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Value Investor
Wealth Building Opportunites for the Active Value Investor

October 13, 2021

Last week, we wrote about how lower quality, in both home appliances and tangible money, debases value and is a form of inflation. Today’s note includes some of our current views on inflation and capital markets, and what investors can do to help mitigate inflation’s effects on their portfolios. The goal, of course, is to protect the long-term purchasing power of investment assets.

Thoughts on Protecting Against Inflation
Last week, we wrote about how lower quality, in both home appliances and tangible money, debases value and is a form of inflation. Today’s note includes some of our current views on inflation and capital markets, and what investors can do to help mitigate inflation’s effects on their portfolios. The goal, of course, is to protect the long-term purchasing power of investment assets.

Like quality debasement, quantity debasement reduces the value of an asset. Surging supply makes any asset incrementally less desirable. A useful example is oil – if there is too much oil, its price collapses. At the extreme, like we saw in April 2020, oil has negative value. If the asset is the U.S. dollar, the effect is inflation. The lower the value of the dollar, the more dollars it takes to buy other stuff with it. With an open firehose of dollars gushing out of Washington – both from rising government spending and from aggressive Federal Reserve Bank policies – the value of the dollar is being debased. This quantitative debasement is perhaps a more transparent term compared to the Fed’s “quantitative easing” term.

We think of inflation in stages. The U.S. economy is currently in an early inflation stage. Inflation appears localized in specific assets and products, including housing, energy and other cyclical commodities, entry-level wages, cars, and some food products. As long as inflation remains constrained to relatively narrow categories, there is probably limited incremental risk to a portfolio’s long-term purchasing power. Investors can adapt by buying shares of companies that directly benefit from this inflation.

In the current Cabot Undervalued Stocks Advisor roster, ConocoPhillips (COP) is a clear beneficiary of rising oil and natural gas prices, while higher new and used car prices are boosting General Motors (GM) shares. Another beneficiary would be homebuilders (we’re not yet interested due to the elevated valuations and risks of higher input and labor costs). Our approach in this stage of inflation is to remain valuation-sensitive and, if possible, have company-specific catalysts.

When inflation, or investor psychology, shifts into a different inflation stage, markets can become highly volatile and not always in the favored direction.

If inflation makes an upshift into becoming more widespread and entrenched, portfolio protection becomes more difficult, as secondary effects come into play. Capital markets are currently evaluating whether this transition is underway. The Fed, for example, may begin to raise interest rates, which can affect an entire investment portfolio, not just selected stocks. Investing in this climate (which we are approaching but haven’t entered yet) generally means buying rising interest rate beneficiaries like banks, as well as cash-flow-rich yet undervalued companies with pricing power. It also would likely mean selling high-multiple, low-earning companies, although those with impressive yet underappreciated growth potential should be able to power through the interest rate headwinds. Treasury bonds indexed to inflation (like TIPS) can be highly effective, as can personally owned real estate like one’s home.

Should inflation accelerate to a sustained 7-10% pace, portfolio defenses need to shift to a different approach. Financial assets like stocks and bonds will broadly lose value, as the effect of rising interest rates takes hold. Tangible assets like personally owned real estate would likely hold their value.

Shares of companies with steady demand, such as makers of consumer necessities with pricing power like beverages, including Coca-Cola (KO) and Molson Coors (TAP), and pharmaceutical makers like Bristol-Myers Squibb (BMY) and Merck (MRK), should be better relative performers although they would likely lose considerable value. We believe that if faced with these conditions, the Fed would be behind the inflation curve even as the federal government would boost its spending – such a set-up would clearly benefit Barrick Gold (GOLD). Shares of companies like Cisco (CSCO), Arcos Dorados (ARCO), Aviva (AVVIY) and Sensata (ST) may suffer. TIPS would continue to offer reasonable protection but probably could not offset all of the damage to a securities-based portfolio.

