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Value Investor
Wealth Building Opportunites for the Active Value Investor

May 30, 2024

Let’s talk about the elephant in the room: the presidential election.

No, I’m not going to touch the political ramifications of Biden vs. Trump, Round 2 with an 11-foot pole. For investors, that doesn’t matter. What matters is what typically happens to the stock market in election years. In the 20 presidential election years since 1944, the S&P 500 is up an average of 7.2% - not terrible, but well shy of the average 10% annual gain in the benchmark index.

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An Election Year Roadmap: How Stocks Might Behave the Next Seven Months

Let’s talk about the elephant in the room: the presidential election.

No, I’m not going to touch the political ramifications of Biden vs. Trump, Round 2 with an 11-foot pole. For investors, that doesn’t matter. What matters is what typically happens to the stock market in election years. In the 20 presidential election years since 1944, the S&P 500 is up an average of 7.2% - not terrible, but well shy of the average 10% annual gain in the benchmark index.

With stocks up 11% through the first five months of 2024, does that mean stocks are destined to be down through year end? Of course not – this is just an average. In fact, the S&P has outpaced the historical norm in each of the last three election years (2020, 2016, 2012), with an average gain of 13.1%. What I’m more interested in is the market’s usual pattern prior to and just after a presidential election.

Interestingly, roughly half the gains in an average election year come in the two months (or slightly less) after the election. From January – October, the average gain in the S&P is 5.6%. In November and December, it’s 5.1%. Clearly, there’s a hold-your-breath element prior to any election. Once a new presidential has been elected, however – regardless of who/which party is elected – there’s a collective exhale on Wall Street.

It happened in 2020, when the S&P was up 7% in November and December after Biden was elected.

It happened in 2016, when the index was up 4% after Trump was elected on November 8.

And with the same two men running for president again, this is the rare presidential election year in which there will be no surprises. No matter the winner, we’ve seen this before – which may partly (though certainly not fully) explain better than normal run-up in the market through the first five months of the year. Conversely, it may dampen market enthusiasm after the election, since neither outcome carries the same excitement of the unknown (the last time an incumbent was re-elected, Barack Obama in 2012, stocks were exactly flat after the election in November/December that year).

Here’s one other pattern to expect: stocks tend to fall in the three months prior to the election. According to data from Fundstrat, they typically peak around mid-August to early September, then fall sharply in October before bouncing back after the election.

Indeed, that pattern played out in each of the last two elections: In 2020, after stretching to new all-time highs in late August, the S&P fell 6.8% over the ensuing two months, bottoming in late October. (Granted, this was also during the pandemic so there were other major factors at play.) In 2016, stocks peaked in mid-August, traded flat until just after Labor Day, then fell more than 4% over the ensuing two months, bottoming on November 4 – just before the November 8 election.

The takeaway? Every year is different, of course. But history says it should be smooth sailing for the next two to three months. Come August, however, expect a slowdown, or more likely a modest pullback, until after the election is settled. In the grand scheme of things, two to three months of a sideways-to-down market isn’t too much to fret about. And on the other side of it – starting Wednesday, November 6, perhaps – there could be plenty of good (or at least better) values out there, ready to be snatched up in the traditional post-election spending spree.

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.

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This Week’s Portfolio Changes
Comcast (CMCSA) Moves from Hold to Sell

Last Week’s Portfolio Changes

Upcoming Earnings Reports

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.

Comcast Corporation (CMCSA) As the subhead above says, this is a Growth and Income portfolio. And CMCSA shares haven’t been growing for two solid years. In fact, they’re down 13% in that time. Thus, my patience with this stock has run out.

Comcast was a very good performer early on after Bruce added it to the Cabot Value Investor portfolio in October 2022 – a very savvy time to buy the stock, after it had just bottomed at multi-year lows below 30 per share. The stock promptly advanced 27% in the ensuing three months, rising to 40 by the end of January 2023 (Bruce recommended it at 31.5 per share). It eventually rose above 46 last August, and again this January. But, bottom line: it’s down since that January 2023 peak, down in the last two years, and down 6% in the last five years.

I’ve been hanging on to CMCSA to see if one last catalyst remains, and thought perhaps the rollout of the new StreamSaver bundle, which packages Netflix, Apple TV+ and Peacock with your Comcast subscription, might move the needle some. So far, it hasn’t.

