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Value Investor
Wealth Building Opportunites for the Active Value Investor

January 19, 2022

The chances of a recession in the foreseeable future seems exceptionally unlikely. The domestic economy is booming: following last year’s estimated 5.2% growth, the economy is estimated to grow at a 3.3% pace this year. Any further Omicron-related deceleration appears more likely to be a temporary slowing rather than anything more ominous. Bolstering this view: future-watchers expect growth to continue at around a 3% pace in 2023. No recession in sight from their perspective.

Is a Recession Actually a Realistic Risk?
The chances of a recession in the foreseeable future seems exceptionally unlikely. The domestic economy is booming: following last year’s estimated 5.2% growth, the economy is estimated to grow at a 3.3% pace this year. Any further Omicron-related deceleration appears more likely to be a temporary slowing rather than anything more ominous. Bolstering this view: future-watchers expect growth to continue at around a 3% pace in 2023. No recession in sight from their perspective.

Even corporate revenues, as estimated by Factset and based on the companies in the S&P 500 Index, are expected to increase 7.6% this year and another 5.6% next year.

Part of successful investing is identifying risks. With both of our value-oriented advisories, this one and the Cabot Turnaround Letter, we concentrate on bottom-up stock-picking. We are in the stock analysis and selection business, not the prediction business – of markets, economies or much anything else. We like attractively valued stocks (which provides downside protection), ideally with some type of catalyst or positive change that will make the company more valuable (providing a driver to a higher valuation regardless of macro conditions).

But, we want to identify and understand what the macro risks are. Our approach is to keep an eye on the horizon, identify what risks are out there, then assess which ones seem to be getting bigger and which one seem to be fading. We currently have 16 risks on our roster – this list is certain to miss something but it provides us with some sense of what the “known unknowns” are. The primary merits of this list: to help keep us from being blindsided. If we have already seen and mentally discounted a major macro risk, we will be better prepared to stay the course if and when the problem arrives.

One risk we see on the horizon is an economic recession in the United States. How could this come about?

First, the gusher of extraordinary fiscal stimulus is in the past. Federal government spending is typically about 20% of GDP – last year it was about 30%. This incremental 10% of GDP won’t be matched this year, and will likely shrink. This effect by itself could prompt a recession, but so far it appears that private sector growth will more than offset the falling contribution from federal spending. Nevertheless, the math is interesting enough to help us understand what is involved.

Another driver: rising interest rates. The Fed seems poised to terminate its bond-buying program, then further tighten monetary conditions with at least three rate hikes (Wells Fargo economists believe the Fed will raise rates seven times over the next 21 months). While a 2% Fed funds rate is historically low, and still well below the inflation rate (see Tom Hutchinson’s outstanding explanation of the Fed’s conundrum, here), the incremental drag on the economy could be huge. Ultra-easy monetary policy has made financing for any project or investment ultra-easy – as this spigot gets constricted it will threaten a wide array of economy-boosting but only marginally worthy activity. While unlikely, this reversal in policy could spawn a recession.

A sharp decline in the stock market could help produce a recession. Collapsing stock prices could close the IPO window and constrict private equity and private credit deals. These deals fund money-losing businesses, so when the funding dries up the companies disappear, and so do the jobs they produced. This happened in the post-dot-com bubble era. The crypto-economy, which is increasingly linked to stock prices and whose profits and buoyant sentiment may be fueling consumer spending at the margin, may tumble, adding further pressure to recessionary pressures.

Other possible causes of a recession: an outbreak of hostilities in the Middle East or elsewhere, and high gasoline and other energy prices, among others.

If a recession does strike, it could be mild, like the post-2000 recession, or metastasize into a major downturn like the 2008 global financial crisis. We have no way of assessing the chances of these possible outcomes – we only want to be aware of them so we are not blindsided by some surprise.

As value-oriented investors, we may select our investments differently from the rest of the market. But in one way, we’re like all investors – we don’t like surprises.

Share prices in the table reflect Tuesday (January 18) closing prices. Please note that prices in the discussion below are based on mid-day January 18 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

Last Week’s Portfolio Changes
ConocoPhillips (COP) – Raising our price target from 80 to 89.

