Value stocks are starting to gain traction.
No, they’re still not outperforming growth stocks. But the 10.5% year-to-date gain in the Vanguard Value Index Fund (VTV) puts it on track for its best year since 2021, and potentially its third-best year in the last decade. That’s progress. And much of the progress has come this month, as the previously thin bull market rally has spread to the myriad unloved non-tech sectors. Value stocks are up more than 3% this month, outperforming growth stocks (as measured by the QQQ ETF), which are flat in July.
Our stocks have fared even better this month, up 4.8% on average, including the July gains in Agnico Eagle Mines (AEM) before it hit our price target and we sold/“retired” it a week ago. Since taking over this newsletter in April, my goal has been to unearth not pure, on-the-brink-of-bankruptcy value stocks, but growing companies trading at value prices – of which there are many these days, given the market’s obsession with all things artificial intelligence and big tech during this hyper-focused bull rally over the last 21 months. Now, it appears Wall Street is finally turning its attention elsewhere, and our growth-plus-value strategy is starting to bear fruit.
It’s just one month, of course. And with more than three months still to go in a high-drama, ever-changing presidential election season, interest rates still at multi-decade highs (for now), and two major wars still raging, there are plenty of sharp edges out there that could quickly pop the bull market’s balloon. But for now, the trend is good; and for the first time in months, it’s a trend that includes the type of stocks that occupy the Cabot Value Investor portfolio.
Note to new subscribers: You can find additional commentary 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.
Send questions and comments to chris@cabotwealth.com.
Also, please join me and my colleague Brad Simmerman on our weekly investment podcast, Cabot Street Check. You can find it wherever you get your podcasts, or you can watch us on the Cabot Wealth Network YouTube channel.
This Week’s Portfolio Changes
None
Last Week’s Portfolio Changes
Agnico Gold Mines (AEM) – Moves from Buy to Sell (reached price target!)
Upcoming Earnings Reports
Thursday, July 25 – NOV, Inc. (NOV)
Wednesday, July 31 – CNH Industrial (CNH), Gates Industrial (GTES)
Growth & Income Portfolio
Growth & Income Portfolio stocks are generally higher-quality, larger-cap companies that have fallen out of favor. They usually have some combination of attractive earnings growth and an above-average dividend yield. Risk levels tend to be relatively moderate, with reasonable debt levels and modest share valuations.
Canadian Solar Inc. (CSIQ) is not only Canada’s largest solar energy company; it’s a global leader in the solar space. And it’s gotten much larger in the last two years, since the Canadian government announced a 50% income tax cut for zero-emission technology manufacturers (which the new 2023 legislation extended by three years). Canadian Solar’s revenues were up 41.5% in 2022, another 2% in 2023 (both record highs), and are on track to tack on another 1.2% this year and a whopping 20.2% in 2025. If it meets those estimates, the company will have gone from $3.5 billion in annual revenues to $8.25 billion in just five years. Earnings per share have more than doubled since 2021, and while they’re expected to take a step back this year, they’re projected to reach new highs of $4.75 per share next year.
And the company is right in the sweet spot for the North American solar boom. It manufactures solar photovoltaic modules and runs large-scale solar projects across Canada, and in 29 other countries, even spinning off a subsidiary – CSI Solar Ltd. – last year that trades on the Shanghai Stock Exchange. The company boasts 61 gigawatt (GW) module capacity, is up to 125GW solar module shipments, and has a project pipeline of 26.3GW. That doesn’t include its battery storage shipments (4.5 GW hours, or GWh) or capacity (20GWh expected by year’s end).
It’s a big company that operates on a global scale, and it’s growing fast. And yet … the stock is a small cap, with a market capitalization of a mere $1.1 billion. It used to be four times as big, trading as high as 63 a share in January 2021. Today, it trades at 16 a share, and at 7x forward earnings, 42% of book value, and a paltry 0.16x sales. The latter two numbers are the cheapest the stock has ever been.
