reddy can start to sell limited volumes of Revlimid in early 2022, and then can sell unlimited volumes starting in 2026. Two other competitors, Natco and Alvogen, have similar agreements with Bristol-Myers.

One emerging but unmeasurable risk cited by some analysts is increased drug price controls following the U.S. presidential election. While initially this looked more likely if the Democratic Party won the White House, it is now looking more likely even in a Republican re-election as the president is increasingly pressing for more price controls.

Bristol-Myers reported some incrementally positive studies relating to its Opdivo franchise.

BMY has about 33% upside to our 78 price target. This would translate into about 9.6x estimated 2022 earnings of $8.09.

BMY shares have ticked down about 1% in the past week.

The stock trades at a low 7.9x estimated 2021 earnings of $7.46. 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, Inc. (AVGO) designs, develops and markets semiconductors (about 72% of revenues) that facilitate wireless communications. The company’s foundation is its #1 industry position in high performance RFIC (radio frequency integrated circuits), whose use in high-end smartphones has driven Broadcom’s growth and profits. About 25% of total revenues come from chips that go into high-end smartphones, with Apple providing about 20% of Broadcom’s total revenues. The company also provides software that runs technology infrastructure including telecom and corporate networks (about 28% of total revenue).

The company has a fascinating history. It originally started as a semiconductor development segment within Hewlett-Packard in the 1960s. When Agilent was spun-off from H-P in 1999, Avago went with it. Private equity firms KKR and Silverlake bought the Avago division from Agilent in 2006 for $2.7 billion and completed its IPO in 2009 at 15/share (no splits).

Fast growth followed as the company rode its semiconductor franchise and made a few semiconductor company acquisitions. In recent years, the company has accelerated its pace of acquisitions, using its growing cash flows to large but often slower-growth companies in oligopolistic industries (hence the wide margins) that have cost-cutting opportunities. Much of the motivation appears to be a search for new sources of profits and cash flows, as the high-end smartphone market using 4G technology is becoming saturated. The transition to 5G may not be smooth and Broadcom may not have as strong of a competitive position as it does in 4G.

Over the past three years, Broadcom has made at least $73 billion in acquisitions, including: Broadcom in 2016 ($37 billion) after which the company took the Broadcom name, Brocade in 2017 ($5.9 billion), CA Technologies in 2018 ($18.8 billion) and Symantec Enterprise in 2019 ($10.7 billion). Other than a $20 billion equity component in the Broadcom/Avago deal, essentially all of the deals were paid for in cash. While these acquisitions produced a large semiconductor and software operation, it also produced Broadcom’s enormous $44 billion debt load.

Broadcom attempted to buy Qualcomm for $117 billion in what would have been one of the largest tech deals in history. However, the combination was rejected by the U.S. government on national security grounds in March 2018.

While Broadcom will likely generate about $13.5 billion in adjusted EBITDA this year, its debt/Adjusted EBITDA ratio (at 3.1x) is fairly high for a semiconductor-focused company that is vulnerable to tech and economic cycles as well as to Apple’s negotiating prowess. The high debt limits Broadcom’s ability to fund new acquisitions – a key part of its strategy that probably won’t be going away. We believe this is why Broadcom is directing so much of its free cash flow to debt repayment. Share buybacks and acquisitions are on the back burner for now. In the fourth quarter (ahead), the company will probably pay down as much as $3 billion in debt.

The company seems committed to its quarterly dividend, which has grown from only $0.485/share only five years ago to $3.25/share in the most recent quarter. We don’t expect this pace of growth to continue, particularly with the company’s commitment to paying down its debt. Broadcom will likely use some of its $3.3 billion in estimated fourth quarter free cash flow to pay its $1.4 billion in total dividends.

Broadcom is generally dedicating about 50% of its free cash flow for dividends – this would imply as much as a 15-20% increase in the dividend.

Broadcom produces exceptionally wide 70% gross margins and 55% adjusted EBITDA margins. Major contributors to the vast size of these margins are the company’s critical and proprietary technologies, and its decision to outsource (low-margin and capital-intensive) manufacturing to contract manufacturers like Taiwan Semiconductor and Foxconn. Broadcom has very little capital spending at about 2% of revenues.

Also contributing to the wide margins are adjustments. Broadcom excludes as much as $1.6 billion in stock-option expenses from its gross margin and adjusted EBITDA margins, or about 7% of revenues. We understand the rationale, but these non-cash compensation expenses turn into either cash expenses or dilutive shares, so they can’t be ignored.

The opportunity for Broadcom is that it can successfully transition its strong 4G wireless technology franchise into 5G, as well as continue to show respectable growth in its other segments. This outcome would lift Broadcom’s revenue growth and profit margins – driving its valuation multiple higher.

