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Value Investor
Wealth Building Opportunites for the Active Value Investor

July 11, 2023

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What Are We Thinking About for the Rest of 2023?

The first half of the year produced stock market returns that few, if any, anticipated. The S&P 500 has uncorked a 15.6% year-to-date return (through last Friday), a remarkably strong showing relative to the index’s history. Brokerage firm forecasts for the rest of the year have an exceptionally wide breadth given the equally wide range of economic forecasts. We will readily admit that we are not in the forecasting business. This saves us from the considerable embarrassment that comes with forecasting as well as an immense amount of time. Our approach requires us to be “macro-aware” but not “macro-driven.” As such, we are well aware of the milieu of others’ forecasts, and the rationales behind them, but find them unactionable for our style of investing.

Yet, like everyone else, we have thoughts and opinions on the markets and economy. So, what are we thinking about for the rest of 2023?

On the stock market: While the gains have been impressive, they have been driven primarily by the “Magnificent Seven” mega-cap tech stocks, which on average have produced a 90% return. For comparison, the now-relevant Dow Jones Industrial Average has returned a humbling 3% this year, while the S&P 500 equal-weighted index (as opposed to the official index which is weighted by each company’s market value) has produced only a 6.2% return. We see little merit in chasing the Mag 7 stocks given the highly elevated expectations embedded in their share prices. The opportunity is in all of the other stocks.

On forecasts and outlooks: Many commentators are prognosticating about the direction of the overall market, the effects of the upcoming earnings season, various economic data points and the Fed’s policy stances and possible moves. Each upcoming report seems to be promoted as a referendum on everything but then gets tossed aside as not meaningful even as the next report is touted as the new referendum.

Similarly, there is much chatter about the inversion of the yield curve and other seemingly surefire indicators of a recession. Despite others’ assurances, we have found the predictive abilities of these indicators to be marginal at best. The “upcoming” recession has been forecast to be only six months away for nearly two years running. A recession, of course, will eventually arrive, as the economic cycle hasn’t been repealed. But, accurately guessing its arrival date, as well as the shape and size of the downturn, are no more likely than accurately guessing the winner of the 2023 World Series (we know for sure that it won’t be Oakland or Kansas City given their records, and long-time Cubs fans are comfortable in their doubts, as well).

What seems unlikely: We doubt that the Fed will raise its benchmark rate (currently 5.00% to 5.25%) to the vicinity of 7%. A rate this high would seem excessive, even if inflation stays stuck in the 4% range. Our current episode of inflation seems driven by exceptionally generous federal spending during the pandemic and through the oxymoronic Inflation Reduction Act as much as by the decade-long gusher of free money engineered by the Federal Reserve. The Fed likely understands this. So, with fiscal spending tapering and student loan repayments restarting, it seems more likely that the Fed will very slowly inch interest rates higher, but probably not much above 6%, if even that.

While possible, it seems unlikely that the Fed will cut interest rates this year or even early next year. Ever since the Fed started its rate hike campaign in March 2022, the markets have fairly consistently been expecting a rate cut to be only a half-year away. We’re still waiting. Eventually, the Cubs will win another World Series, too.

Share prices in the table reflect Monday, July 10 closing prices. Please note that prices in the discussion below are based on midday July 10 prices.

Note to new subscribers: You can find additional color on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Value Investor on the Cabot website.

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This Week’s Portfolio Changes
Allison Transmission (ALSN) – Moving the shares from Buy to Hold.

Last Week’s Portfolio Changes
No changes.

Upcoming Earnings Reports
Friday, July 14: Citigroup (C)
Tuesday, July 25: Sensata Technologies (ST)
Thursday, July 27: Comcast (CMCSA)
Thursday, July 27: Allison Transmissions (ALSN)
Thursday, August 3: Gates Industrial (GTES)
Tuesday, August 8: Barrick Gold (GOLD)
Tuesday, August 15: Aviva, plc (AVVIY)
Wednesday, August 16: Cisco Systems (CSCO)

Growth & Income Portfolio

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

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

CSCO shares slipped 1% this past week and have 29% upside to our 66 price target. The valuation is attractive at 9.5x EV/EBITDA and 13.4x earnings per share. The 3.1% dividend yield adds to the appeal of this stock. BUY

Comcast Corporation (CMCSA) – With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worries about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, generous dividend and sizeable share buybacks.