Upcoming Earnings Reports
Thursday, January 27: Dow (DOW)
Tuesday, February 1: Sensata Technologies (ST)
Thursday, February 3: Merck (MRK), ConocoPhillips (COP)
Friday, February 4: Bristol-Myers Squibb (BMY)

Growth/Income Portfolio
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, has a solid, investment-grade balance sheet, and trades at a sizeable discount to its peers.

If Bristol can demonstrate at least the reasonable potential for merely stable revenues during its patent expiration period, which we believe will happen, the shares are remarkably undervalued. On a free cash flow yield basis, assuming an average of $15 billion/year, the shares trade at a 11% free cash flow yield.

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

BMY shares slipped 2% in the past week and have about 21% upside to our 78 price target. Valuation remains low at 8.1x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 7.9x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.

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 4% in the past week, perhaps not surprising in the sloppy tech tape, and have 10% upside to our 66 price target. The stock trades near its post-dot-com peak, having surpassed its prior post-bubble high of about 58 set in mid-2019. The all-time high was set in March, 2000 at just over 80. The shares offer a 2.5% dividend yield. 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 oversized 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.

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

KO shares rose 1% in the past week and are just below their all-time high. The shares have about 5% 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 2.8% 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, its cyclicality and concern that management will squander its resources. The shares are driven by: 1) commodity plastics prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; 2) volume sold, largely driven by global economic conditions, and 3) ongoing efficiency improvements (a never-ending quest of all commodity companies). We see Dow as having more years of strong profits before capacity increases signal a cyclical peak, and expect the company to continue its strong dividend, reduce its pension and debt obligations, repurchase shares slowly and restrain its capital spending.

Industry conditions will likely be strong for a while. Dow remains well-positioned to generate immense free cash flows over the next few years, even as the stock market cares little about cash but rather is focused on the incremental newsflow related to economic growth, energy prices and any industry capacity changes. In the meantime, Dow shareholders can collect a highly sustainable 4.6% dividend yield while waiting for more share buybacks, more balance sheet improvement, more profits and a higher valuation.

There was no significant company-specific news in the past week. We note the incremental 1% increase in earnings estimates for 2022 and 2023.

Dow shares rose 2% in the past week and have 29% upside to our 78 price target. BUY

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

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

Merck shares were flat in the past week. Investor expectations are very low yet the company won’t passively accept its presumed demise. The shares have about 22% upside to our 99 price target.

Merck produces generous free cash flow to fund its current dividend (now yielding 3.4%) as well as likely future dividend increases (the company recently raised its dividend by 6%), although its shift to a more acquisition-driven strategy will slow the pace of increases. BUY

Buy Low Opportunities Portfolio
Arcos Dorados (ARCO), which is Spanish for “golden arches,” is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina and Chile. The shares are depressed as investors worry about the pandemic, as well as political/social unrest, inflation and currency devaluations. However, the company has a solid brand and high recurring demand and is well-positioned to benefit as local economies reopen. The leadership looks highly capable, led by the founder/chairman who owns a 38% stake, and has the experience to successfully navigate the complex local conditions. Debt is reasonable relative to post-recovery earnings, and the company is currently producing positive free cash flow.

Macro issues, including issues in Brazil including its economic conditions (in particular, inflation, running at a 10.1% rate), currency and the chances that a socialist might win next year’s Brazilian presidential elections will continue to move ARCO shares. Brazil is one of the most Covid-vaccinated countries in the world, which reduces pandemic-related demand risks.

The company will hold its annual Investor Day on January 26, 2022, at 7:30am New York time, with a live webcast available through Arcos’ website. There was no significant company-specific news in the past week.

ARCO shares slipped 2% in the past week and have about 37% upside to our 7.50 price target. We remain steady in our conviction in the company’s recovery. BUY

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc was hired as the new CEO in July 2020 to revitalize Aviva’s laggard prospects. She divested operations around the world to re-focus the company on its core geographic markets (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 and share repurchases.

Much of our interest in Aviva is based on its plans for returning its excess capital to shareholders, including share repurchases and dividends. These distributions could be substantial. We also look for incremental shareholder-friendly pressure from highly regarded European activist investor Cevian Capital, which holds a 5.2% stake.

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

Aviva shares rose 1% in the past week. Insurance company stocks are sensitive to financial market gyrations (in both directions) they have leveraged balance sheets with their principal tangible assets being investments and securities. Aviva shares have about 17% upside to our 14 price target. BUY

Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest-quality gold mining companies. About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%). Barrick will continue to improve its operating performance (led by its new and highly capable CEO), generate strong free cash flow at current gold prices, and return much of that free cash flow to investors while making minor but sensible acquisitions. Also, Barrick shares offer optionality – if the unusual economic and fiscal conditions drive up the price of gold, Barrick’s shares will rise with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work – it offers extra upside. Barrick’s balance sheet has nearly zero debt net of cash. Major risks include the possibility of a decline in gold prices, production problems at its mines, a major acquisition and/or an expropriation of one or more of its mines.

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

Over the past week, commodity gold slipped fractionally to $1,814/ounce. Per-ounce gold prices remain range-bound between $1,700 and $1,900. The 10-year Treasury yield jumped to 1.84%. While this yield is a post-pandemic high, it is roughly equal to rates in late 2019, suggesting that interest rates could rise a lot more given the 7% inflation rate (compared to maybe 2% in late 2019). The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), was unchanged at 95.71. The index remains about 3% below its pre-Covid late 2019 level of about 99.

Concerns over the Fed’s pace and magnitude of tightening, as well as geopolitical tensions in the Ukraine, along a general increase in global tensions, have pushed around gold, interest rates and the dollar. We see the vast spread between upper-1% Treasury yields and nearly 7% inflation rate being closed at least partly by rising interest rates. It would seem highly unlikely that the spread remains any wider than three or four percentage points over time.

If the Fed is too slow in raising rates compared to inflation, gold prices seem poised to surge. However, if the Fed over-corrects by raising rates too quickly, gold would appear overpriced. Yet, one wonders if the Fed would then reverse course to slash interest rates as they did following their over-tightening in late 2018.

Barrick shares were flat 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 paid an additional $0.42/share in special distributions last year (no clarity on 2022 special dividends), lifting the effective dividend yield to 4.2%. BUY

Citigroup (C) – Citi is one of the world’s largest banks, with over $2.4 trillion in assets. The bank’s weak compliance and risk-management culture led to Citi’s disastrous and humiliating experience in the 2009 global financial crisis, which required an enormous government bailout. The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser.

Citigroup reported fourth-quarter earnings of $1.46/share, missing the consensus earnings estimate of $1.66/share. However, excluding a large negative impact from expenses related to the Asia divestitures, earnings would have been $1.99/share – well-ahead of consensus. It’s not clear what the consensus included, so we’ll grade Citi’s results as good enough, given all of the strategic and macro changes underway. Citi shares fell about 1% on a day when most other bank shares also fell.

Overall, the Citi’s retrench and rebuild turnaround is on track even as expenses will likely remain a bit elevated due to divestiture and rebuilding costs as well as rising compensation costs.

Revenues rose about 1% from a year ago. In the Institutional Clients group (which includes trading, investment banking, corporate lending and other activities), revenues rose 4% as capital market activity remained robust. Revenues in the Global Consumer group fell 6% due to weak lending and mortgage revenues. Corporate revenues rose by $288 million, but this segment is driven by gains in the investment portfolio and run-off businesses, so it is less important to Citi’s overall value.

Operating expenses rose 18%. Excluding $1.2 billion of costs related to the Asia divestitures, expenses rose 8% – still large but understandable as the bank is investing more in its core business after years of underspending. For the year, expenses excluding Asia divestiture expenses rose 6%.

Credit losses (write-offs) remained low at $866 million, or about 0.13% of total loans. Citi released about $400 million in reserves. The bank may release more reserves, especially if credit trends continue to improve, but if so then releases would likely be at a much slower pace. Citi has plenty (arguably still too much) of reserves (at 2.49% of loans), as well as plenty of capital (CET1 ratio of 12.2%).

Adjusted net income slipped 2% from a year ago. Fourth-quarter adjusted return on tangible equity (ROTE) was 10.1%, down slightly from 10.6% a year ago. For the year, ROTE was 14.4%, definitely moving in the right direction (was 6.6% in 2020).