In thinking about risks, the largest is its outsized Apple relationship, followed by aggressive competition from other chip suppliers. Also, the transition to 5G wireless technology could weaken Broadcom’s franchise. We wonder about Broadcom’s expansion into software. The CA and Symantec acquisitions appear to be accretive to earnings and produce revenue growth, and most likely some cost synergies, but it is unclear if they actually make Broadcom a more valuable company. We have some doubt about the long-term strategic value (to shareholders) of the two large software acquisitions. Similarly, we are alert to the risk of another major acquisition. Broadcom has been somewhat successful in its purchases but no company is immune to mistakes.

All of these risks weigh on Broadcom’s valuation, leading us to place a conglomerate discount on its shares. We are setting our price target for Broadcom at 410, offering 13% upside from the current price. This is just over 15x its estimated 2022 earnings of $27.01. On an EV/EBITDA basis, this translates into an 11.5x multiple.

AVGO shares ticked down about 1% over the past week and are about 4% below their record high close of 375. They have held their value in a difficult market.

The shares trade at 16.4x estimated FY202 earnings of $22.00 and 14.4x estimated FY2021 earnings of $25.14 in FY2021. The shares pay a 3.6% 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.
The recent hurricanes appear to be providing a modest improvement in plastics prices, incrementally but perhaps not materially helping Dow.

Dow shares fell about 6% this past week, giving up much of their recent gains. However, the shares appear to remain in an uptrend. The shares have about 26% upside to our 60 price target.

The shares trade at a reasonable 16.4x estimated 2022 earnings of $2.91, although this is two years away. Valuation on estimated 2020 earnings of $0.85 is less meaningful as this assumes no recovery.

The high 5.9% 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 spinoff 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 at about $41-$42, the high 8.9% dividend yield appears safe for now even if it is beginning to imply a cut.

TOT shares have been volatile this week as investors worried about the economic outlook. This month, Brent crude (the London-based benchmark) prices fell to $39.61 but then rose to $43.82, and now trades at around $41-$42. West Texas Intermediate crude (the U.S. benchmark) has shown more weakness – while this should be of minimal relevance to Total’s earnings, we note that most U.S. traders probably watch the WTI more closely, and thus trade TOT shares based on WTI.
For the past week, TOT shares have dipped about 8% and have about 24% upside to our 43 price target.

Consensus estimates point to full-year EPS of $1.41 and $2.90 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 11.7x estimated 2021 earnings reflects only partial recovery toward normalized earnings of around $4.00. At $4.00 in earnings, the shares trade at about 8.5x. Risk-tolerant investors should consider adding to positions below 38. HOLD


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 minuscule $3 million (not billion) in total debt.

Columbia’s shares dipped 3% this past week. The shares have about 12% more upside to our 100 price target. We will stay with our Buy rating for now, but as the stock is approaching our target, we are evaluating a move to Hold.

The shares currently trade at 21.5x estimated 2021 earnings of $4.16. 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, the size of credit losses in its GM Financial unit and news related to new technologies.

We continue to like GM under Mary Barra’s leadership. The recently announced deals with Honda Motors and Nikola indicate that the company is moving forward with new initiatives as well as continuing to improve its core business. We are big believers in the “addition by subtraction” strategy that she is pursuing. For decades the company was geographically and organizationally over-extended, seeking growth for growth’s sake. But it ended up stuck in chronically unprofitable and ungovernable operations in too many markets. With the global car-producing industry in a secular over-capacity position, Barra has smartly led GM to exit Europe, India, Russia, Thailand and Australia since taking the reins in 2014.

The Nikola deal took a positive turn this week, as founder Trevor Milton resigned from his role as Executive Chairman. Why positive? Most notably, it brings in Steve Girsky as his replacement. We mentioned Girsky last week – he previously was an auto industry analyst for Morgan Stanley, transitioned to executive roles in the auto industry and eventually joined GM’s board of directors. He brings considerable credibility to Nikola – he understands the big picture strategic issues for Nikola, knows how to work with Wall Street analysts, and has a rational, high-integrity approach to overseeing companies. His expertise is not in operations – Nikola has a CEO and a full slate of managers for that – and Girsky would likely change senior management if the company isn’t executing well.

One fascinating possibility is that GM could enter into closer ties with Nikola now that it will be overseen by a trusted leader. If its reputation is re-polished, Nikola could emerge as a possible new brand of electric vehicles under GM. Perhaps GM would enter into a more meaningful joint venture or perhaps acquire Nikola (although, at $18 billion in market value, nearly 40% of GM’s, Nikola is too big right now). Or, Nikola might head in another direction, perhaps partnering with other car-makers. Either way, for GM, the new leadership at Nikola opens up new possibilities.

