Cabot Stock of the Month Issue: January 12, 2023

Welcome to our first annual TOP PICKS issue! For this month, I asked the Cabot analysts to give me a couple of their top picks for 2023. I think you will find they have produced a nice selection of companies in diverse sectors. And just as I did in my previous newsletter, Wall Street’s Best Stocks, I’ll keep track of their picks and let you know how they fare.

But first, let’s talk about the market.

Market Overview

And what a crazy market it was in 2022!

As you can see in the above chart, the Dow Jones Industrial Average declined some 8.8% last year. However, those 30 stocks fared much better than the S&P 500, which was down by 19.4%, and the tech-laden Nasdaq, which lost 33.1%.

The catalysts for the sad market in 2022 began with the Russia-Ukraine War and then was further pummeled by rising inflation and interest rates.

Style-wise, value stocks did the best last year; however, each category was in the red with large-cap value stocks falling by 9.69%, mid-caps downs by 13.92%, and small caps declining by 16.49%. And growth stocks suffered even more, with small caps down 27.12%, mid-caps off by 27.73%, and large caps falling 30.25%.

As for sectors, energy stocks were the only net gainers for 2022, rising, on average, 57.6%. As the following chart shows, across the board, the rest of the S&P 500 sectors—on average—declined.

Source: SeekingAlpha.com

The housing market saw an incredible boom through the first half of the year, with prices accelerating at a ridiculous pace, inventory that fell off a cliff, and way more buyers than sellers.

However, about mid-year, the housing industry began to slow. Prices started falling, inventory went up, and the cycle started to look more normal. It’s not there yet, as prices continue to fall—by 3.1% last month, which is better than the 9.8% decline in the previous month. But inventory continues to be the lowest in decades. And escalating interest rates are not helping buyers or sellers. For the near future, I believe that housing will continue to be so-so—at least until we begin to see mortgage rates fall.

In other economic news, the unemployment picture is still a very positive sign. At a healthy 3.5% (down 0.2% from November’s rate) now, economists expect it to go to about 4.3% this year, which is still pretty good when you consider that the historical unemployment rate in the U.S. averaged 5.74% from 1948 until 2022.

For 2023, many economists are forecasting the chances of a “mild” recession are between 50% and 65%. And they also predict that the Federal Reserve will begin cutting their Fed Funds rate either in the third or fourth quarter.

So, what does this mean for the stock market? Well, the market usually is a pretty good forecaster for the economy, meaning that market movements generally occur a couple of quarters ahead of any economic events. Today, the markets have been listening to the recession talk for months. And that, along with inflation and rising interest rates, has restrained stocks.

Going forward, that means that until a recession shows up, stocks may still be reined in, with defensive, consumer staples stocks potentially taking the lead. Other sectors that look interesting for the beginning of 2023 are healthcare—which has also become somewhat of a defensive sector, and technology, which got killed last year. But industry gurus have been talking up the Internet and retail tech sector, with economist Yardeni predicting that revenues will grow by 10.4% this year, compared to 8.2% in 2022. And with valuations at incredible discounts, it seems that these stocks have a lot of room to grow.

Time will tell. In the meantime, I will continue to look for value and growth propositions to diversify and grow your portfolios.

Now, let’s get to our TOP PICKS!

Top Picks for 2023

The following two picks are from Tyler Laundon, 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 research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.

More Speculative Pick

Catalyst Pharmaceuticals (CPRX) is a small-cap biopharma company focused on in-licensing, developing and commercializing novel medicines to treat rare diseases. It has a market cap of just under $2 billion.

While the company came public in 2006, current growth is a result of a collaboration struck with BioMarin (BMRN) in 2012 when Catalyst obtained the North American rights to amifampridine.

At the time amifampridine was being developed to treat Lambert-Eaton Myasthenic Syndrome (LEMS), a neuromuscular disorder that often causes severe and progressive muscle weakness and fatigue.

LEMS occurs when the immune system disrupts communication between nerves and muscles and disrupts the release of an important chemical called acetylcholine (ACh). Lacking proper release of ACh muscles don’t fully function. LEMS impacts about 3,000 people in the U.S. and many more worldwide.