In a portfolio that puts a premium on growth, it’s hard to rationalize keeping a stock that doesn’t budge, and a company whose sales are expected to be flat through 2025. Let’s say goodbye to Comcast, pocket the tidy 22% return (not including the 3.2% dividend yield), and clear out a spot in our Growth/Income Portfolio for a new addition with more upside in next week’s issue. SELL

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.

There was no news for Honda this week.

Earlier this month, the company reported another strong, hybrid-growth-fueled quarter, but so far the stock doesn’t have much to show for it – a common theme this earnings season. Thanks in part to a weak yen, the Japanese automaker saw a 77% increase in its operating profits in the most recent quarter, on a 21% improvement in sales. Hybrid sales were the real star, helping Honda sell 3 million cars globally, up from 2.3 million in the same quarter a year ago.

“Hybrids are our weapon,” CEO Toshihiro Mibe said.

So the company is leaning into deploying its new “weapon,” with plans to produce 2 million hybrids by 2030; an $11 billion investment in a new EV and EV battery plant in Canada should help both with hybrids and electric vehicles – an area in which Honda continues to lag behind other major automakers (the Honda Prologue is the only fully electric vehicle it sells in the U.S.). Meanwhile, the company is using its excess profits to ramp up stock buybacks.

HMC shares are down slightly since our last update, though are still in the 32-33 range they’ve traded in for most of May. The stock has been slow out of the gates since we recommended it in early April, despite a stellar quarter that further enhanced our thesis that booming hybrid sales (and Honda’s willingness to finally lean into its strength) have given the automaker new life. Investors have been slow to catch on to Honda’s new reality, but with the stock trading at less than 8x forward earnings and 0.42x sales, I believe they soon will.

HMC shares have 37% upside to our 45 price target. The 2.5% dividend yield will throw a few bucks our way until the share price finally gets going. 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 14.7x EBITDA and 16.1x 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.

There was no company-specific news for Philip Morris this week.

The company is coming off an encouraging earnings report in late April. Adjusted EPS of $1.50 outpaced analyst estimates of $1.41 per share, while revenues improved 11% year over year. There was a clear driver behind the sales growth: Zyn. That’s the company’s nicotine pouch; it sold 131.6 million cans of Zyn in Q1, a whopping 80% improvement from the first quarter a year ago. Zyn’s share of the nicotine pouch market is now up to 74%. Another contributor to Philip Morris’ strong quarter was its heated tobacco device IQOS, which is expected to launch in the U.S. in the second quarter. Global shipments of IQOS grew by 21% to 33.1 billion in the quarter.

PM shares are down 1.5% in the last week but up 12% since a mid-April bottom at 88, outperforming the market thanks in large part to that promising earnings report, especially the news about Zyn. The stock has 21% upside to our 120 price target. The 5.2% dividend yield adds to the appeal. BUY

United Airlines (UAL) – People are flying 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 7.4% 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 cheap. It trades at a mere 5x forward earnings estimates, with a price-to-sales ratio of just 0.32 and a price-to-book value of 1.90. The stock peaked at 96 a share in November 2018; it’s currently in the low 50s.

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.

There was no company-specific news for United Airlines this week, though it did get dinged along with other airlines by a guidance cut from peer American Airlines’ (AAL). American revised its second-quarter EPS guidance to a range of $1.00 to $1.15 per share, down from its previous range of $1.15 to $1.45. As a result, airline stocks as a group (as measured by the JETS ETF) are down about 4.5% in the last couple trading days; UAL shares are down 3% since we last wrote.

Mind you, American’s guidance cut has no impact on United’s second-quarter outlook – which was modest to begin with, at 7% revenue growth and a 20% decline in EPS. Meanwhile, passenger numbers are soaring even ahead of the always-busy summer travel season: They were higher every day this May than they were last May. So, the baby-out-with-the-bathwater selling that’s occurred among all airline stocks since American’s guidance cut seems overdone. And UAL shares are now even more undervalued, trading at less than 5x forward earnings and a mere 0.31x sales.

The stock has 38% upside to our 70 price target. 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.