Used vehicle prices (at the wholesale level) dipped negative, at -0.9%, in the first two weeks of September, according to the Mannheim Used Vehicle Value Index. This follows sharp but decelerating increases in recent months. This is understandable as potential buyers would eventually balk at the higher prices and may be waiting for new models to be rolled out. Also, the supply of used vehicles has increased with the revival of new car sales (more trade-ins). We don’t see this decline in prices as a foreshadowing of a price collapse but rather a move in the direction of more balance in the vehicle market. GM and other car makers have had a stronger pricing environment since the pandemic started, ironically, due to lower new car supply. A price weakening is only a minor incrementally negative news item.

This past week, GM shares fell about 7%, and nearly all of that decline occurred on Monday. The stock has about 53% upside to our 45 price target. The target price implies 8.2x multiple on 2022 estimated earnings of $5.50.

Current Wall Street estimates project EPS of $2.56 and $4.49 in 2020 and 2021, respectively. On the 2021 estimate, GM shares trade at a 6.6x 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.

Markets may have been spooked by weak sales of Molson Coors products in recent data from Nielsen. In the week ending August 29th, its sales (in dollars) showed a surprising decline of -1.0% year-over-year. However, this appears to have been a one-time anomaly as sales returned to a positive +2.9% the following week. On a volume basis, the trends is similar, although weaker as the company has been successful in raising prices. A similar phenomenon occurred around the July 4th weekend, so perhaps consumers trade-up around holidays. For Molson Coors, the key is for revenues to be stable or slightly positive – rapid growth is not necessary for the stock to work as this is a cash-flow and stability story.

TAP shares continue to slip toward lows not seen in over a decade. For TAP shareholders, this is a bit of a hand-wringing time. There generally isn’t much meaningful news between quarterly reports, so the stock’s downward slide more reflects sentiment than facts. I own a decent amount of TAP shares personally, and am holding tight here. But I recognize the stress that the price decline puts on investors not as comfortable with sitting on underwater positions.

Patience is the key with Molson Coors shares. We think the value is solid although it might take a year or two to be recognized by the market. It is almost bizarre, in our view, that a reasonably stable food and beverage company like Molson Coors trades at perhaps half the multiple of typical consumer staples stocks.

TAP shares have about 75% upside to our 59 price target. At just under 34, the shares trade at a highly discounted 9.3x estimated 2020 earnings of $3.62/share, and about 8.7x estimated 2021 per share earnings of $3.88. One way to look at this low multiple is to think about what it implies about investors’ views on earnings. If investors applied a very conservative 12x multiple on 2021 earnings, it suggests that investors expect about $2.81 in earnings that year. We think it is highly unlikely that earnings would drop 22%, or even drop at all.

On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.7x 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 slipped about 2% this past week and have about 46% upside to our 43 price target.

ViacomCBS shares trade at about 7.4x estimated 2021 EBITDA, which we believe undervalues its impressive leadership and assets. On a price/earnings basis, VIAC shares trade at 6.4x estimated 2021 earnings of $4.62. ViacomCBS shares offer a sustainable 3.3% dividend yield and look attractive here. BUY


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 spinoff. 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 3.8% dividend yield.

Our price target for EQH shares is 28, which translates into about 5x estimated 2022 earnings of $5.77/share, or about .72x estimated tangible book value in a few years of $39/share (assuming no share repurchases).

We have recently learned that more strict standards may be applied to selling life insurance and other related products, depending on how the elections turn out next month. While this change would slow new product sales, we wonder about the likelihood of any new standards being implemented given the immense power of the insurance lobby. However, we note the risk and thought it useful to pass the thought on to you.

EQH shares fell 6% this past week. The shares now trade 10% below their 20 IPO price. Part of the weakness is likely due to the weak equity markets, which may pressure the value of the company’s investment portfolio, and thus its book value. However, the company seems to have a fairly effective hedging program that would mitigate much of the effect of any market downturn. We also note that the fixed income markets remain an anchor of stability.

Also, investors hoping for rising interest rates saw much of that hope dashed by the Fed’s new priority, which has been described as “low rates forever”. This likely led to some selling, as well.

Like many insurance companies, investors often value Equitable on a book value basis. On this basis, EQH shares trade at 63% of its $28.68 book value, a considerable discount.

EQH shares are also undervalued on earnings, trading at 4.1x 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.

MPC shares are essentially unchanged in the past week. Although the shares have 32% upside to our 41 price target, the uncertainty around the margin outlook keeps us, for now, from raising the shares to a Buy rating. The 7.5% 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, and possibly on hurricane-related sentiment (we’re in the heart of hurricane season).

Wall Street analysts are forecasting a 2020 full-year loss of $(3.36)/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 $0.53/share.

Like most energy stocks, MPC offers a useful vehicle for traders: its economics are closely tied to oil prices yet the company has stabilizing operations like its refining and MPLX midstream businesses. The large and pending cash inflow from the Speedway sale provides additional balance sheet stability and downside protection relative to most other energy companies. HOLD