Yet, regardless of one’s outlook, diversification is critical. There is no way to get the portfolio decisions exactly right. It’s also useful to remember that, even if inflation surges and appears intractable, it can all change quickly in the opposite direction. Almost exactly 40 years ago, on September 30, 1981, the 20-year US Treasury bond hit a yield of 15.78%. Investors could hardly be bothered to buy at these stunningly generous yields. But, by Thanksgiving, less than 60 days later, the yield had collapsed to 13%, on its way to less than 7.6% by 1986.

In this week’s edition, we are introducing a new Earnings and Valuation table. This will make it easier to see the trends in earnings estimates, and the P/E valuations, for all of the recommended companies. We welcome your feedback and suggestions for further improvements.

Share prices in the table reflect Tuesday (October 12) closing prices. Please note that prices in the discussion below are based on mid-day October 12 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.

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Today’s Portfolio Changes
Otter Tail Corporation (OTTR) – Moving from Hold to Sell.

Last Week’s Portfolio Changes
Otter Tail Corporation (OTTR) – Moving from Buy to Hold.

Bristol Myers Squibb Company (BMY) shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry. The likely worst-case scenario is flat revenues over the next 3-5 years. Bristol should continue to generate vast free cash flow, helped by a $2.5 billion cost-cutting program, and has a relatively modest debt level.

In a Phase 2 study, Bristol’s treatment for ulcerative colitis failed to show favorable results, which weighed on the stock. The company nevertheless remains optimistic about deucravacitinib’s longer-term prospects.

BMY shares slipped another 4% in the past week and have about 37% upside to our 78 price target.

We continue to believe that most of the downward pressure on BMY shares is due to worries over new drug price controls in the $3.5 trillion infrastructure bill, although some emerging worries about the company’s ability to replace its patent-expiring treatments may be creeping in.

Given the shares’ ever-falling valuation, especially against relatively steady earnings estimates, we think the stock looks increasingly attractive. Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 3.4% dividend yield that is well-covered by enormous free cash flow make a compelling story. BUY

Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

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

CSCO shares slipped 1% in the past week and have about 10% upside to our 60 price target. The shares remain attractive at 16.2x estimated FY2022 earnings and 11.3x EV/EBITDA based on FY2022 estimates. CSCO shares offer a 2.7% dividend yield. We continue to like Cisco. BUY

Coca-Cola (KO) is best-known for its iconic soft drinks yet nearly 40% of its revenues come from non-soda beverages across the non-alcoholic spectrum. Its global distribution system reaches nearly every human on the planet. Coca-Cola’s longer-term picture looks bright, but the shares remain undervalued due to concerns over the pandemic, the secular trend away from sugary sodas, and a tax dispute which could cost as much as $12 billion (likely worst-case scenario). The relatively new CEO James Quincey (2017) is reinvigorating the company by narrowing its 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.

Competitor PepsiCo reported encouraging third-quarter sales, and raised its revenue guidance, as demand for soda in restaurants and other venues rebounded. This is a favorable backdrop for Coca-Cola’s upcoming earnings report.

Coca-Cola said it is expanding its partnership with MolsonCoors to bring TopoChico Hard Seltzer to Canadian markets starting next summer, following its initial success in the United States.

KO shares rose another 2% this past week following PepsiCo’s results and have about 18% upside to our 64 price target.

While the valuation is not statistically cheap, the shares remain undervalued given the company’s future earning power and valuable franchise. Also, the value of Coke’s partial ownership of a number of publicly traded companies (including Monster Beverage) is somewhat hidden on the balance sheet, yet is worth about $23 billion, or 9% of Coke’s market value. This $5/share value provides additional cushion supporting our 64 price target. KO shares offer an attractive 3.1% dividend yield. BUY

Dow Inc. (DOW) merged with DuPont to create DowDuPont, then split into three companies in 2019 based on product type. The new Dow is the world’s largest producer of ethylene/polyethylene, the most widely used plastics. Investors undervalue Dow’s hefty cash flows and sturdy balance sheet largely due to its uninspiring secular growth traits and its cyclicality. 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). Investors worry about a cyclical peak and whether Dow will squander its vast free cash flow. 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.