There was no company-specific news for Canadian Solar this week, and the share price didn’t budge one bit, which was actually a good sign given the pullback in the market and on the heels of a nice bounce-back in the stock the previous couple weeks. Having fallen from a hair under 20 all the way to 14 in June, the tick back up toward the high 16s qualifies as real progress; perhaps the worst is over for CSIQ and solar stocks as a group. I’ve been writing for weeks that the selling in renewable energy stocks is way overdone, with the WilderHill Clean Energy ETF (PBW) dipping to seven-year lows, and 85% below its early-2021 peak. While renewable energy stocks have a checkered history, they’ve rarely been this cheap, and Canadian Solar is one of the fastest growing of the bunch. The rally in small-cap stocks is surely lending a hand in the turnaround at the moment.
CSIQ shares have a whopping 68% upside to our 28 price target. BUY
Dick’s Sporting Goods (DKS) has been growing steadily for years.
From 2016 to 2023, the sporting goods chain’s revenues have improved 64%, from just under $8 billion to just under $13 billion. This year, the top line is on track to top $13 billion for the first time. It should top $13.5 billion next year.
Dick’s, in fact, has grown sales in each of the last seven years – including in 2020 and 2021, when most other retailers saw sales nosedive due to Covid restrictions. But Dick’s all-weather ability to keep growing no matter what’s happening in the world or the economy speaks to its versatility. Since Covid ended, however, Dick’s sales have entered another stratosphere. As youth sports returned in 2021, Dick’s revenues jumped from $9.58 billion to $12.29 billion. They’ve been rising steadily each year since and are expected to do so again this year.
But Dick’s isn’t purely a growth stock—it’s also undervalued. DKS shares currently trade at just under 17x forward earnings estimates and at 1.31x sales. To be sure, it’s not the cheapest stock in our portfolio. But it is one of the fastest growing – and pays a solid dividend to boot.
Dick’s gave back some of its 10% gain of two weeks ago, falling 5%, though trading well north of its July lows at 198 (and our 200 entry point). There was no news, so this looks like standard consolidation after a big run-up, though the market downturn likely made the pullback in DKS shares a bit steeper.
DKS has 23% upside to our 250 price target. The 2.2% dividend yield adds to the appeal. BUY
Honda Motor Co. (HMC) – After years of declining sales, Honda was rejuvenated in 2023 thanks to hybrids. The Japanese automaker sold 1.3 million cars last year, up 33% from 2022; a quarter of the cars it sold were hybrids, led by its popular CR-V sport utility vehicle (SUV) and Accord mid-size sedan. The CR-V was the best-selling hybrid in the U.S. last year, with 197,317 units sold. The Accord wasn’t far behind, with 96,323 sold. All told, Honda’s hybrid sales nearly tripled in 2023, to 294,000 units.
So, Honda is making the full pivot to hybrids, with the Civic soon to become the latest addition to its hybrid fleet. Investors have started gravitating more to the companies that sell them. Invariably, those are well-established, big-name car companies made famous by many decades of selling internal combustion engine vehicles; most aren’t ready to fully abandon their roots but want to tap into the surging national (and global) appetite for electric, so they instead are turning to hybrids as a compromise. As a result, these once-stodgy car companies are tapping into new revenue streams, and their share prices are surging accordingly.
Among the hybrid-rejuvenated, brand-name automakers, Honda offers the best value.
Things have been quiet with Honda ahead of its August 7 earnings report. The stock was down about 2.5% but remains within the 31-32 band it’s been in for most of June and July. The stock remains dirt-cheap, trading at 7x forward earnings and 0.41x sales. HMC shares have 42% upside to our 45 price target. The 4.2% dividend yield has helped soften the underperformance in recent months. BUY
Philip Morris International (PM) – Based in Connecticut, Philip Morris owns the global non-U.S. rights to sell Marlboro cigarettes, the world’s best-selling cigarette brand. Cigarettes comprise about 65% of PMI’s revenues. The balance of its revenues is produced by smoke-free tobacco products. The cigarette franchise produces steady revenues and profits while its smoke-free products are profitable and growing quickly. The upcoming full launch of IQOS products in the United States, a wider launch of the IQOS ILUMA product and the recent $14 billion acquisition of Swedish Match should help drive new growth.
