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Value Investor
Wealth Building Opportunites for the Active Value Investor

March 12, 2024

With the completion of the Super Tuesday primaries, the final grid for the 2024 U.S. presidential election appears to be set. While it is always possible that some surprise will lead to a different lineup on one or both cards, our country is now on track for a rematch of Biden v. Trump. The election date of Tuesday, November 5, is less than eight months away.

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Election Gravity Well

With the completion of the Super Tuesday primaries, the final grid for the 2024 U.S. presidential election appears to be set. While it is always possible that some surprise will lead to a different lineup on one or both cards, our country is now on track for a rematch of Biden v. Trump. The election date of Tuesday, November 5, is less than eight months away.

Given the philosophical differences between the two leading candidates, most voters likely have a strong emotional view of their choice and of the “other” candidate. Given the stakes involved and the media’s drive to attract attention, we anticipate that we will see an “unprecedented” volume of hype and propaganda in this election season. And, the closer we get to that date, the higher the volume.

This ever-growing gravity well can readily consume investors. One common error is to lose the ideal of emotion-free investing and instead get caught up in the emotions of politics. Another is to mix “what I believe needs to happen in America” with “what will likely actually happen.” An investor may have a strong opinion about how to fix America, but there is a vast distance between that belief and where things actually go. And, it is easy to assume that if one’s favored candidate wins then all will go exceptionally well, but if the other candidate wins then all will collapse. Such extreme outcomes haven’t happened yet, and there is no reason to believe an extreme outcome is imminent this time, either.

A frequent error is to pick stocks based on how companies and industries might benefit or be harmed by the election outcomes. First, the winner of the presidential election is probably unpredictable. Second, a winning president may need majorities in both the House and Senate to pass their agenda, but the outcomes of Congressional elections are also unpredictable. And, there is no accurate way to foretell what policies the elected president will choose, or when, or in what form. Closely related, there can be a wide spread between a candidate’s campaign promises and the elected president’s legislative success.

So, investors should work extra hard to keep their investing lives separate from their political lives. Not only will this likely protect their investing results, it may also help them see opportunities if other investors fall deep enough into the political-emotional rabbit hole to create mispriced stocks.

Share prices in the table and discussion below reflect Monday, March 11 closing prices. Please note that prices in the discussion below are based on mid-day March 11 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

Last Week’s Portfolio Changes

Upcoming Earnings Reports
Friday, March 22: Worthington Enterprises (WOR)

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 and generates vast cash flow. Its announced deal for Splunk will drain most of its cash hoard but we see this as being replenished relatively quickly.

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

Cisco shares remain attractive given their reasonable valuation and the company’s strong cash flow production. But we are incrementally wary that the business cycle is turning against Cisco. For now, we will stay the course with our Buy rating.

CSCO shares rose 2% in the past week and have 32% upside to our 66 price target. Based on 2024 estimates, unadjusted for the Splunk acquisition, the valuation is reasonably attractive at 9.7x EV/EBITDA and 13.3x earnings per share. BUY

Comcast Corporation (CMCSA) 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.

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

Comcast shares rose 4% in the past week and have 6% upside to our 46 price target. HOLD

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 13.5x EBITDA and 15.6x per-share earnings 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.

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

PMI’s shares rose 4% in the past week and have 28% upside to our 120 price target. The shares offer an attractive 5.5% dividend yield. BUY

Buy Low Opportunities Portfolio

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.

On Thursday, March 7, Aviva reported full-year results, with adjusted operating profits of £1.5 billion rising 9%. Operating earnings of £0.40/share rose 1% and were 11% above estimates. Net insurance revenues rose 8.5%. Claims costs rose 7% but were smaller as a percent of revenues. Corporate costs fell 1%. The return on equity was 14.7%. Aviva’s full-year dividend was set at £0.334/share, in line with our estimate. Cash flow and capital look healthy. All in, Aviva continues to produce solid results.

The company set a 2026 operating profit target of £2 billion, about 36% above the 2023 results. For 2024, the company said it would raise the dividend by about 5%. Also, share buybacks will continue with a new £300 million program now underway. Aviva’s share count fell 2% last year – this new buyback program would reduce it by another 2%.

Aviva’s strategic and operational turnaround is largely complete, and we are waiting for a higher valuation multiple. From here, the leadership is working to produce steady and repeatable if dull revenue, profit, capital and dividend growth, along with repurchasing a steady 2% or so of its shares each year. Over time, this consistency should help the shares grind higher to our 14 price target, currently only about 16% away.

Aviva shares rose 4% in the past week and have 16% upside to our 14 price target. Based on management’s guidance for the 2024 full-year dividend, the shares offer a generous and sustainable 7.5% yield. On a combined basis, the dividends and buybacks offer 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.

Over the past week, commodity gold jumped 4% to $2,192/ounce, another record high. Gold is holding its $2,000+ pricing despite what is increasingly becoming a higher-for-longer U.S. interest rate environment. Some enthusiasm is perhaps from the growing optimism that the Fed will cut rates at least once this year and that the future trajectory is down, rather than up.

However, gold’s 7% surge from its trailing four-month average price suggests that some other reasons are driving it higher. These might include enduring domestic and international government deficits, as well as enduring inflation. Also, reasonably reliable official data indicates that central banks, particularly China’s, are stepping up their gold purchases.

There may be a correlation trade among hedge funds that links gold and Bitcoin. Bitcoin is surging as demand has been remarkably strong for newly approved Bitcoin ETFs. Most previous institutional holdouts, including BlackRock, have become supporters of Bitcoin. The correlation trade would carry gold upward with Bitcoin prices.