In 2018, Catalyst obtained FDA approval for amifampridine tablets (commercial name is Firdapse) for adults with LEMS. Commercial launch was early 2019 and is now available for adults. A pediatric label expansion is now in a Phase 3 trial. Canada has approved the treatment for adults and expansion efforts in Japan are underway.

Catalyst is also on the prowl for assets to spur more growth. In 2021, the company began evaluating drug candidates beyond neuromuscular diseases in an effort to diversify its revenue base. Management has said it will seek to acquire companies and

acquire or in-license drug products in development.

On that note, in July 2022 Catalyst acquired the rights to Ruzurgi from Jacobus Pharma. This acquisition from settled an on ongoing patent dispute and helped remove an overhang from CPRX stock.

Then on December 19 Catalyst announced the acquisition of the rights to FYCOMPA from Eisai. This drug is approved for epilepsy, should generate $136 million in the 12 months ending March 31, 2023 and should add to Catalyst’s earnings. The $160 million acquisition also includes an option to evaluate and potentially acquire an additional epilepsy drug from Eisai.

Clearly, Catalyst management is thinking of building a bigger company. In Q3 the company added $35 million to its balance sheet to end the quarter with $256 million in cash. Revenue grew by 59% to $57.2 million. EPS was $0.26 (+86%).

Analysts expect revenue growth of around 49% ($210 million) in 2022 and growth of 20% ($250 million) in 2023. Expected EPS is $0.73 (+33%) this year and $0.88 (+19%) in 2023.

From Nancy: Catalyst rose more than 170% in 2022. And analysts have recently increased their price targets for the company to $24 (a whopping $6 rise!), primarily due to the Eisai agreement. Currently, 18 hedge funds own that stock, an increase of two funds from the previous quarter.

More Conservative Pick

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.

The company was founded in 2002 and came public in 2004. It is based in Chicago and has additional locations in the U.S., Canada, India, Singapore, and Switzerland.

Huron has a market cap of around $1.5 billion and is on pace to grow revenue by nearly 20% to $1.1 billion in 2022. EPS should be up 27% to $3.31. Management plans to return 25% to 50% of free cash flow to shareholders.

Looking to 2023, the current consensus is for revenue to growth 10% to $1.21 billion and EPS to grow 20% to $3.98.

As with other successful consulting firms, technology, data, analytics, and people are the heart of Huron’s business. The company can’t succeed if it hasn’t hired and developed industry-specific talent required to help other organizations achieve their goals. The company ended Q3 with 4,571 revenue-generating professionals, up 23% over a year ago.

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.

Examples of clients include health systems, hospitals, universities, research institutions, banks, asset managers, insurance and private equity firms, oil and gas and utilities companies and the federal government.

Huron serves nearly 2,000 clients around the world. Its 10 largest clients accounted for just under 20% of 2021 revenue.

The company has recently begun to focus more on its strength of 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 with major enterprise software companies in this area, including Oracle (ORCL), Salesforce.com (CRM), Workday (WDAY), Amazon Web Services (AMZN), Informatica (INFA) and SAP (SAP), among others.

It’s not the sexiest stock out there. But it’s a great business. And it’s growing revenue and earnings at double-digit rates.

From Nancy: This was our Cabot Stock of the Month pick last month. For more information on the company, please see our Portfolio Update section.

The next four recommendations are from Bruce Kaser, Chief Analyst of Cabot Turnaround Letter and Cabot Undervalued Stocks Advisor. Bruce has more than 25 years of value investing experience in managing institutional portfolios, mutual funds, and private client accounts.

Conservative Pick for Cabot Turnaround Letter

Nokia Corporation (NOK) is one of the world’s primary providers of telecom equipment, along with Ericsson, Samsung, and China-based Huawei. Based in Finland, the company struggled with disappointing new product initiatives including mobile phones, a lack of a major telecom upgrade cycle, a wrong-way bet on semiconductor technology, and weak leadership. Its €15.6 billion acquisition of Alcatel-Lucent in 2016 has been a disappointment as well. Current worries include the intensely competitive environment, particularly in radio access networks, a core component in telecom systems. Nokia shares have gone nowhere in the past ten years.

New leadership, however, is refocusing and rebuilding Nokia. Pekka Lundmark helped develop Nokia’s business in the 1990s, then gained valuable business and leadership experience from impressive roles at other major companies until rejoining Nokia as CEO in late 2020. Under Lundmark, the company has corrected its semiconductor mistake, reinvigorated its sales efforts, streamlined its profit structure and is investing heavily in new product development that is lifting its market share trajectory.

These improvements are showing up in the company’s financial results. Sales growth hit 6% ex-currency and earnings per share rose 25% in the most recent quarter. The operating profit margin dipped, but this was due to a timing issue with high-margin patent contracts. Nokia remains on track to maintain and build upon its already-improved margins, even as it ramps up its technology spending.

Global telecom service providers continue to ramp their spending for the rollout of 5G technology. India has been widely cited as a large and upcoming new market. Due to security concerns, China’s Huawei is being sidelined, leaving more market share opportunities for western companies like Nokia. While the industry is highly competitive, Nokia is increasingly capable of maintaining its position, at a minimum.

Free cash flow is strong, allowing the company to now hold €4.7 billion in cash above its debt balance. With its new financial flexibility, Nokia has restored its dividend and is about halfway through its €600 million share repurchase program.

The share valuation at 4.8x estimated 2023 EBITDA, is unchallenging. All-in, this under-appreciated company offers an attractive turnaround opportunity for 2023.

From Nancy: Nokia has been repurchasing shares. Its most recent repurchase was for a total EUR 1,288,111.50. Following the transactions, Nokia Corporation holds 34,113,878 treasury shares. The company just signed an agreement with British Telecom for access to Nokia’s AVA software, to improve the telco company’s network-monitoring capabilities. Also, Nokia announced that together with O2 Telefonica Germany it had successfully completed the industry’s first two-component carrier aggregation using a 5G connection with sub-6 GHz spectrum.

Aggressive Pick for Cabot Turnaround Letter

ZimVie Holdings (ZIMV) is a $900 billion (revenues) medical technology company that produces spinal and dental implants. Sales are roughly evenly split between the two segments, and about 30% of revenues are generated outside of the United States. The company was spun-off from Zimmer Biomet in February 2022. The former parent still holds a 19.7% stake.

After an initial surge of enthusiasm, investors have lost faith in the company’s prospects, sending its shares down 80%. The primary concerns focus on ZimVie’s small scale relative to competitors, its struggling dental products segment, and elevated debt which requires relatively high annual interest and principal payments. Regarding its size, the company holds the #5 market share in dental implants and #6 market share in spinal implants. The smaller scale limits ZimVie’s ability to spend on new product innovations and to attract the highest-producing sales representatives that are vital to long-term growth. While the dental segment is operating relatively well, the spinal segment is in turnaround mode as it struggles with weak product differentiation.

ZimVie’s debt at 4.4x EBITDA is floating rate and carries a 5% annual debt repayment requirement – the combination consumes much of the company’s free cash flow. Adding further pressure to investor sentiment is the limited public company experience of ZimVie’s leadership team.

However, ZimVie shares look appealing on several measures. First, at 5.1x estimated 2023 EV/EBITDA and 6.5x estimated 2023 earnings per share, the shares are remarkably inexpensive. And, while earnings estimates for many companies are sliding, estimates for ZimVie remain essentially unchanged from over a year ago. The drop in the share price isn’t because earnings are collapsing, it is because the multiple has collapsed. Expectations are dour, offering a valuable margin of safety should the company fail to deliver on its promises, while offering considerable upside potential if it is successful.

Second, ZimVie’s dental business has a solid franchise that likely can produce 4-6% annual revenue growth. This provides a solid base while the management turns around the Spinal segment. The Spinal segment strategy is to stabilize its market share and profits by pruning low-profit products, exiting unprofitable geographies, and introducing new higher-margin products. Also, ZimVie is working to re-energize its commercial sales organization – previously neglected under its former corporate parent. Importantly, new leadership in this segment is bringing a much-needed fresh perspective.