The company is changing some leadership within the NBCUniversal business. Mike Cavanagh, president of parent company Comcast (arguably the #2 executive behind chairman/CEO Brian Roberts), recently inherited the role of overseeing the NBCUniversal operations, as the former head was removed after inappropriate behavior. Cavanagh announced that he will not appoint a new head of NBCUniversal, rather, he will oversee it within his role as Comcast President. Cavanagh shuffled/promoted a few other NBCUniversal executives, perhaps to satisfy some who may have thought they were the heir apparent to the top NBCUniversal role. We see little chance of any major changes to the unit’s performance as a result of the changes but find it important to recognize that new people (veterans, to be sure) are running NBCUniversal.

Comcast shares rose 1% in the past week and have 9% upside to our 46 price target. BUY

Buy Low Opportunities Portfolio

Allison Transmission Holdings, Inc. (ALSN) Allison Transmission is a midcap manufacturer of vehicle transmissions. While many investors view this company as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world, Allison actually produces no car or light truck transmissions. Rather, it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its EBITDA margin is sharply higher than its competitors and on par with many specialty manufacturers. And, it is a leading producer and innovator in electric axles which all electric trucks will require. The company generates considerable free cash flow and has a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years.

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

ALSN shares were flat in the past week and have 3% upside to our recently raised 59 price target. Allison shares offer a reasonable 1.6% dividend yield. Given the limited upside to our price target, we are moving this stock to a HOLD. HOLD

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc, hired as CEO in July 2020, is revitalizing Aviva’s core U.K., Ireland and Canada operations following her divestiture of other global businesses. The company now has excess capital which it is returning to shareholders as likely hefty dividends following a sizeable share repurchase program. We expect that activist investor Cevian Capital, which holds a 5.2% stake, will keep pressuring the company to maintain shareholder-friendly actions.

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

Aviva shares slipped 3% this past week and have 42% upside to our 14 price target. Based on management’s guidance for the 2023 dividend, which we believe is a sustainable base level, the shares offer a generous 8.5% yield. On a combined basis, the dividend and buybacks offer more than a 10% “shareholder yield” to investors. 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 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 ticked lower to $1,928/ounce. The 10-year Treasury yield jumped 18 basis points to 4.04% (100 basis points equals one percentage point) after reaching 4.09% earlier in the week. Enduring economic growth and marginal inflation progress is convincing investors that the Fed will continue to raise interest rates, even as some recent manufacturing data suggest that the economy is slowing. The U.S. Dollar Index (the dollar and gold usually move in opposite directions) ticked lower to 102.29.

Investors and commentators offer a wide range of outlooks for the economy, interest rates and inflation. We have our views but hold these as more of a general framework than a high-conviction posture. Investing in gold-related equities is a long-term decision – investors shouldn’t allow near-term weakness to deter their resolve.

Barrick shares slipped 5% in the past week and have 65% upside to our 27 price target. 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.

Citi reports earnings on Friday, with a consensus estimate of $1.44/share.

Citi shares fell 1% in the past week and have 84% upside to our 85 price target. The shares remain attractive as they trade at 55% of tangible book value of $84.21. The recently raised $0.53 quarterly dividend looks sustainable and offers investors a 4.6% yield.

When comparing Citi shares with a U.S. 10-year Treasury bond, Citi offers a higher yield and considerably more upside price potential (over 70% according to our work vs. 0% for the Treasury bond). Clearly, the Citi share price and dividend payout carry considerably more risk than the Treasury bond, but at the current valuation, Citi shares would seem to have a remarkably better risk/return trade-off. BUY

Gates Industrial Corp, plc (GTES) – Gates is a specialized producer of industrial drive belts and tubing. While this niche might sound unimpressive, Gates has become a leading global manufacturer by producing premium and innovative products. Its customers depend on heavy-duty vehicles, robots, production and warehouse machines and other equipment to operate without fail, so the belts and hydraulic tubing that power these must be exceptionally reliable. Few buyers would balk at a reasonable price premium on a small-priced part from Gates if it means their million-dollar equipment keeps running. Even in automobiles, which comprise roughly 43% of its revenues, Gates’ belts are nearly industry-standard for their reliability and value. Helping provide revenue stability, over 60% of its sales are for replacements. Gates is well-positioned to prosper in an electric vehicle world, as its average content per EV, which require water pumps and other thermal management components for the battery and inverters, is likely to be considerably higher than its average content per gas-powered vehicle.