Our view on gold prices is based on what we believe is a structural upshift in inflation. These changes include war, government spending, crime, oil prices and past-the-peak fading of the benefits of global free trade, in addition to a tight labor market. There is a reasonably good chance that inflation will remain above a 3% pace indefinitely. This would imply permanent 4-6% interest rates.

The 10-year Treasury yield slid to 4.10%. The U.S. Dollar Index (the dollar and gold usually move in opposite directions) ticked 1% lower to 102.91.

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 rose 3% in the past week and have 70% upside to our 27 price target. The shares remain depressed despite gold prices trading near $2,200, indicating that investors have no confidence in gold prices and little confidence in the company’s ability to generate higher cash flow. 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. Investors have lost hope in Citigroup, creating an impressive bargain.

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

Citi shares rose 2% in the past week and have 49% upside to our 85 price target. The stock remains attractive as it trades at about 66% of tangible book value of $86.19. The dividend offers investors a 3.7% yield. BUY

CNH Industrial (CNHI) 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. See our November 30 Alert and the December 5 Monthly letter for more color on our thesis.

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

CNH’s shares rose 3% in the past week and have 25% upside to our 15 price target. The 3.3% dividend yield offers a reasonable interim cash return. 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 lineup and quality, operating efficiency, culture and financial performance. Gates completed its IPO in 2018. Following several sell-downs, Blackstone has a 27% stake today.

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

Gates shares rose 9% in the past week and have crossed our 16 price target. As such, we are reviewing our price target and rating on Gates shares. 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.

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

The price of West Texas Intermediate (WTI) crude oil ticked down 2% to $78.13/barrel. Demand remains robust while supplies continue to be reasonably plentiful. Several OPEC+ producers led by Saudi Arabia agreed to extend their production cuts through June.

For the moment, the two major hot wars – in Ukraine and in the Middle East – appear to have stopped getting worse. This has eased pressure on oil prices. However, outcomes in wars are unpredictable. Another major step-up in aggression, particularly in the Middle East, could push oil prices higher. If Iran becomes directly involved, oil prices could surge to at least $150/barrel.

The price of Henry Hub natural gas slipped 10% this past week to $1.79/mmBtu (million BTU), beneath its rough floor at around $2. As the traders’ saying goes, “The cure for low commodity prices is low commodity prices.” As such, producers will likely curtail production, but this is a slow and unsteady process that is unlikely to raise natural gas prices significantly until at least the end of summer. For NOV, the commodity price weakness will incrementally reduce demand for its equipment.

NOV shares rose 5% in the past week and have 41% upside to our 25 price target. The dividend produces a reasonable 1.1% dividend yield. BUY

Worthington Enterprises (WOR)Following the split-up of Worthington Industries late last year, “Enterprises” focuses on producing specialized building products (42% of sales) and consumer products (48%). The value of these operations was previously obscured by the market’s perception that the original Worthington Industries was primarily a steel processor. While the market sees an average company with a mix of only partly related products, we see a high-quality company with strong positions in valuable and profitable niches, backed by capable management and a solid balance sheet.

Worthington Enterprises was selected as the Cabot Stock of the Week.

WOR shares fell 1% in the past week and have 18% upside to our 73 price target. The dividend produces a reasonable 1.0% dividend yield. BUY

Growth/Income Portfolio

Stock (Symbol)Date AddedPrice Added3/11/24Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Cisco Systems (CSCO)11/18/2041.3250.2421.60%3.20%66Buy
Comcast Corp (CMCSA)10/26/2231.543.6738.60%2.80%46Hold
Philip Morris International (PM)9/18/2396.9694.25-2.80%5.50%120Buy

Buy Low Opportunities Portfolio

Stock (Symbol)Date AddedPrice Added3/11/24Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Aviva (AVVIY)3/3/2110.7512.0512.10%7.00%14Buy
Barrick Gold (GOLD)3/17/2121.1315.88-24.80%2.50%27Buy
Citigroup (C)11/24/2167.2857.44-14.60%3.70%85Buy
CNH Industrial (CNHI)11/30/2310.7412.0612.30%3.30%15Buy
Gates Industrial Corp (GTES)8/31/2210.7216.856.70%0.00%16Buy
NOV, Inc (NOV)4/25/2318.1917.95-1.30%1.10%25Buy
Worthington Enterprises (WOR)2/6/2457.1362.248.90%1.00%73Buy

Current price is yesterday’s mid-day price

CVI Valuation and Earnings

Growth/Income Portfolio

Current Price2024 EPS
2025 EPS
Change in 2024 EstimateChange in 2025 EstimateP/E 2024P/E 2025
CSCO 50.05 3.76 3.880.0%0.0% 13.3 12.9
CMCSA 43.34 4.26 4.630.0%0.0% 10.2 9.4
PM 93.72 6.40 7.030.0%-0.1% 14.6 13.3

Buy Low Opportunities Portfolio

Current Price2024 EPS
2025 EPS
Change in 2024 EstimateChange in 2025 EstimateP/E 2024P/E 2025
AVVIY 12.06 0.45 0.501.4%1.4% 27.0 24.2
GOLD 15.87 0.94 1.110.6%0.6% 16.8 14.3
C 57.00 5.93 7.11-0.7%0.0% 9.6 8.0
CNHI 12.00 1.56 1.590.0%-0.4% 7.7 7.6
GTES 16.17 1.38 1.610.4%0.7% 11.7 10.1
NOV 17.79 1.52 1.840.0%0.0% 11.7 9.7
WOR 61.64 3.47 3.560.0%0.0% 17.8 17.3

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.

Current price is yesterday’s mid-day price.
CSCO: Earnings estimates are for calendar years.

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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.