Agnico Eagle Mines (AEM) is the world’s third-largest and likely the highest-quality and lowest-risk gold mining company. Its strategy of “proven geological potential in premier jurisdictions” appropriately describes its exclusive focus on quality mines in the legally safe countries of Canada, Mexico, Australia and Finland. In the past few years, Agnico has made several in-region acquisitions including Kirkland Lake in 2022 for $11 billion and Yamana Gold’s Canadian assets for $2.6 billion. The plan for the next five years is to fully integrate and improve these operations and grow production in its existing mines.

As the owner of some of the industry’s highest-quality mines, Agnico has production volumes that look steady for years to come. While some of its ten major mines will see tapering output, nearly all of the others will have steady increases, driven by continued investment and exploration. Agnico’s gold reserves are high quality and increased 11% last year, supporting its outlook for at least stable production volumes. In 2023, the company’s production came in at the high end of its guidance range.

Agnico continues to be an efficient operator, with all-in sustaining costs (or AISC) of about $1,200/ounce, which is roughly 12% below the industry average. Helping its economics are the quality of its mines, the close geographic proximity of its Ontario and Quebec mines and the surplus capacity in its Detour Lake facility that will allow for higher throughput with minimal incremental costs.

We see in Agnico a well-managed company that meets/exceeds its production and cost guidance yet has shares that are noticeably undervalued.

There was no company-specific news for Agnico Eagle Mines this week, though gold prices pulled back about 4% after touching new all-time highs above $2,430 an ounce a week ago. That dragged most gold mining stocks down, though AEM’s losses (-1%) have been quite modest.

Agnico reported strong first-quarter results in late April, with revenues up 21% and EPS up 33% year over year with gold prices spiking to all-time highs in the quarter. Both figures handily beat analyst estimates. Also, the gold miner ended the quarter with cash and cash equivalents of $524.6 million, up 55%, while total cash from operating activities reached $783.2 million, up from $649.6 million a year ago.

AEM shares have 11% upside to our 75 price target. As long as gold prices remain elevated, gold stocks are likely to stay in favor. 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. 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.

There was no company-specific news for Aviva this past week.

AVVIY shares are down 3% after flirting with 52-week highs around 12.7 a week ago. A break above that 12.7 level would be bullish, but right now it’s acting as suborn overhead resistance. (We’re seeing similar action in many names out there, in fact, with resistance near their prior peaks.) The stock remains cheap, trading at less than 12x earnings estimates, with a price-to-sales ratio of 0.41 and a price-to-book of 1.45. Shares have 13% upside to our 14 price target. The 6.6% dividend yield adds to our strong total return thus far. 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.

The bill has come due for Citigroup to pay for its 2022 “fat-finger” accidental trade of $444 billion that led to a flash crash in European markets. A failure in its trading system led to one of its London traders accidentally creating a basket of $444 billion instead of the $58 million basket he’d intended to sell. U.K. regulators have handed down a $78.4 million fine, which Citigroup is not disputing.

The announcement of the fine last week, along with softness in many financial names, has weighed on C shares, with the stock down about 4.5% since. Bigger picture, the bank is coming off a strong quarter last month. Revenue came in at $21.1 billion, ahead of $20.4 billion expected. Earnings per share of $1.86 blew away analyst estimates of $1.23. However, EPS was down 27% from last year’s first-quarter tally due to higher expenses and credit costs. Revenue was also down, about 2% year over year, but it was only down compared to a first quarter last year in which the bank sold an overseas business.

The highlight was Citi’s investment banking unit, which saw a 35% revenue bump on the strength of a solid Q1 for the market.

C shares are still up 8% from their mid-April bottom, and are trading just above May support. From a valuation perspective, the stock is cheap at less than 11x earnings and at 1.5x sales. It has 38% upside to our 85 price target. 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.

There was no company-specific news for CNH Industrial this week.

Earlier this month, the company reported earnings that were a bit mixed.

Both sales (-9.8%) and earnings per share (-5.7%) declined from the same quarter a year ago. However, both figures beat modest estimates, with EPS (33 cents) coming in well ahead of the 26 cents that were estimated.

Broken down by segment, CNH’s Agriculture wing (its largest at $3.37 billion, or 70% of total revenues) saw a 14.1% decline in sales year over year. Construction revenues dipped 10.7% year over year. Financial Services were the lone bright spot, with revenues increasing 24.8% over last year.