The company produces wide EBITDA margins, has a reasonable debt balance and generates considerable free cash flow. The management is high-quality. In 2014, private equity firm Blackstone acquired Gates and significantly improved its product line-up and quality, operating efficiency, culture and financial performance. Gates completed its IPO in 2018, with Blackstone retaining a 63% stake today.

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

GTES shares were flat in the past week and have 19% upside to our 16 price target. BUY

NOV, Inc (NOV) – This high-quality, mid-cap company, formerly named National Oilwell Varco, builds drilling rigs and produces a wide range of gear, aftermarket parts and related services for efficiently drilling and completing wells, producing oil and natural gas, constructing wind towers and kitting drillships. About 64% of its revenues are generated outside of the United States. Its emphasis on proprietary technologies makes it a leader in both hardware, software and digital innovations, while strong economies of scale in manufacturing and distribution as well as research and development further boost its competitive edge. The company’s large installed base helps stabilize its revenues through recurring sales of replacement parts and related services.

The shares trade at the low end of their 20-year range due to investor expectations for an uninspiring future. We see this consensus view as overly pessimistic, given the company’s strong position in an industry with improving conditions, backed by capable company leadership and a conservative balance sheet.

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

The price of West Texas Intermediate (WTI) crude oil rose 4% in the past week to $73.89/barrel, while the price of Henry Hub natural gas fell 4% to $2.63/mmBtu (million BTU).

NOV shares rose 5% in the past week and have 46% upside to our 25 price target. The dividend produces a reasonable 1.2% 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 safety 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. Our Sensata investment remains an underperforming (from a business fundamentals perspective) work in progress.

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

ST shares rose 1% in the past week and have 68% upside to our 75 price target. Our price target looks optimistic, but we will keep it for now, even as it may take longer for the shares to reach it. BUY

Growth/Income Portfolio

Stock (Symbol)Date AddedPrice Added7/10/23Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Cisco Systems (CSCO)11/18/2041.3251.4324.50%3.00%66Buy
Comcast Corp (CMCSA)10/26/2231.541.8532.90%2.80%46Buy

Buy Low Opportunities Portfolio

Stock (Symbol)Date AddedPrice Added7/10/23Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)2/22/2239.9957.0542.70%1.60%59Hold
Aviva (AVVIY)3/3/2110.759.83-8.60%8.50%14Buy
Barrick Gold (GOLD)3/17/2121.1316.52-21.80%2.40%27Buy
Citigroup (C)11/23/2168.145.71-32.90%4.50%85Buy
Gates Industrial Corp (GTES)8/31/2210.7113.3925.00%0.00%16Buy
NOV, Inc (NOV)4/25/2318.817.12-8.90%1.20%25Buy
Sensata Technologies (ST)2/17/2158.5744.47-24.10%1.10%75Buy

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.
Buy – This stock is worth buying.
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.

CVI Valuation and Earnings

Growth/Income Portfolio

2023 EPS
2024 EPS
Change in 2023 EstimateChange in 2024 EstimateP/E 2023P/E 2024
CSCO 51.08 3.81 4.040.0%0.0% 13.4 12.6
CMCSA 42.08 3.64 4.080.0%0.0% 11.5 10.3

Buy Low Opportunities Portfolio



2023 EPS


2024 EPS


Change in 2023 Estimate

Change in 2024 Estimate

P/E 2023

P/E 2024

ALSN 57.34 6.57 6.900.0%0.0% 8.7 8.3
AVVIY 9.85 0.55 0.620.0%0.0% 18.1 16.0
GOLD 16.32 0.93 1.14-0.2%-0.2% 17.6 14.3
C 46.15 5.94 6.47-1.0%-0.3% 7.8 7.1
GTES 13.42 1.19 1.380.1%0.7% 11.3 9.7
NOV 17.14 1.35 1.67-0.2%-0.2% 12.7 10.3
ST 44.57 3.84 4.32-0.1%-0.1% 11.6 10.3

Current price is yesterday’s mid-day price.
CSCO: Estimates are for fiscal years ending in July of 2023 and 2024

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.