The company is highly profitable, generates strong free cash flow and carries only modestly elevated debt (at about 3.2x EBITDA) which it will whittle lower over the next few years. The share valuation at about 16.3x EBITDA and 17.4x per-share earnings estimates is too low in our view. Primary risks include an acceleration of volume declines and/or deteriorating pricing, higher excise taxes, new regulatory or legal issues, slowing adoption of its new products, and higher marketing costs. A strong U.S. dollar will weigh on reported results. While unlikely, Philip Morris could acquire Altria, thus reuniting the global Marlboro franchise.
Philip Morris reported another solid quarter on Tuesday. Revenue improved 9.6% year over year in the second quarter, while earnings per share of $1.59, while down slightly (-0.6%) year over year, beat estimates. The cigarette maker’s smoke-free products continued to carry the day, with nicotine pouch sales – led by its signature Zyn product – up 50.6%, while heated tobacco items (led by IQOS) improved 13.1% in shipment volume. Both offset what were essentially stagnant cigarette sales (0.4% uptick in shipment volume). Smoke-free products now account for 38% of Philip Morris’ total revenues.
The rosy quarter was good enough to prompt the company to lift full-year EPS guidance from 9% to 11% growth to 11% to 13% growth.
The strong earnings results have catapulted PM shares to a two-year high above 109, with gains coming both before and after the report. The stock is now within 9% of our 120 price target. The 4.8% dividend yield adds to what is now a solid total return since the stock was added to the portfolio last September. BUY
United Airlines (UAL) – People are flying in planes again in Covid’s aftermath, and no major airline is taking advantage of it quite like United.
United Airlines is the fastest-growing major U.S. airline. The third-largest airline carrier in the world by revenues behind Delta (DAL) and American (AAL), United is expected to grow sales by 5.9% in 2024 – more than its two larger competitors – and that’s with revenues already topping a record $50 billion in 2023 – 19.6% higher than in 2022, which was also a record year. For United, business has not only returned to pre-pandemic levels; it’s better.
Meanwhile, the stock is super cheap. It trades at 5x forward earnings estimates, with a price-to-sales ratio of just 0.29 and a price-to-book value of 1.51. The stock peaked at 96 a share in November 2018; it’s currently in the upper 40s.
A company that’s making more money than ever before (gross profits reached a record $15.2 billion last year, though earnings were still second to 2019 levels on a per-share basis), and yet its stock trades at barely more than half its peak from five and a half years ago. A true growth-at-value-prices opportunity.
United reported second-quarter earnings a week ago – just after the previous issue “went to print” – and the results were mixed. Profits improved 23% year over year and handily topped estimates. Revenues, meanwhile, improved 5.7% year over year but fell just short of estimates. Third-quarter guidance also came in a bit light, though full-year EPS guidance ($9-$11) remained the same.
Record demand, particularly for international flights, in the wake of Covid has been driving sales growth for United, which was our main premise (in addition to the bargain price) for buying it. The latest quarterly data, despite falling just shy of estimates in a couple places, only enhanced that thesis.
After an initial bump, UAL shares retreated back to the high 46 range, with a 3% dip on Wednesday. All told, the stock is virtually unchanged since our last issue. It has nearly 50% upside to our 70 price target. And the stock remains the cheapest in our portfolio. It can’t stay this cheap much longer before the institutions spot a bargain. BUY
Buy Low Opportunities Portfolio
Buy Low Opportunities Portfolio stocks include a wide range of value opportunities. These stocks carry higher risk than our Growth & Income stocks yet also offer more potential upside. This group may include stocks across the quality and market cap spectrum, including those with relatively high levels of debt and a less clear earnings outlook. The stocks may not pay a dividend. In all cases, the shares will trade at meaningful discounts to our estimate of fair value.
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. While activist investor Cevian Capital has closed out its previous 5.2% stake, highly regarded value investor Dodge & Cox now holds a 5.0% stake, providing a valuable imprimatur and as well as ongoing pressure on the company to maintain shareholder-friendly actions.
Aviva shares mostly held their gains after breaking above 12.7 resistance for the first time since May 2022.