Overall, CNH’s cash/cash equivalents dipped to $3.24 billion from $4.32 billion at the end of 2023. Total debt was up a tick, to $27.78 billion. But cash from operating activities improved to $894 million from $701 million.

CNH shares are down sharply since the report, getting an initial bump but giving back about 6% in each of the last two weeks as Wall Street seems to have decided there was more bad than good in the results. Trading at 7x earnings (and just 0.6x sales), CNHI shares have 33% upside to our 14 price target. The 4.4% dividend yield is at least providing a life raft as the stock has taken on water in recent weeks. 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. Following several sell-downs, Blackstone has a 27% stake today.

There was no company-specific news for Gates this week.

Like CNH, Gates is coming off some mixed earnings results from earlier this month. The 31-cent EPS results outpaced analyst estimates of 30 cents and was up 20% from the 25 cents it earned in the first quarter a year ago. However, sales of $862.6 million even more narrowly missed analyst estimates and, more importantly, represented a 3.9% decline from the $897.7 million in revenue from Q1 a year ago. The underwhelming results sent GTES tumbling about 8.7% in the immediate aftermath, though it has bounced back since, regaining all its losses before pulling back about 1.5% this week. It’s important to note that prior to the report, GTES was trading near 52-week highs.

GTES shares have 16% upside to our 20 price target. They trade at 1.34x sales and 1.44x book value, so they remain undervalued by traditional measures. GTES remains our best-performing stock, with a return of 61% in less than two years. 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 company-specific news for NOV this past week.

NOV reported earnings in late April that were fairly mixed. Revenues improved 10% year over year (better than the 7.7% top-line growth that was expected), but EPS declined 5.6%, far less than the 15% shortfall that was estimated. However, with operating profits and adjusted EBITDA improved, the company plans to return more cash to shareholders: $1 billion in share repurchases over the next three years (a big amount considering the current market cap is just $7.2 billion), and a 50% hike in the dividend payout starting this June. The driller currently pays a 30-cent (1.6% yield) annual dividend.

NOV shares were down 2% for the week, as crude oil prices haven’t topped $80 a barrel in May. The stock has 32% upside to our 24 price target. It trades at just 12x forward earnings estimates and 0.84x sales. 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 is acquiring 100% of Hexagon Ragasco, a Norwegian company that specializes in lightweight, customizable LPG composite cylinders used for leisure, household and industrial applications, for approximately $98 million. Hexagon Ragasco did $64 million in sales last year – a drop in the bucket compared to Worthington’s $4.9 billion.

Worthington is also selling 49% of its Sustainable Energy Solutions (SES) segment to Hexagon Composites, Hexagon Ragasco’s parent company, for roughly $10 million. Both transactions are relatively minor, and haven’t moved the needle much for WOR investors. WOR shares were down slightly this week after falling 3.5% the week before, and have now dipped below monthslong support at 57. Perhaps the worst of the selling is already over, as the stock has held above 56 for the last four trading days.

WOR shares have 29% upside to our 73 price target. BUY

Growth/Income Portfolio

Stock (Symbol)Date AddedPrice Added5/29/24Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Comcast Corp (CMCSA)10/26/2231.538.1321.00%3.20%---Sell
Honda Motor Co. (HMC)4/4/2436.3432.79-9.77%2.50%45Buy
Philip Morris International (PM)9/18/2396.9699.582.70%5.20%120Buy
United Airlines (UAL)5/2/2450.0151.262.50%N/A70Buy

Buy Low Opportunities Portfolio

Stock (Symbol)Date AddedPrice Added5/29/24Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Agnico Eagle Mines (AEM)3/25/2456.3167.920.60%2.30%75Buy
Aviva (AVVIY)3/3/2110.7512.3615.00%6.60%14Buy
Citigroup (C)11/24/2167.2861.84-8.10%3.40%85Buy
CNH Industrial (CNH)11/30/2310.7410.49-2.30%4.40%15Buy
Gates Industrial Corp (GTES)8/31/2210.7217.361.40%N/A20Buy
NOV, Inc (NOV)4/25/2318.1918.11-0.40%1.20%25Buy
Worthington Enterprises (WOR)2/6/2457.1356.3-1.50%1.10%73Buy

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

Current price is yesterday’s mid-day price.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .