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Value Investor
Wealth Building Opportunites for the Active Value Investor

June 20, 2023

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If You Don’t Like the Stock Market Right Now, Wait a Few Minutes?

Here in New England, the weather can change quickly. A sunny morning can seemingly without warning turn into a rainstorm by the afternoon. Not that long ago, we had three seasons in a single day – snow in the morning, followed by rain, then summer-like temperatures by three in the afternoon. There’s an old saying, “If you don’t like the weather, wait a few minutes.”

This sounds a lot like our stock market these days. At the end of 2021, the markets viewed the future as bright and sunny, only to turn dark and dour (and down by 28%) by October 2022. Then, in a sharp U-turn, optimism rebounded, driving the market up 26%. Beneath this year’s top-line S&P500 surge, dull value stocks lagged severely but since early June are now showing new signs of life, while the one-sided mega-cap tech stock momentum appears to be fading. Sentiment seems to be cycling faster between value and growth stocks.

Behind this uptick in cycle speed is the outlook for interest rates. Here in mid-June, the Fed seems to be approaching the end of its rate hike campaign, but no one knows for sure. Being data-dependent, the Fed doesn’t know for sure either. So, every economic data release becomes a referendum on the Fed’s next steps. This past Tuesday, the housing start data was surprisingly strong – suggesting that the Fed will continue to raise interest rates to slow the economy – hence the stock market (and especially value stocks) fell.

If you don’t like the stock market right now, wait a few minutes – or at least until the next economic data point.

Share prices in the table reflect Tuesday, June 20 closing prices. Please note that prices in the discussion below are based on mid-day June 20 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
No changes.

Last Week’s Portfolio Changes
Allison Transmission Holdings (ALSN)Raising price target from 54 to 59.
Molson Coors Beverage Company (TAP) – Moving from Buy to Sell.

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.

Cisco said it was launching a new AI networking chip to compete with products from Broadcom and Marvell. An announcement like this is only marginally newsworthy when companies across the economic spectrum are jumping on the AI bandwagon. Cisco is no doubt launching such a chip, but its impact on the company’s profits will likely be negligible.

CSCO shares rose 2% this past week and have 28% upside to our 66 price target. The valuation is attractive at 9.6x EV/EBITDA and 13.6x earnings per share. The 3.0% 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.

Comcast seems to be incrementally moving toward an exit from its ill-fated $40 billion acquisition of Sky, the British satellite broadcasting company. Other than its strong relationship with English Premier League football, Sky seems to have little strategic value to Comcast, and, rather, has become a cloud over an otherwise clear Comcast strategy. Comcast for now seems to be taking a piecemeal approach – recently it has worked on deals to sell off its German operations, with divestitures of other operations potentially underway.

Comcast shares were flat in the past week and have 13% 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 dipped 2% in the past week and have 10% upside to our recently raised 59 price target. Please see last week’s note for more behind our price target increase. Allison shares offer a reasonable 1.7% dividend yield. BUY

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.

Aviva was selected as the Cabot Stock of the Week.

Aviva shares fell 1% this past week and have 39% 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 8.3% 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 slipped 1% to $1,945/ounce. The 10-year Treasury yield fell 6 basis points to 3.72% (100 basis points equals one percentage point). The U.S. Dollar Index (the dollar and gold usually move in opposite directions) fell 1% to 102.70.

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 fell 4% in the past week and have 67% 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.

Citigroup said that its recent job cuts will raise its expenses in the current quarter as it pays severance and incurs other costs. It also commented that trading and other revenues would be weaker due to the now-resolved debt ceiling stand-off. However, the bank also said that it will have repurchased about $1 billion of its shares this quarter – a move we fully agree with given the shares’ remarkably discounted price.

Citi shares fell 2% in the past week and have 79% upside to our 85 price target. The shares remain attractive as they trade at 56% of tangible book value of $84.21. The $0.51 quarterly dividend looks sustainable and offers investors a 4.3% 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 slipped 1% in the past week and have 24% upside to our 16 price target. 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. 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.

On Friday, June 9, we moved shares of Molson Coors Beverage Company (TAP) from Buy to Sell. The shares were approaching our 69 price target, with only about 4% upside remaining. This is close enough, given that much of the run-up is being driven by Budweiser’s Bud Light marketing blunder in the United States. Sales of Bud Light have slumped as much as 25%, while sales of Coors, Miller and others have jumped. It’s not clear how long this phenomenon will last, but the share valuation is becoming relatively full. We are reluctant to raise our price target from here.

Since our initial recommendation on August 5, 2020, shares of Molson Coors have produced a 90% total return. SELL

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 $70.27/barrel, while the price of Henry Hub natural gas rose 8% to $2.55/mmBtu (or, million BTU).

After a lag, the one million barrel/day production cut by Saudi Arabia seems to be supporting oil prices. A risk for oil prices is that the Saudis bear the entire burden of the production cut, such that the cut may not be indefinitely sustainable. Also, oil continues to flow into global markets from Russia, even as Chinese demand isn’t picking up due to its weakening growth prospects. We have no insight into the direction of crude oil or natural gas prices. Our interest is in prices staying reasonably elevated to encourage continued/higher drilling activity, which seems likely given the current low level of activity across both oil and natural gas segments.

NOV shares were unchanged in the past week and have 64% upside to our 25 price target. The dividend produces a reasonable 1.3% 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 were unchanged in the past week and have 67% 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 Added6/20/23Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Cisco Systems (CSCO)11/18/2041.3251.5824.80%3.00%66Buy
Comcast Corp (CMCSA)10/26/2231.540.6929.20%2.90%46Buy

Buy Low Opportunities Portfolio

Stock (Symbol)Date AddedPrice Added6/20/23Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)2/22/2239.9953.3533.40%1.70%59Buy
Aviva (AVVIY)3/3/2110.7510.09-6.10%8.30%14Buy
Barrick Gold (GOLD)3/17/2121.1316.1-23.80%2.50%27Buy
Citigroup (C)11/23/2168.147.63-30.10%4.30%85Buy
Gates Industrial Corp (GTES)8/31/2210.7112.9821.20%0.00%16Buy
NOV, Inc (NOV)4/25/2318.815.38-18.20%1.30%25Buy
Sensata Technologies (ST)2/17/2158.5744.93-23.30%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 51.66 3.81 4.050.0%0.0% 13.6 12.8
CMCSA 40.75 3.67 4.09-0.1%0.0% 11.1 10.0

Buy Low Opportunities Portfolio

2023 EPS
2024 EPS

Change in

2023 Estimate

Change in

2024 Estimate

P/E 2023P/E 2024
ALSN 53.44 6.61 6.890.0%0.0% 8.1 7.8
AVVIY 10.07 0.54 0.610.0%0.0% 18.5 16.4
GOLD 16.21 0.95 1.150.2%0.3% 17.1 14.1
C 47.57 6.13 6.55-0.5%-0.5% 7.8 7.3
GTES 12.87 1.19 1.370.5%1.1% 10.8 9.4
NOV 15.21 1.36 1.67-0.2%-0.7% 11.2 9.1
ST 44.87 3.84 4.32-0.1%0.0% 11.7 10.4

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.