There’s been no news since the company finalized a 249-million-pound deal to buy Probitas, which should expand Aviva’s market reach in its global corporate and specialty division. Shares of the U.K.-based life insurance and investment management firm remain cheap, trading at 11x earnings estimates, with a price-to-sales ratio of 0.41. Shares have 10% upside to our 14 price target. The 6.6% dividend yield adds to our strong total return thus far. BUY
CNH Industrial (CNH) – This company is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment and is the #2 ag equipment producer in North America (behind Deere). Its shares have slid from their peak and now trade essentially unchanged over the past 20 years. While investors see an average cyclical company at the cusp of a downturn, with a complicated history and share structure, we see a high-quality and financially strong company that is improving its business prospects and is simplifying itself yet whose shares are trading at a highly discounted price.
There was no news for CNH ahead of its earnings report next Wednesday, July 31. And yet, in the midst of a down week for the market, shares gave back about half their run-up from the previous week’s 11% rally.
Expectations for the quarter are quite modest. Analysts expect a 12.7% decline in revenues, with a 28.9% dip in EPS year over year. However, the company handily beat bottom-line estimates last quarter, so let’s see if this quarter’s projections are similarly pessimistic.
We will keep our rating at Hold until after the earnings report. If you own some, hang on to see if an earnings surprise can provide another boost. If not, I’d wait to start a new position until after the new results come out. HOLD
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. Following several sell-downs, Blackstone has a 27% stake today.
Gates also reports second-quarter earnings on July 31. Like CNH, Gates had a big, double-digit rally (16%!) two weeks ago as the market pivoted from high-valuation tech stocks to the many other unloved sectors. But unlike CNH, Gates mostly held its gains, giving back less than 2% since our last update.
While big things are not expected from Gates in Q2, analysts are looking for a modest 4.3% revenue decline with earnings per share remaining flat year over year at $0.36. Gates has beaten earnings estimates in three of the last four quarters, so we’ll see if it can do so again.
GTES remains our best-performing holding, up roughly 63%. It still has 14% upside to our 20 price target, and the shares continue to be undervalued, trading at a mere 12x earnings estimates and 1.34x sales. 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.
We see the 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.
NOV reports second-quarter earnings today (Thursday, July 25) after the closing bell. Analysts are estimating 4.8% revenue growth but a 10.2% decline in earnings per share.
Like CNH and GTES, NOV shares gave back some of their gains after a double-digit run-up the week before. NOV was down 5% this week – crude oil retreating from $82 to $77 likely didn’t help matters – but is still trading well north of its July lows (17.7). We’ll see how today’s earnings report moves the needle.
NOV has 29% upside to our 24 price target. The stock is cheap, trading at 12x forward earnings estimates and just 0.84x sales. BUY
Growth/Income Portfolio | |||||||
Stock (Symbol) | Date Added | Price Added | 7/24/24 | Capital Gain/Loss | Current Dividend Yield | Price Target | Rating |
Canadian Solar Inc. (CSIQ) | 6/6/24 | 18.95 | 16.26 | -14.20% | N/A | 28 | Buy |
Dick’s Sporting Goods (DKS) | 7/5/24 | 200.1 | 201.9 | 0.90% | 2.20% | 250 | Buy |
Honda Motor Co. (HMC) | 4/4/24 | 36.34 | 31.44 | -13.50% | 4.20% | 45 | Buy |
Philip Morris International (PM) | 9/18/23 | 96.96 | 110.52 | 14.00% | 4.80% | 120 | Buy |
United Airlines (UAL) | 5/2/24 | 50.01 | 47.12 | -5.80% | N/A | 70 | Buy |
Buy Low Opportunities Portfolio | |||||||
Stock (Symbol) | Date Added | Price Added | 7/24/24 | Capital Gain/Loss | Current Dividend Yield | Price Target | Rating |
Aviva (AVVIY) | 3/3/21 | 10.75 | 12.74 | 18.50% | 6.60% | 14 | Buy |
CNH Industrial (CNH) | 11/30/23 | 10.74 | 10 | -6.90% | 4.40% | 15 | Hold |
Gates Industrial Corp (GTES) | 8/31/22 | 10.72 | 17.5 | 63.20% | N/A | 20 | Buy |
NOV, Inc (NOV) | 4/25/23 | 18.19 | 18.58 | 2.10% | 1.20% | 25 | Buy |
Note for stock table: For stocks rated Sell, the current price is the sell date price.
Current price is yesterday’s mid-day price.
Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.