The good news is that it seems that the markets are back on track, although we remain cautious.
Economic statistics continue to be strong, with factory orders and consumer confidence better than analysts expected. Home prices have moderated somewhat, although interest rates and the continuing lack of inventory are not helping that market.
However, on the bright side, GDP, at 2.9%, came in better than forecasted, and nonfarm payrolls did too. The unemployment rate remains steady at 3.7%, continuing at historical lows.
As I said, the market has shown improvement, with every sector but Energy up for the month. The best-performing sectors were Communication Services (up 11.81%), Technology (10.02%), and Basic Materials (8.86%). The weakest sectors were Energy (-4.15%), Consumer Discretionary (up 3.09%), and Financial Services (up 3.33%).
Mid-cap and large-cap Growth stocks, along with mid-cap Value stocks, also had a great month, rising (9.40%, 8.88%, and 8.52%, respectively).
Sentiment—both institutional and retail—has become more bullish in the past few weeks. We are, too; we like the direction we are seeing but are wading in carefully, just in case.
While I’m still feeling cautious, I like the direction I see in Growth stocks, so I asked Tyler Laundon, Chief Analyst of Cabot Early Opportunities and Cabot Small-Cap Confidential, for a recommendation this month. His answer was Huron Consulting (HURN). His reasoning: “It’s a small-cap consulting company that’s big in healthcare and education. Those two markets are in a constant state of change so there is always demand for extra help. Huron has been building out solutions and talent to help with digital transformation and that’s proving to be a very good move for business. Revenue and EPS should both grow at double-digit rates over the next three years.”
Here’s a summary of Tyler’s recent write-up on the company:
“Huron Consulting (HURN) is a professional services company focused on helping clients develop sound business models, streamline operations, embrace digital transformation, and navigate constant change.
“Huron has a market cap of $1.5 billion and is on pace to grow revenue by nearly 20% to $1.1 billion this year. EPS should be up 27% to $3.31. Management plans to return 25% to 50% of free cash flow to shareholders.
“Its biggest market segments are Healthcare and Education, which represented 42% and 26% of 2021 revenue, respectively. The remaining 32% of revenue came from what Huron now calls its Commercial segment, which includes energy and utilities, financial services, industrials and manufacturing, and public sector markets.
“Huron serves nearly 2,000 clients around the world. Its ten largest clients accounted for just under 20% of 2021 revenue.
“The company has recently begun to focus more on its strength: providing digital services such as helping customers transition to cloud-based tech and analytic solutions. In fact, it has begun reporting revenue specifically related to Digital, and has been building out partnerships in the area. Digital is a huge growth driver (+46% in Q3) as it represents Huron’s ability to help organizations invest in cloud-based tech and analytic solutions.
“It is now a partner with many of the major enterprise software companies, including Oracle (ORCL), Salesforce.com (CRM), Workday (WDAY), Amazon Web Services (AMZN), Informatica (INFA) and SAP (SAP), among others.
“Huron is an active acquirer of small consulting and technology firms that help round out the business and/or add capabilities at a lower cost than internal development. Acquisitions in 2021 include Unico (data strategy and tech consulting), Bad Rabbit (research administration software services team), Whiteboard (student enrollment advisory firm), and Perception Health (healthcare predictive analytics). Expect more of the same in future quarters. The company has also trimmed areas, such as its Life Sciences business, that aren’t strategic.
“In Q3, reported in early November, revenue rose 28% to $292.2 million. EPS rose 29% to $1.01. The company enjoyed strong demand for Digital capability services (+45.5%) as clients continue to invest in the cloud and in analytics. Consulting and Managed Services revenue was up 15.5%.
“Huron is on track to deliver full-year revenue growth of 19% to $1.1 billion and EPS growth of 27% to $3.31. Looking into 2023, the current consensus is for revenue to grow 10% to $1.21 billion and EPS to grow 20% to $3.98.
“As part of its accelerated growth and profitability strategy, Huron management expects to deliver, through 2025, low double-digit annual revenue growth, high-teen annual EPS growth, and to deploy 25% to 50% of cash flow to shareholders. This should be good for the stock. Over the first nine months of 2022, Huron has repurchased 7.8% of its common stock.
“HURN trades with a trailing PE of 17.7, close to the low end of its range dating back almost a decade.”
Huron Consulting Group Inc. (HURN)
52-Week Low/High: $42.66 - 80.72
Shares Outstanding: 19.93 million
Institutionally Owned: 97.37%
Market Capitalization: $1.577 Billion
Dividend Yield: n/a
Foray into digital services is adding new
About the Analyst: Tyler Laundon, Cabot Early Opportunities & Cabot Small-Cap Confidential
Tyler Laundon is Chief Analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting, and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.