At its investor day last week, Dow mostly reiterate its message of disciplined growth, free cash flow generation and ESG principles. The company highlighted its financial targets of earning another $3 billion in underlying EBITDA, greater-than 13% ROIC, 2.0-2.5x adjusted debt-EBITDA and returning 65% of net income to shareholders.

One disappointment was that the company increased (somewhat modestly) its capital spending plans, partly on a new zero net emissions facility in Alberta, Canada, as part of its drive to become a fully net-zero-emissions company by 2050. We’re of mixed views on this: clearly it is important for the global environment and boosts Dow’s ESG bonafides, but the transition is risky – can it be done in an economically efficient way?

Overall, although the 119-slide presentation contained little new information, it was helpful in increasing our understanding of Dow’s plans.

Dow shares slipped 3% this past week and have 36% upside to our 78 price target.

Analysts are somewhat pessimistic about 2022 earnings (they assume a 29% decline from 2021). However, the 2023 estimate ticked up 4% - an encouraging sign perhaps related to renewed confidence in Dow’s plans and outlook.

The high 4.9% dividend yield adds to the shares’ appeal – especially in a low-interest-rate environment. In a prolonged downcycle, the dividend could be cut, but that could be years away and even then a cut isn’t a certainty if Dow can manage its balance sheet and down-cycle profits reasonably well. BUY

Merck (MRK) shares are undervalued as investors worry about Keytruda, a blockbuster oncology treatment (about 30% of revenues), facing generic competition in late 2028. Also, its Januvia diabetes treatment may see generic competition next year, and like all pharmaceuticals it is at risk from possible government price controls. Yet, Keytruda is an impressive franchise that is growing at a 20% rate and will produce solid cash flow for nearly seven more years, providing the company with considerable time to replace the potential revenue loss. Merck’s new CEO, previously the CFO, will likely accelerate Merck’s acquisition program, which adds both 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 and we think it will divest its animal health sometime in the next five years.

Merck’s molnupiravir has generated considerable media and industry buzz. The company is pressing for FDA approval, which would be a huge boost to MRK shares, and other health organizations including the World Health Organization are showing strong interest as well. We recently read some comments about a risk that the treatment may create. While we are not medical experts, our understanding of the treatment is that it inserts errors into the virus’ genetic code, with these mutations then preventing replication, thus ending the threat to one’s health. However, there is some concern (we have no way to evaluate these) that the treatment could also alter human genetic codes, thus creating a form of cancer. This outcome would end the future of molnupiravir and likely pull MRK shares back to the low 70 price range.

The European Union is hoping to sign a supply deal with Merck for the experimental drug, and Merck is planning to boost its production of molnupiravir in advance of what appears to be strong demand.

Merck shares slipped 3% this past week as enthusiasm over their Covid treatment faded a bit and have about 25% upside to our 99 price target. Valuation remains attractive, especially as earnings estimates for 2022 moved up about 4%.

We note that Keytruda’s patent expiration doesn’t happen until late 2028. If the company produces earnings close to these estimates and continues to provide evidence of solid post-Keytruda prospects, as we expect, the shares are considerably undervalued.

Merck produces generous free cash flow to fund its current dividend (now yielding 3.3%) as well as likely future dividend increases, although its shift to a more acquisition-driven strategy will slow the pace of increases. BUY

Otter Tail Corporation (OTTR) is a rare utility/industrial hybrid company, with a $2 billion market cap. The electric utility has a solid and high-quality franchise, with a balanced mix of generation, transmission and distribution assets that produce about 75% of the parent company’s earnings, supported by an accommodative regulatory environment. The industrial side includes the Manufacturing and Plastics segments. Otter Tail has an investment grade balance sheet, produces solid earnings and prides itself on steady dividend growth. The unusual utility/manufacturing structure is creating a discounted valuation, which might make the company a target for activists, as the two parts may be worth more separately, perhaps in the hands of larger, specialized companies.