Citi halted its share repurchase program in the fourth quarter, to help it maintain its capital ratios as it charges off various costs. We anticipate that Citi will resume its repurchase program in the first quarter.

Strategic changes continue. Citi announced that it is divesting its Mexico retail banking business. This market is one of Citi’s largest retail operations – its divestiture is an encouraging indication that the bank is serious about its retrench-and-rebuild strategy that focuses on the United States. However, we note that the Mexico retail operations had a return on tangible capital of about 25%, so the exit synergies need to develop fairly quickly. CEO Jane Fraser called the Mexico retail business “… a jewel” but for someone else not Citi. She should know: she oversaw the business when she ran Citi’s Latin America operations. The divested Asia operations had a roughly 5% ROTE, so their divestiture was an easy call. The bank will retain its institutional and private banking operations in Mexico.

Citi also announced its exit from Vietnam, Malaysia, Indonesia and Thailand.

According to Fraser, Citi wants to “be the pre-eminent bank for institutions with cross-border needs” and be a “global leader in wealth, a major player in consumer payments and lending in the home market.” Underlying the strategy is to become “simplified, more focused.”

Citi is changing its reporting structure to more clearly highlight the value of its businesses. While we are aware of the deck-chair-reshuffling risk that comes with such moves, these changes make a lot of sense. Similar operations are being grouped together: within Institutional Clients Group, the stable-earning TTS and Securities Services are now under the “Services” segment while volatile-earning Equity Markets and Fixed Income Market are combined under “Markets.” Private Banking is now grouped with Wealth Management – it never belonged in the Institutional segment, and being part of a transactions-driven business can lead to bad practices like stuffing individual accounts with unsalable but high-margin in-house investment products. Also, the bank is isolating businesses that it is selling or winding down to keep their impact separate from core operations.

Citi shares fell 2% over the past week and have about 29% upside to our 85 price target. The valuation remains attractive at 83% of tangible book value and 8.4x estimated 2022 earnings. Our set of peer banks currently trade at an average of 2.1x tangible book value and 13.5x estimated 2022 earnings. Citi shares are among the cheapest in the banking sector – a major attraction as expectations are low. As the bank grinds along with its turnaround, the valuation should continue to lift.

The recent surge in the 10-year Treasury yield has helped boost the shares. The Treasury market has shown little concern about inflation. With inflation currently running at 7.0%, Treasuries would produce a negative post-inflation return of about 5% every year – this seems unsustainable. For perspective, a 7.0% inflation rate over ten years produces a near-doubling of the price level. Treasury investors would be left far behind in terms of spending power.

Given this, Treasury yields and inflation rates should eventually converge (perhaps not to the exact same rate but certainly a lot closer than the current 5-percentage point spread). The market still seems convinced that the inflation rate will tumble back to perhaps a 3% pace, such that more aggressive Fed action beyond their anticipated three rate hikes is not needed.

We see a greater likelihood that when the Fed stops its bond buying program, bond prices and yields will return to the market’s control, for the most part. This will probably result in higher interest rates across the board. This would be supportive of Citi’s earnings power.

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

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

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

Last week, we wrote about how an increase in underground tremors in the Texas shale drilling regions is prompting regulators to restrict the use of water disposal wells. This week, the Wall Street Journal picked up on the story – indicating that the issue is starting to reach the investing mainstream. We continue to anticipate that the overall effect on ConocoPhillips and other major producers is not likely to be large but could reduce overall oil industry production and be incrementally supportive of oil prices and thus Conoco.

West Texas Intermediate crude is currently trading at $85.03/barrel, up 5% from a week ago, while natural gas in the United States is priced at $4.10, up about 5% from a week ago. Cold weather is pressuring natural gas prices around the world, including in Europe which relies on gas from Russia via a pipeline that runs through Ukraine. The recent attacks on oil-producing giant United Arab Emirates, once thought to be somewhat out of the rebels’ range, add to fears of an oil supply crunch.

ConocoPhillips shares jumped 4% in the past week and have about 2% upside to our recently raised 89 price target. Earnings estimates for the next two years have increased by 3-6% as oil prices move upwards. 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 straightforward – a reasonably stable company whose shares sell at an overly discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently re-instated its dividend.

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

TAP shares rose 5% in the past week and have about 33% 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 8.6x 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 fell 3% in the past week and have about 44% upside to our 46 price target (using the same target as the Cabot Turnaround Letter). The shares continue to trade at a remarkably low valuation while offering an attractive 3.5% dividend yield. BUY

Sensata Technologies (ST) is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. As the sensors’ reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market.

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

ST shares fell 3% in the past week to about 4% below their all-time high. Until their earnings report, there is little reason for the shares to fully escape the downturn in nearly all technology shares. The shares have about 21% upside to our 75 price target. BUY

Disclosure:The chief analyst of the Cabot Undervalued Stocks Advisor personally holds shares of every recommended security, except for “New Buy” recommendations. The chief analyst may purchase or sell recommended securities but not before the fourth day after any changes in recommendation ratings has been emailed to subscribers. “New Buy” recommendations will be purchased by the chief analyst as soon as practical following the fourth day after the newsletter issue has been emailed to subscribers.

Growth/Income Portfolio
Stock (Symbol)Date AddedPrice Added1/18/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Bristol-Myers Squibb (BMY)04-01-2054.8264.8918.4%3.3%78.00Buy
Cisco Systems (CSCO)11-18-2041.3259.7344.6%2.4%66.00Buy
Coca-Cola (KO)11-11-2053.5860.9013.7%2.7%64.00Buy
Dow Inc (DOW) *04-01-1953.5060.2012.5%4.7%78.00Buy
Merck (MRK)12-9-2083.4781.54-2.3%3.4%99.00Buy
Buy Low Opportunities Portfolio
Stock (Symbol)Date AddedPrice Added1/18/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Arcos Dorados (ARCO)04-28-215.415.410.0%7.50Buy
Aviva (AVVIY)03-03-2110.7512.0712.3%5.1%14.00Buy
Barrick Gold (GOLD)03-17-2121.1318.56-12.2%1.9%27.00Buy
Citigroup (C)11-23-2168.1065.30-4.1%3.1%85.00Buy
ConocoPhillips (COP)9-24-2165.0287.5134.6%2.1%89.00Buy
Molson Coors (TAP)08-05-2036.5351.6541.4%2.6%69.00Buy
Organon (OGN)06-07-2131.4232.072.1%3.5%46.00Buy
Sensata Technologies (ST)02-17-2158.5762.576.8%75.00Buy

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

Buy – This stock is worth buying.
Strong Buy – This stock offers an unusually favorable risk/reward trade-off, often one that has been rated as a Buy yet the market has sold aggressively for temporary reasons. We recommend adding to existing positions.
Hold – The shares are worth keeping but the risk/return trade-off is not favorable enough for more buying nor unfavorable enough to warrant selling.
Sell – This stock is approaching or has reached our price target, its value has become permanently impaired or changes in its risk or other traits warrant a sale.

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

CUSA Valuation and Earnings
Growth/Income Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
BMY 64.28 7.89 8.190.0%0.0% 8.1 7.8
CSCO 59.88 3.42 3.680.0%0.0% 17.5 16.3
KO 60.83 2.43 2.600.0%0.0% 25.0 23.4
DOW 60.25 6.32 6.441.0%1.6% 9.5 9.4
MRK 81.27 7.24 7.230.0%0.0% 11.2 11.2
Buy Low Opportunities Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
ARCO 5.46 0.30 0.370.0%0.0% 18.2 14.7
AVVIY 12.00 1.24 1.35-2.1%0.0% 9.7 8.9
GOLD 18.78 1.13 1.13-0.7%-1.4% 16.6 16.6
C 65.64 7.84 8.460.0%0.0% 8.4 7.8
COP 87.30 8.32 7.482.8%5.5% 10.5 11.7
TAP 51.86 4.08 4.340.0%-0.2% 12.7 11.9
OGN 31.88 5.90 6.02-0.5%0.0% 5.4 5.3
ST 62.17 4.07 4.69-0.2%-0.4% 15.3 13.3

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