Tyler’s small-cap portfolios favor a high allocation to stable, high-growth companies, upon which he layers strategic purchases of higher-risk, event-driven investments. He first began publishing his analysis of small-cap opportunities in 2009. Since 2012, he has led his subscribers into 10 doubles. Between 2012 and September 2015 his small-cap recommendations generated cumulative returns of over 2,300%, including both winners and losers, and outperformed the Russell 2000 Index by an average of 28% per year.
Prior to joining Cabot, Tyler founded and operated a small business for 15 years. He then worked as a consultant for start-up technology companies, as well as Vermont’s largest healthcare institution. From 2009 to 2015, he was the chief analyst of growth stocks at Wyatt Investment Research, where his research spanned the full spectrum of the growth stock universe, from micro-cap start-ups to multi-national mega-caps.
Tyler holds a B.S. and MBA from The University of Vermont, where he graduated Valedictorian. He has been quoted by U.S. News & World Report and has presented investing ideas and strategies for The Money Show and Bloomberg Markets LiveINSIGHTS. Tyler Laundon focuses primarily on growth stocks in his Cabot Small-Cap Confidential and Cabot Early Opportunities newsletters.
I’ve followed Tyler’s insights and analysis for many years, and enjoy his thoroughly researched recommendations. So, as small-cap growth stocks have begun to shake off their doldrums of the past year, I sought out Tyler to find out his current thoughts about that market niche.
Here is our interview:
Nancy: Last time we spoke, Tyler, eight of the ten companies in your portfolio had market caps of less than $10 billion. Is that still the case or is your portfolio skewed to larger- or smaller-cap issues?
Tyler: The current Cabot Small-Cap Confidential portfolio has 11 positions. Only one has a market cap over $10 billion. We’ve held that stock since 2018 and are up over 200% - it was much smaller when I added it. The vast majority of our current stocks have market caps under $3 billion. This reflects the addition of new positions that have pulled back to very attractive levels, in my view.
Nancy: Small-cap stocks have been under a lot of pressure in the past year, with small-cap value companies mostly outperforming small-cap growth businesses. Do you have a forecast for both value and growth for 2023?
Tyler: I don’t have a specific forecast for both growth and value in 2023, though I’ll note that analysts believe 2023 will be better for value stocks than for growth stocks given where we are in the economic cycle. If we look at year-to-date 2022 results (as of December 1) we see that the S&P 600 SmallCap Index is -11.2%, with the value component -6.6% and the growth component -16%. From the September 2022 lows, the three groups are all +16% to +18%. Will value continue to outperform, or will growth rebound further? I don’t know, if I were buying at the index level, I’d want to own both and evaluate as we move through the year. More important to me is that small caps as an asset class are trading at a historical discount to large caps, so that makes them attractive. As a small-cap stock picker, I’ll be trying to be in the strongest stocks in both areas.
Nancy: How do rising interest rates affect the valuation of small-cap companies? And do you think their valuation is more vulnerable than their larger-cap peers?
Tyler: The relationship is similar to that of interest rates and large-cap stocks. Higher interest rates make higher-growth, higher-valuation small-cap stocks less attractive than comparatively lower-valuation small caps. But only up to a point. Once we get close to the peak cycle interest rate—which we should be rapidly approaching—and move into a more stable period of monetary policy, things become fuzzier, at least for a period. Then as we approach a period of easing, those higher-valuation small caps become very attractive. The challenge is to be aware of this dynamic and, just like with large caps, be aware of the potential duration of, and between, the cycles. In terms of small-cap valuation vulnerability, this is a tough one. Small caps are currently much more attractive on valuation than large caps so that’s not a current concern. In fact, it’s a plus. Beyond that, it’s more sector and stock specific as there are different dynamics affecting both small and large caps in certain end markets.
Nancy: Your portfolio looks pretty well-diversified. I see names in auto manufacturing, technology, healthcare, and other sectors. Do you currently have a favorite small-cap sector?
Tyler: We’ve done very well with small-cap MedTech stocks in 2022. I continue to like it for 2023. I also like a number of names in specialty finance and professional services, which can be resilient in an iffy economy. In tech, I like efficiency solutions, like software and online marketplaces that streamline operations and make businesses more efficient. Those types of solutions will always be in demand.
Nancy: What are the 3-5 most critical challenges in 2023 to the companies currently in your portfolio?