While the company’s debt service is elevated, it generates more than enough free cash flow to cover the costs. As its operating profits improve, its ability to service this debt increases. ZimVie currently holds $116 million in cash, providing a valuable financial cushion. And we see the debt constraint as a positive – it focuses management on its existing operations rather than relying on acquisitions.

The company’s management appears capable. Vafa Jamali, who joined Zimmer in 2021 to become ZimVie’s CEO, brings considerable medical technology senior leadership experience at both smaller companies and major firms including Medtronic and Covidien.

With low investor expectations, a strong dental segment and a pending turnaround in its Spine segment, ZimVie shares have strong upside potential with relatively limited downside.

From Nancy: The shares of ZIMV hit a bump in the last quarter after the company downward revised its 2023 guidance. However, they rose more than 10% in December, as investors flocked back to the stock, as analysts embraced the company’s new focus on further R&D.

Conservative Pick for Cabot Undervalued Stocks Advisor

Comcast Corporation (CMCSA), with $120 billion in revenues, is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television (about 55% of revenues), NBCUniversal (32% of revenues), which includes the Universal movie studios and theme parks, NBC and Telemundo television networks and the Peacock TV streaming service, and Sky media company in Europe (13% of revenues). Comcast also owns the Philadelphia Flyers professional hockey team and a 33% stake in the Hulu streaming service. The Roberts family holds a near-controlling stake in Comcast yet has been a good steward of the firm’s resources.

Comcast shares have tumbled 40% from their late 2021 peak and now trade in line with their late-2016 price. Investors worry 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 company that for decades has successfully fended off intense competition while increasing its revenues and profits. Its operational breadth and depth, as well as management’s patience and discipline, have allowed it to understand and adapt to changes in technology and customer preferences. In the recently completed third quarter, revenues rose 5% excluding the one-off boost from the year-ago Tokyo Olympics. And profits rose 6% even when including the effects of higher Olympics profits a year ago. Compared to the pre-pandemic third quarter of 2019, recent revenues and profits were 11% higher. These are hardly the markings of a company on the brink.

The company’s diversified operations have helped provide it with valuable stability. Its slow-and-steady cable business is highly profitable even as it invests in technology upgrades to maintain its edge over competitors. Incremental losses in the number of total customer relationships are being offset by higher pricing and new services. Comcast is expanding its small but promising wireless phone service, supported by attractive pricing, quality performance and (surprisingly) generally well-regarded Xfinity customer service reputation. While losses in the emerging Peacock streaming service remain elevated, the company will likely use its disciplined capital allocation mindset to reshape this unit to at least breakeven over the next few years.

NBCUniversal continues to recover from the pandemic. The Universal theme parks recently recorded record-high US profits, while summer hits like “Jurassic World: Dominion” and “Minions: The Rise of Gru” have boosted year-to-date Studio profits to above comparable 2019 results.

The company is not without its challenges, of course. The Sky operations remain uninspiring with flat revenues excluding the effects of the weak British pound, but this segment continues to generate respectable profits. Advertising revenues across all of Comcast fell 26% in the third quarter but these comprise about a tenth of the company’s total revenues and are likely to rebound with the eventual cyclical upturn.

A major appeal of Comcast is that it generates immense free cash flow—a strength that is likely to endure. Cash flow from operations look resilient and the company is able to maintain its competitive edge while restraining its capital spending to about 11-12% of revenues. This free cash flow is not only plenty to support its reasonable debt level (which carries a low and fixed rate of interest), but also supports a generous dividend (recently raised 8%) and sizeable share buybacks. Comcast has repurchased 6% of its shares in the past five quarters. In September, the company doubled its buyback program to $20 billion, strongly suggesting buybacks will continue.

Despite its strengths and quality, Comcast shares trade at an overly discounted 6.5x cash operating profits (EBITDA) and 9.1x earnings, and offer a 3.1% dividend yield. Investors searching for solid and enduring value at a very fair price need look no further than Comcast.

From Nancy: In the third quarter, Comcast bought back $3,525 million in stock, bringing its total share buybacks to $45.38 billion in the last 10 years. Shares fell in 2022, but now analysts are predicting rising EPS, $3.75 on $120.11 billion in revenues. That should help boost the shares.

Aggressive Pick for Cabot Undervalued Stocks Advisor

Citigroup (C) 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 relatively new CEO Jane Fraser.

Fraser, an impressive 17-year company veteran with leadership and turnaround experience in nearly every segment of the bank (she is light in investment banking but has experience as an investment banker), is focusing on Cit’s strengths in Wealth and Commercial Banking, as well as credit cards, while offloading low-value operations. Her task also includes cleaning up regulatory and compliance issues, upgrading the tech infrastructure, tightening, and focusing its culture, and cutting expenses.

To an extent perhaps unmatched in the industry, Citi has operations across the globe. Global reach works best in capital markets activities like commercial and investment banking (Citi is performing well in these) but tends not to work well in local market activities like consumer banking (where Citi is struggling). Fraser has offloaded 13 consumer units including those in Australia and South Korea with its business in Mexico in active negotiations. These divestitures should boost capital levels while reducing expenses. Wealth management, which has both global and local features, is a good business for Citi, where it is well-positioned in several attractive regions including Asia.

As it sits today, Citi is in reasonably strong condition. Capital (at 12.2% CET1 ratio) is sturdy and comparable to its major peers. Credit quality is healthy as are its credit reserves. Like all major banks, Citi is struggling with slow loan growth and narrow net interest margins.

Trading at 55% of tangible book value (compared to Wells Fargo at 120% and Bank of America at 150%) and 6.5x estimated 2023 earnings, Citi shares are among the cheapest in the banking sector – a major attraction as expectations are low. As the bank grinds along with its turnaround, the valuation should improve. Investors enjoy a 4.4% dividend yield.

From Nancy: Citi is also in our Cabot Stock of the Month portfolio. Please see the Portfolio Update section for additional information.

These next Top Picks come from Mike Cintolo, Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Mike is a growth stock and market timing expert. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.

Conservative Pick

Impinj (PI) is allocated to the chip stock basket, but the company’s real theme surrounds the Internet of Things (IoT), with the firm’s offerings allowing businesses of various shapes and sizes to connect basically everything (potentially trillions of items) to the cloud.

The benefits are potentially huge, ranging from inventory and fulfillment visibility, loss prevention for checkouts at retailers, far more efficient supply chain operations and much more. The firm is best known for its radio identification (it dubs it RAIN) endpoint ICs, which cost just pennies, are battery-free, can work without a line of sight, and can be read at rapid speed (1,000 items per second at 10 meters).

Impinj also offers readers, gateways, and software, too, including a new Authenticity platform that can authenticate everyday items (counterfeiting is a huge issue globally).

All in all, the firm says it’s the leader across all its product lines, having sold well north of 60 billion (!) endpoint ICs and plenty of its other offerings, too. Supply has been an issue, but we’re not sure that’s a bad thing. According to management, demand for its endpoint ICs has run at least 50% higher than what Impinj can supply (for six straight quarters!), and the firm sees some easing of supply restraints coming up. And even before that happens, business is picking up, with endpoint IC revenue (which makes up three-quarters of the total) hitting its fourth straight quarterly record in Q3, rising 19% from the prior quarter, and with another sequential increase expected in Q4.

The overall numbers are just as impressive: Sales growth is accelerating (17%, 27% and 51% the past three quarters), while earnings took off in Q3 (34 cents a share, up from a loss a year ago and double estimates), with analysts looking for another big bottom-line gain (up 40%) in 2023.

There are some customer concentration issues (it sells to OEMs, and a couple of them make up nearly half of revenue), which, combined with supply worries, does raise the risk of some major pothole.

That said, the top brass is on record saying demand should remain strong into 2023, and Wall Street sees great things ahead: PI made a huge comeback in the summer, pulled back reasonably into the fall, and then exploded higher on earnings in late October.

And, impressively, it has held those gains and even nosed to new highs since then. Pullbacks will come, of course, but I’m thinking PI looks like a fresh leader should the market get its act together.

From Nancy: Impinj took a hit during COVID, with revenue declining 9% in 2020, but things changed in 2021, as revenues grew 37%. For all of 2022, analysts expect the company to see revenues rise 33%-34%. Shares of PI have risen more than 100% over the past year.

Speculative Pick

Biotechs have been in a three-steps-forward, two-steps-back uptrend since early summer, and Neurocrine Bio (NBIX) continues to look like a leader in the space, both technically and fundamentally. The story is all about Ingrezza, which is a treatment for a rare side effect of antipsychotic drugs that causes involuntary movements in the face and body that obviously have a negative psychological impact (being self-conscious) and sometimes can become permanent without treatment.

While rare, the drug is a big seller, with an expected $1.4 billion of revenue this year, up 30%-ish from last year. And more importantly, management sees a ton of opportunity just in its core area, with more than a half million undiagnosed patients in the U.S. alone (it thinks only 15% are both diagnosed and on treatment), so the potential is there for Ingrezza sales to easily more than double over time.

Neurocrine also has another niche product likely to hit the market soon. The company has applied for approval of valbenazine (likely approval early next year), which treats another disease that causes involuntary movements (side effect of Huntington’s) that affects maybe 25,000 people.

Those two should keep the numbers kiting higher, with analysts seeing the top line rising 20% next year while earnings reach nearly $4 per share—all while the firm’s excellent pipeline (12 mid- to late-stage programs in trials; a key Phase II readout for a child epilepsy treatment due by year-end, with two more Phase II results in other drugs next year) continues to progress.

The stock actually broke out in the summer, held the breakout level during the market’s autumn plunge and has kicked into gear as the market has bounced. We think the stage is set for medicals and biotechs to help lead the next advance and NBIX looks like one of the top dogs in that group.

From Nancy: It was just announced that the FDA has accepted Neurocrine Biosciences’ supplemental New Drug Application (sNDA) for valbenazine as a treatment for chorea associated with Huntington’s Disease (HD). The agency set a Prescription Drug User Fee Act (PDUFA) target action date of August 20, 2023.

The following pick is from Chris Preston, Chief Analyst, Cabot Stock of the Week.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week. He has been an investment analyst for more than a decade and a professional writer/editor for nearly 20 years, picking up multiple writing awards along the way. His bylines have appeared in Forbes, The Money Show, Time Magazine, U.S. News and World Report and ESPN.com.

The EURO STOXX 50 Index, composed of 50 stocks from 11 countries in the Eurozone, was down about 10% in 2022, well shy of the losses in the S&P 500 (-19.4%) and the Nasdaq (-33.1%), and only slightly below the outperforming Dow (-8.8%). The FTSE 100, London’s benchmark stock market index, was actually flat in 2022. Portugal’s (+4%), Greece’s (+3%) and Bosnia and Herzegovina’s (+8%) stock markets were all up in 2022.

Why the strength across the Atlantic?

It’s not due to lower inflation. Europe’s average inflation rate is 10%, higher than America’s recently reported 7.1% rate.

It’s not due to higher GDP growth. The U.S. economy expanded by 2.6% in the third quarter. No major European nation grew by even 1%, and a couple of big names (England, the Netherlands) contracted slightly.

The difference can be seen in the aggressiveness of their central banks. Interest rates aren’t accelerating in Europe at the same speed that they are in the U.S. America’s Federal Funds rate is up to a range of 4.25% to 4.5%. The average interest rate across Europe is a mere 2%.

Meanwhile, European stocks didn’t explode the way U.S. stocks did in the 20 months following the March 2020 Covid crash. During that time, the S&P 500 more than doubled. The EURO Stoxx 50 was up 77% during that time, while the London Stock Exchange gained only 39%. Thus, European valuations weren’t as high coming into the year.

The combination of less aggressive central banks and more muted valuations made 2022 far less catastrophic for European markets; in some cases, it was actually a decent year. And plenty of European stocks have momentum headed into 2023.

AstraZeneca (AZN) is one of them. You probably recognize the name: It’s the forgotten Covid-19 vaccine developer. The U.K.-based biotech essentially finished fourth in a three-horse race—behind Moderna, Pfizer/BioNTech, and Johnson & Johnson—to bring the jab to America. So, its share price never quite took off the way BioNTech’s or Moderna’s did. Now, it’s faring much better than both, thanks in large part to its vast array of cancer medicines.

Those include Tagrisso, Imfinzi and Enhertu, which helped the company’s oncology portfolio grow sales by 24% in the most recent quarter. Meanwhile, the company hasn’t gotten out of the Covid game; sales of its Evusheld Covid therapy drug have steadily grown. All told, AstraZeneca was on track to grow revenues by 19.4% in 2022 and earnings per share by 26%. More growth (5.1% revenues, 3.9% EPS) is expected in 2023. All that growth has led to a 23% bump in AZN’s share price in the last year, all of which has come since late October. Sprinkle in the 2.1% dividend yield, and there’s a lot to like here.

From Nancy: AstraZeneca has more than $1 billion in yearly sales and has 179 programs in its pipeline. And just this week, the company, with its partner Sanofi (SNY), announced that the FDA accepted their biologics license application (BLA) seeking approval for nirsevimab, The drug is a first protective option against respiratory syncytial virus (RSV) disease for all infants. The companies expect the FDA should reach a final decision in the third quarter of this year.

And lastly, here’s my Top Pick for 2023:

The York Water Company (YORW) will be 207 years old in 2023—the oldest water business in the U.S. The company was founded by local businessmen who were worried about fire protection.

Although 71% of the Earth’s surface is covered in water, only half a percent is drinkable. And with a global population of more than 8 billion (and growing!), water is a “hot” commodity.

York impounds, purifies, and distributes drinking water, serving customers in the fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergents, barbells, and motorcycle industries in 51 municipalities within three counties in south-central Pennsylvania.

The company posted Q3 EPS of $0.40, topping analysts’ estimates by $0.02. Revenue rose 9%, to $15.81 million, also beating analysts’ estimates by $0.81 million. In the last four quarters, York Water has met analysts’ earnings estimates once and beaten them the remaining three periods.

York pays a dividend yield of 1.80%, and the company has the longest record of consecutive dividends since 1816.

Institutions own about 48% of the outstanding shares of York Water, and hedge funds have recently increased their ownership of the stock.

For a steady company with an essential product, growing earnings, and a consistent dividend, York Water should be on your shopping list for 2023.

Portfolio Updates

The shares of M/I Homes (MHO) are up about 5% in our portfolio. Both fundamentals and technical look good, with most analysts continuing their Strong Buy rating on the company.

Trading at a P/E of just 2.86, these shares are very undervalued. Buy

Tom Hutchinson, Chief Analyst of Cabot Dividend Advisor, shared his recent update on Qualcomm Inc. (QCOM):

“After a stellar performance in 2021, QCOM is down 30% YTD in 2022. That’s about the same as the overall semiconductor sector this year. That’s the bad news. The good news is that technology stocks can turn around fast and make up for lost time as the environment changes, and it likely will in the new year. 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. Before long, the market, which tends to anticipate six to nine months ahead, may start pricing in a recovery. HOLD.”

Wall Street analysts currently rate the stock a Strong Buy (17 reports), with one Buy ranking, based on its 32% revenue growth last year. However, they see revenue declining for 2023, at least for a couple of quarters. But shares, with a P/E of just 9.48 look very discounted to me. I’m going to keep a Hold on for right now, but may be changing that to Buy in the very near future.

Carl Delfeld, Chief Analyst of Cabot Explorer, says that shares of MP Materials (MP) “inched up to 27 this week after some weakness the month prior so I will keep it a hold pending more positive developments.”

The stock of MP, however, has fallen past my stop-loss, so I’m going to cut our losses on this stock today. Sell

Devon Energy (DVN) is expected to report quarterly EPS of $1.99, up 43.17% from last year’s quarter. Revenue estimates for $4.83 billion, up 12.95% from the year-ago period.

For the full year, estimates call for EPS of $8.66 per share and revenue of $19.91 billion. If those are correct, Devon will see a +145.33% rise in EPS and +67.07% in revenues.

Continue to Buy.

Bruce Kaser, Chief Analyst of the Cabot Turnaround Letter and Cabot Undervalued Stocks Advisor, updated Citigroup Inc. (C), saying, “This past week, the yield spread between the 90-day T-bill and the 10-year Treasury bond, which approximates the drivers behind Citi’s net interest margin, narrowed to negative-57 basis points (100 basis points in one percentage point) due primarily to the jump in 10-year yields. This spread remains nearly the widest since at least the early 1980s.

“Our interpretation is that investors are assuming that the Fed rate hikes and other macro drivers will drag down inflation to sub-5% or so in a year. Given that the inflation metrics are flattening out or declining, this assumption may be perfectly reasonable.”

“CSCO shares rose 1% for the week and have 38% upside to our 66 price target. The valuation is attractive at 9.4x EV/EBITDA and 13.5x earnings per share. The 3.2% dividend yield adds to the appeal of this stock. BUY.”

Often, higher interest rates lead to more profitability for banks, and Citigroup’s third-quarter net interest income reflected that. It was $12.5 billion was up 5% from Q2’s figure, and up 18% year over year. Investors also love Citi’s above-average dividend yield.

Continue to Buy.

Michael Brush, Chief Analyst of Cabot SX Cannabis Advisor, updated Curaleaf (CURLF), saying, “As for the third quarter, Curaleaf reported 7% year-over-year sales growth on November 7, and 1% sequential growth to bring in $340 million in the third quarter. Retail sales (76% of revenue) increased by 16% to $260 million, driven in part by store openings.

“The company added six retail dispensaries in Arizona, Nevada and Florida and closed one in Colorado, bringing the store count to 142. It opened two Florida dispensaries in November after the quarter closed, taking the total to 144. The company opened a second dispensary in Tallahassee in December, bringing the Florida store count to 55. Curaleaf posted its 19th consecutive quarter of retail sales growth. Wholesale revenue decreased 14% to $79 million, as the company continued to reduce its wholesale business in lower-margin states.

“Sales growth was hurt by delays in the opening of a Bordentown, New Jersey store, and Hurricane Ian in Florida. Strong NJ sales growth and two new store openings offset these negatives. Curaleaf losses declined to $51 million compared to $55 million in the third quarter of 2021. Note that this company is founder-run, which can be a plus in investing. Board chair Jordan and board vice chair Joseph Lusardi founded Curaleaf. BUY.”

Shares were hit hard in December selling, but that makes them more discounted! Continue to Buy.

Tyler Laundon, Chief Analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities, updated Huron Consulting (HURN), commenting that the stock is “roughly flat over the last week and about 10% off its high. No new news. BUY.”

Huron’s shares are trading with a P/E of just 17.15, compared to an industry P/E of 22.22. Its Price/Book of 2.6, compared to the industry’s 5.52. That spells undervalued to me! Continue to Buy.

*Aggressive (A), Moderate (M), Conservative (C)

*Aggressive (A), Moderate (M), Conservative (C)

ETF Strategies

Our ETF portfolio looks good, for the long term. 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, U.S. Healthcare Ishares ETF (IYH), remain positive.

I’m continuing our conservative tendency, at least until I see how solid the recession predictions turn out. And while the bond ETFs are still underwater, I’m using those as a hedge—just in case of a recession.

In the meantime, I plan to add a couple more ETFs to our portfolio, incorporating more value and balance. I’ll have those to you mid-issue.

For now, follow my recommendations in our portfolio table, according to your own personal strategy and risk profile.

The next Cabot Money Club Stock of the Month issue will be published on February 9, 2023.