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

OTTR shares slipped 1% this past week and trade at our 57 price target. The valuation is full, and we see balanced risk/return at this point. In a rising rate environment, the slow but steady growth of the utility segment profits become incrementally lower-multiple. The cyclical surge in the manufacturing segment profits may have one more step-up but are probably capped afterwards and may face pressure from rising costs. As such, we are moving OTTR shares to a SELL. SELL

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. Arcos’ leadership looks highly capable, led by the founder/chairman who owns a 38% stake. The shares are undervalued as investors worry about the pandemic, as well as political/social unrest, inflation and currency devaluations. However, the company is well-managed and positioned to benefit as local economies reopen, and it 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 will continue to move ARCO shares. We would like to see stability/strength in the Brazilian currency after its weakness since the pandemic. The pace of vaccinations in Brazil appears to be accelerating, which should boost economic results later this year, likely helping Arcos’ business. The political situation is edgier, as slow job growth increases the pressure on the president, Jair Bolsonaro, in advance of the October 2022 election. See additional comments in our September 1 letter.

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

ARCO shares slipped another 4% this past week and have about 54% upside to our 7.50 price target. Investors are showing more worries about Brazil’s economic difficulties, even as Covid risks are becoming less acute. We remain steady in our conviction in the company’s recovery. The low share price offers a chance to add to or start new positions. BUY

Aviva, plc (AVVIY), based in London, is a major European insurance company specializing in life insurance, savings and investment management products. Amanda Blanc was hired as the new CEO last year to revitalize Aviva’s laggard prospects. She has divested operations around the world to aggressively re-focus the company on its core geographic markets (UK, 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.

Much of our interest in Aviva is in what it plans to do with its current and future excess capital, including the proceeds from its divestitures. So far, the company has recently raised its interim dividend by 5% to £0.0735/share (about $0.20 per ADS, as there are 2 underlying common shares per ADS, and the exchange rate is about $1.38) and will return at least £4 billion (about $5.5 billion) by 2H 2022, mostly through share buybacks. It will complete £750 million of the buybacks “immediately.” The balance of the divestiture proceeds will go toward debt paydown.

We anticipate that the company will pay a final (year-end) dividend of about twice its interim dividend, for a full-year total recurring dividend of about $0.61/ADS. On this, the shares would produce an annual dividend yield of about 5.7% – rather appealing in an era when AA-rated corporate bonds yield about 1.8%

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

Aviva shares were flat this past week and have about 28% upside to our 14 price target. BUY

Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest quality gold mining companies. About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%). The market has little interest in Barrick shares. Yet, 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 more cash than debt. 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.

Commodity gold prices stabilized at $1,759/ounce while the 10-year Treasury yield continued to move up, now at 1.58%. The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions) is trading at 94.53, continuing its upward move since this past May. The index remains about 4% below its pre-Covid late-2019 level of about 99. Gold prices seems range-bound for now.

The market continues to be impatient with gold stocks, in no small part due to rising interest rates. If interest rates keep rising, it certainly is possible that gold prices slip further. As Barrick’s shares are sensitive to gold prices, they will fall farther and faster, and have the possibility of dipping into the mid-teens. Investors not comfortable with this possibility should probably sell their Barrick shares.

Our view is to hang onto Barrick shares, wait until the momentum sellers clear out, then buy more. Fundamentally, the company is doing well and has solid leadership, quality mines and a very strong balance sheet. It might take a long time, but we remain confident that eventually the shares will hit the target price.

Not to get too far into the weeds, but if the U.S. economy stalls out (inevitable at some point), and if/when the stock market tumbles, it seems highly likely that the Fed will return to a zero-rate environment and the federal government will unleash another huge stimulus package. These would probably be an unmitigated positive for gold prices and for Barrick shares.

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

Barrick shares rose 3% this past week and have about 44% upside to our 27 price target. The price target is based on 7.5x estimated steady-state EBITDA and a modest premium to our estimate of $25/share of net asset value.

On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.9% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year (no clarity on 2022 special dividends), lifting the effective dividend yield to 4.2%. BUY

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

Yet, supporting energy prices is resilient demand, especially as the challenges to reducing the reliance on carbon-based energy remain daunting. Subdued supply growth should also support oil prices, particularly as major energy companies are under increasing pressure to reduce their production to help fight climate change. And, following years of aggressive drilling in the US, shale oil’s most productive days may be in the past. If so, domestic production, now running about 15% below 2019 levels, may be permanently lower.

We like Conoco’s low valuation at about 5x EV/EBITDAX as well as its free cash flow yield of close to 12%. Many analysts still have oil prices of perhaps $55-$60/barrel in their earnings estimates, implying that profits and cash flow will be stronger than estimated.

Conoco has an investment-grade balance sheet, produces strong free cash flow, and has publicly committed to limiting its capital spending to 50% of its annual cash flow. The shares offer a respectable base-level dividend to shareholders that appears rock-solid.

West Texas Intermediate crude is currently trading at $80.57/barrel, while natural gas in the United States is priced at $5.48. At these prices, we anticipate considerable profits from Conoco.

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

ConocoPhillips shares rose 3% this past week and have about 9% upside to our 80 price target. We note the 4-6% increase in the consensus earnings estimates, likely reflecting the steady increase in oil and natural gas prices. On its recurring $.46/quarter dividend, COP shares offer a 2.5% dividend yield. BUY

General Motors (GM) is making immense progress with its years-long turnaround. It is perhaps 90% of the way through its gas-powered vehicle turnaround and is well-positioned but in the early stages of its electric vehicle (EV) development. GM Financial will likely continue to be a sizeable profit generator. GM is fully charged for both today’s environment and the EV world of the future, although the underlying value of its emerging EV business is unclear.

The shares reflect conservative but reasonably strong gas-powered vehicle profits but assign no value to the EV operations. This zero-value almost certainly is wrong but the EV operations have no sales or profits so the valuation is by definition speculative at this point.

GM held its investor meeting last week, highlighting its ambitions for the next decade or so. Our initial impression of the 59-page slide deck and various Day 2 more in-depth presentations is that GM has laid out a fascinating and all-encompassing vision, in at least reasonable detail, for its rollout of all kinds of new technologies and services. The company is aiming for revenues to at least double, to nearly $300 billion, by 2030, with overall margins expanding to 12-14%, well-above the 6-8% margin rate of prior years. EV revenues are projected to be as high as half of total vehicle revenues, or about 35% of total sales. New technology and services will go from maybe $2 billion in revenues today to as much as 30% by the end of this decade and produce wide profit margins.

Yet in stepping back from what is a brain-full to digest, the upshot is that GM will make capital investments of $10 billion a year, basically forever, on top of spending that runs through the income statement. That’s a lot of money going out the door that otherwise could go into shareholders’ pockets. And, it is all going toward new technologies and other stuff that doesn’t really exist today and may or may not have strong demand in the future. GM’s case IS compelling, but speculative, nevertheless.

GM hopes to garner a higher valuation through all of this, maybe move GM from its current 1x revenues valuation today to perhaps a 2-3x revenues valuation. This would compare to Tesla’s 15x revenues valuation. But, many (most?) of GM shareholders today aren’t the same ones that bid up Tesla and other tech stock to high valuations. To earn a 2-3x or higher valuation, GM investors would require consistent execution, impressive results and a reasonably robust gas-powered vehicle market basically every year, for perhaps five or more years, to achieve full investor buy-in. That’s a lot to ask for. Especially when one is reminded that GM just recalled, for the second time, its Chevy Bolt EVs, has run into a colossal shortage of semiconductors, and is recovering from a brief but deep pandemic – none of which were in its plans as recently as 19 months ago.

So, we don’t see GM soon becoming a high-multiple company, although from the opposite perspective the shares embed low expectations. We’ll let the shares ride up a bit more, perhaps to our 69 target, then say goodbye for now. This stock will likely get cheap again, and we’d be thrilled to buy it back.

GM will receive up to $1.2 billion from LG Chem to cover costs of the Chevy Bolt recall due to battery fires.

GM shares surged 8% this past week following their investor update and have 17% upside to our 69 price target.

The valuation remains attractive. The P/E multiple is helpful, but not a precise measure of GM’s value, as it has numerous valuable assets that generate no earnings (like its Cruise unit, which is developing self-driving cars and produces a loss), its nascent battery operations, and its other businesses with a complex reporting structure, nor does it factor in GM’s high but unearning cash balance which offsets its interest-bearing debt. However, it is useful as a rule-of-thumb metric, and provides some indication of the direction of earnings estimates, and so we will continue its use here. We are raising our rating to 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 reinstated its dividend.

Coca-Cola said it is expanding its partnership with MolsonCoors to bring TopoChico Hard Seltzer to Canadian markets starting next summer, following its initial success in the United States.

TAP shares slipped 5% in the past week and have about 51% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.1x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. BUY

Organon & Company (OGN) was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings.

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

OGN shares rose 1% this past week and have about 40% upside to our 46 price target (using the same target as the Cabot Turnaround Letter). The shares continue to trade at a remarkably low valuation and offer an attractive 3.4% dividend yield. BUY

Sensata Technologies (ST) is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. Also, 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.

Once a threat, electric vehicles are now an opportunity, as the company’s expanded product offering (largely acquired) allows it to sell more content into an EV than it can into an internal combustion engine vehicle. Risks include a possible automotive cycle slowdown, chip supply issues, geopolitical issues with China, currency and over-paying/weak integration related to its acquisitions.

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

ST shares rose 1% this past week and have about 32% upside to our 75 price target. The stock trades at an attractive valuation, including its 10.9x EV/EBITDA multiple based on estimated 2022 results. BUY

Note for stock table: For stocks rated Sell, the current price is the sell date price.

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 Added10/12/21Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Bristol-Myers Squibb (BMY)04-01-2054.8257.064.1%3.4%78.00Buy
Cisco Systems (CSCO)11-18-2041.3254.2831.4%2.7%60.00Buy
Coca-Cola (KO)11-11-2053.5854.231.2%3.0%64.00Buy
Dow Inc (DOW) *04-01-1953.5057.747.9%4.8%78.00Buy
Merck (MRK)12-9-2083.4779.59-4.6%3.3%99.00Buy
Otter Tail Corporaton (OTTR)5-25-2147.1057.2721.6%2.7%57.00Sell
Buy Low Opportunities Portfolio
Stock (Symbol)Date AddedPrice Added10/12/21Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Arcos Dorados (ARCO)04-28-215.414.83-10.7%7.50Buy
Aviva (AVVIY)03-03-2110.7510.931.7%5.4%14.00Buy
Barrick Gold (GOLD)03-17-2121.1318.66-11.7%1.9%27.00Buy
ConocoPhillips (COP)9-24-2165.0273.4112.9%2.5%80.00Buy
General Motors (GM)12-31-1936.6058.9661.1%69.00Buy
Molson Coors (TAP)08-05-2036.5345.7725.3%69.00Buy
Organon (OGN)06-07-2131.4232.844.5%46.00Buy
Sensata Technologies (ST)02-17-2158.5756.63-3.3%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
Prior 2022
EPS Estimate
Prior 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
Buy Low Opportunities Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Prior 2022
EPS Estimate
Prior 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023

Current price is yesterday’s mid-day price.