Tyler: First, macro factors like interest rate policy, supply chain disruptions and Covid policies in China (supply chain related) are going to be challenges for global markets, including small caps in the U.S. They also represent opportunities depending on how the chips fall. The potential for rising unemployment, lower consumer spending and reduced corporate spending in the U.S. is also a concern if we go into recession. I’m trying to mitigate these types of concerns through stock selection.
The shares of M/I Homes (MHO) are up slightly over the past month. Investors are beginning to take note, especially the institutions. According to Insider Monkey, the shares of MHO now occupy 23 hedge fund portfolios. The company’s largest institutional shareholder is BlackRock, with about 4.6 million shares.
Trading at a P/E of just 2.57, these shares are very undervalued. Buy
In his latest report on QUALCOMM Incorporated (QCOM), Tom Hutchinson, Chief Analyst of Cabot Dividend Investor had this to say: “After a long time floundering in the abyss, QCOM moved 20% higher this month. The cooler inflation numbers ignited a big rally in tech. Even if the worst still isn’t over for the sector, QCOM is showing you how fast it can move higher when the tech sector environment improves, and it surely will. Remember, the market anticipates. Qualcomm just announced a profit slowdown for the quarters ahead. But the market has been pricing that in all year, even when current profits were still booming. In the months ahead, the market will start to look toward the recovery. Hold.”
The shares of QCOM have made great progress in the past month, as Tom mentioned. But with continuing concerns about China’s lockdown, I’m keeping my rating of the stock at Hold for now.
Carl Delfeld, Chief Analyst of Cabot Explorer recently updated his view of MP Materials Corp. (MP), saying, “MP Materials shares pulled back a couple of points over the last two weeks, but the company is on track to meet its goal of filling in its rare earth supply chain and eventually manufacturing permanent magnets. My call with management went well and my price target over the next six months is 45.”
The shares have been under pressure, although the company’s financials continue to beat analysts’ expectations. The shares are selling at a discount. Let’s continue with our Buy recommendation for now.
Shares of Devon Energy (DVN) have been choppy, but Wall Street analysts are bullish on the company. Argus just increased their price target for the company, all the way up to 90 from 77. And Piper Sandler raised their target from 96 to 98. The discounted valuation, as well as the company’s strong fundamentals and a healthy dividend yield of 7.89% make the shares attractive.
Continue to Buy.
Bruce Kaser, Chief Analyst of the Cabot Turnaround Letter and Cabot Undervalued Stocks Advisor, updated Citigroup Inc. (C), saying, “Citi shares trade at 59% of tangible book value and 7.1x estimated 2023 earnings. The remarkably low valuations assume an unrealistically dim future for Citi.
Citi shares fell 3% in the past week and have about 78% upside to our 85 price target. We anticipate that the bank is done with share buybacks until there is more clarity on the economic and capital market outlook, which could readily be a year or more away. BUY.”
Citi is still in the infancy of its turnaround process. This is a long-term venture, and institutional investors are taking the bet. Right now, institutional holdings in Citi’s stock are around 73%. Continue to Buy.
Our newest recommendation, Curaleaf Holdings, Inc. (CURLF) is sailing along nicely. In a recent update, Michael Brush, Chief Analyst of Cabot SX Cannabis Advisor, reported, “Curaleaf is the winner on the perception front. Its market capitalization of $4.8 billion tells us investors expect a lot from the company, and its price/sales ratio of 2.8 is among the highest in the group. Not that it hasn’t already proven its mettle. ‘By the end of 2022, Curaleaf will have grown revenue at a staggering compounded annual growth rate of roughly 105% since 2018,’ notes board chair and co-founder Boris Jordan. The company projects $1.45 billion in 2022 sales, more than double 2020 sales.
“Curaleaf International is the largest vertically integrated cannabis company in Europe. It has a lot of room to expand production, and it boasts import and distribution capabilities in the U.K., Germany, Italy, Switzerland, and Portugal. The company thinks Europe’s population of 748 million people potentially supports annual legal market cannabis sales of $229 billion, compared to $677 million in 2021.”
Shares are up about 25% since our recommendation. Continue to Buy.
Stock of the Month Portfolio
*Aggressive (A), Moderate (M), Conservative (C)
*Aggressive (A), Moderate (M), Conservative (C)
Our ETF portfolio is improving. This month, First Trust Water ETF (FIW), iShares US Energy (IYE), ALPS Medical Breakthroughs ETF (SBIO), AGFiQ US Market Neutral Anti-Beta Fund (BTAL), and one of our newest recommendations, iShares US Healthcare ETF (IYH) are all positive.
Many economic advisors are still calling for a recession in 2023, so I want to keep our portfolio fairly conservative right now.
With that in mind, I’d like to add the 4-Star rated Vanguard Dividend Appreciation ETF (VIG) to our portfolio. The fund consists of the common stocks of companies that have a record of increasing dividends over time. This fund is low-risk, and very well-diversified, as you can see in its top ten holdings below. It is a blend of value and growth, consisting of mostly large-cap stocks.
Currently, the fund’s top five industries are: Financials (20.34% of assets), Healthcare (16.52%), Technology (15.83%), Industrials (15.31%)Energy (20.10%), and Consumer Defensive (14.16%). The fund should be considered Conservative.
The fund’s expense ratio is 0.06%.
Its top ten holdings are:
|Top 10 Holdings (31.56% of Total Assets)|
|JPMorgan Chase & Co||JPM||3.73%|
|Johnson & Johnson||JNJ||3.69%|
|UnitedHealth Group Inc||UNH||3.20%|
|Visa Inc Class A||V||3.01%|
|The Home Depot Inc||HD||2.85%|
|Procter & Gamble Co||PG||2.84%|
|Comcast Corp Class A||CMCSA||2.25%|
I believe the rest of our portfolio is in good shape. The bond funds continue to trade at losses, but I’m holding on to them for a while, to see how/if a recession materializes, in which case, they should become profitable and serve as a hedge against any equity downturns.
Huron Is Taking Advantage of the Digital Revolution
As Tyler mentioned, shares of Huron Consulting are on the move but still very undervalued considering the steady revenues this company has produced in all three of its segments: Healthcare, Education, and Commercial.
Certainly, its shares have almost doubled since the beginning of the year, but investors—both institutional and retail—are beginning to embrace the stock, recently pushing it up to 52-week highs.
The company has beaten earnings estimates in each of the last four quarters, and part of that growth can be attributed to its rising digital capabilities (40% growth in the last quarter).
In a recent survey, James McGough, Founder of Europe’s biggest technology EXPO – DTX, said, “71% of our recent C-level visitors have told us they no longer wanted to work in what I call ‘departmental isolation’ and were actively seeking to work with others across their organization to help realize the digital industry’s massive potential.”
And KPMG reported, “CEOs continue to prioritize digital investment—with 72% agreeing they have an aggressive digital investment strategy, intended to secure first-mover or fast-follower status.” In its survey, KPMG found that 40% of managers have already taken steps to go digital, while another 37% plan to do so within the next six months.
Fusioninformatics.com says the top five industries that will be affected by digital transformation are:
Digital Supply Chain. The global pandemic has hugely impacted the entire supply chain sector across the logistics industry, so digital transformation will make logistics much more efficient. Gartner reports that “by the year 2024, 50% of the entire supply chain companies will invest in AI(Artificial Intelligence), Advanced Analytics-based applications/apps in their DX journey. Supply Chain digital transformation will allow companies to align with their strategies that will ensure smooth growth while mitigating risks and optimizing costs benefitting the entire sub-segment impacting the industry concerned.”
Online Learning. The UN Sustainable Development Report (2021) reported that ed-tech investments reached US$18.66 billion in 2019 while the overall market for online education/learning is projected to reach US$350 billion by 2025.
Telehealth. Total integration of healthcare became a burgeoning reality during the pandemic. Now, telehealth is expanding to include more healthcare mobile apps and telemedicine solutions.
Fintech. One of the first industries to embrace digital, financial services continue to explode on the digital pathway. Mobile apps, open banking, digital wallets, and digital lending are all becoming commonplace.
Digital Agriculture/Farming. The adoption of an Agricultural Data Exchange is already helping farmers manage and monitor their crops, leading to “smart farming.”
As you can see, almost all of these applications could potentially fall into one of Huron’s already successful product lines.
And digital is just the icing on the cake to Huron’s other advantages:
- Leading market positions and accelerating growth in two critical industries—Healthcare and Education
- Rising market share in Commercial industries
- Strong balance sheet
- Attractive share repurchase program, with 20%-25% of cash flow targeted annually
Huron is growing in each of its arenas, but very importantly, the company is carefully managing its margins as you can see on the following chart:
Consequently, what’s not to like? Growing revenues and earnings, a developing market segment, rising share prices, but still undervalued. I’d call that a Buy.
The next Cabot Money Club Stock of the Month issue will be published on January ??, 2022.