The election is over, a winner swiftly declared, and the Fed is set to cut rates again today. All of that is hugely bullish, as evidenced by the market hitting fresh all-time highs on Wednesday. But it’s even bigger news for small-cap stocks, which are historically overdue for a massive run. So today, we add a new small-cap stock whose name virtually everyone knows – and perhaps has indulged in themselves. That addition is part of a sweeping portfolio overhaul in our November issue, which includes two stocks reaching – actually eclipsing – our price targets, and our one true laggard getting the ax after a bad earnings report.

Lots to talk about today. Let’s get right to it.

Between the expansion of the war in the Middle East, a U.S. dockworker strike that could slow the supply chain again, and the uncertainty of a too-close-to-call presidential election next month, there are a lot of headwinds out there serving to counterbalance the good vibes created by last month’s Fed rate cut. Add in the fact that we’re in the traditional “spooky season” of October – the month in which the market has bottomed in each of the last four years – and it’s a good time to add some security to your portfolio.

So today we do just that … by adding a well-known home security company to our Buy Low Opportunities Portfolio. It’s been in business for a century and a half but has only been a public company for the past seven years. And with profits accelerating, the stock has become cheap.

Details inside.

The Fed is on the precipice of cutting interest rates for the first time in years; when that happens, homebuilder stocks tend to benefit first. But that’s not the only reason to be bullish on the sector. Homebuilders have changed the way they do business in recent years to become more like car makers, only with greater upside and higher internal rates of return. With both those short- and long-term winds at their sails, homebuilder stocks are a good – and still undervalued – bet. And today, we add a big name in the space that has the best combination of growth and value.

Enjoy!

Two years after the yield curve inverted, there’s still no U.S. recession in sight. As a result, financials – beaten to a pulp during the double whammy of the 2022 bear market and the March 2023 bank collapse – have become the fastest-growing non-tech sector of the market. It’s also one of the most undervalued. So in this month’s issue, we add a very recognizable big bank that does a little bit of everything – and seems to be everywhere. It’s growing at a healthy clip and yet is cheaper than even the average financial at the moment.

Details inside.

Consumer cyclicals, perhaps more than any other sector, are at the nexus of what we look for in Cabot Value Investor these days: solid growth, but at value prices. And today we add a high-profile stock from one of the most resilient subsectors of an otherwise sluggish retail space. Its shares were overly beaten down in the weeks since underwhelming May retail sales prompted a flash mini-selloff in all things retail. But this remarkably reliable, steady-as-she-goes growth company didn’t deserve it, and shares are now trading at a rare discount.

Details inside.

Renewable energy stocks have never lived up to their considerable promise, having peaked more than 16 years ago. And yet, there’s rarely been a bigger gap between the stocks’ value and the industry’s growth in the wake of the Inflation Reduction Act. Renewable energy projects – solar in particular – have taken off since President Biden signed that bit of eco-friendly legislation, in August 2022. Most solar companies are reporting record revenues these days. But the stocks haven’t followed suit, trading at 2018 levels.

That seems like a pretty extreme divergence between the industry and its companies’ share prices. So in this month’s issue of Cabot Value Investor, we add a solar company that’s capitalizing on the global investment in alternative energy, but is still woefully undervalued, trading at a mere 0.18x record sales.

Details inside.

The dark clouds of persistent inflation and high interest rates continue to hover over the market. But with a record amount of capital on the sidelines and little to no movement in most stocks over the last two-plus years, I’m optimistic that better days are ahead, assuming the inflation/Fed clouds eventually part. Thus, I continue to seek out companies that are essentially growth stocks at value prices. And today, we add another one to our portfolio in the form of a big-name company that’s benefitting greatly from a return to normalcy in a post-Covid world … but whose shares are trading at barely half their pre-pandemic peak.

Enjoy!

After years of being either ignored or sold off, value stocks are finally having a moment on Wall Street. The Vanguard S&P 500 Value Index Fund (VOOV) is up 25% in the last five months and is actually outpacing growth titles over the last month. Still, it’s a bull market, and growth stocks are king. How to compete as value investors in a growth-minded market? By seeking growth stocks at value prices.

Today, we do just that, adding a household name that’s been rejuvenated thanks to a shift in industry trends. The stock is up 18% year to date, and yet its shares remain dirt cheap by virtually every measure.

Enjoy!

Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the March 2024 issue.

We discuss the similarities between poker and value investing. This past month we moved two stocks from Buy to Sell – Allison Transmission (ALSN) as it reached our price target, and Sensata Technologies (ST) as its management continues to take a path that is not shareholder friendly.

Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.

Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the February 2024 issue.

Spin-offs should be in every value investor’s toolkit. In this issue, we are adding a spin-off, Worthington Enterprises (WOR), to our Buy recommendations roster.

We comment on recent earnings from Comcast (CMCSA) and provide updates on our other recommended stocks.

Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.

Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the January 2024 issue.

We review the stock market’s remarkable performance in 2023 and highlight our recommendations that produced notable gains along with our clunkers. Our view on the 2024 market is that stocks will have an average year, with the Magnificent Seven producing flat/modest returns at best. Readers should keep in mind quotes from Yogi Berra and Warren Buffett when considering market forecasts. Onward to 2024.

Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.

Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the December 2023 issue.

Artificial intelligence-inspired investors are partying like it’s 1999. We’re finding attractive value elsewhere, in discarded industrials like our new Buy recommendation, CNH Industrial (CNHI).

Tesla (TSLA) is getting lots of headlines these days, and for good reason.

Their CEO and founder, Elon Musk, was tabbed by President-elect Donald Trump to head up something called the Department of Government Efficiency (along with Vivek Ramaswamy); their stock price is up 57% in the last month; and the company is coming off its first truly encouraging quarterly earnings report in a year. Anyone who invested in TSLA a year ago, five years ago, or 13 years ago, when our Mike Cintolo first recommended the stock in his Cabot Top Ten Trader advisory, has made a LOT of money.

But another company has surpassed Tesla as the biggest EV seller in the world. And today, we add it to the Cabot Value Investor portfolio.

The honeymoon phase for a second Trump term continues on Wall Street. Stocks are up 3.5% in the week since Trump won the election, with all three of the major indexes advancing to new all-time highs. The reaction is being framed as specific to Donald Trump and his potential influence on stock prices – the so-called “Trump Trade” – but in reality, this is nothing new.

In recent years, there’s always been a honeymoon phase for stocks after a presidential election – regardless of which party or candidate won. And it typically lasts until the newly elected president’s inauguration in late January.

As you read this, I am likely fortifying my house in preparation for the 400-500 Trick-or-Treaters that are sure to descend on our place in Vermont in a few hours. That’s no exaggeration – we live on a crowded street that draws kids from all over town, and even adjoining towns, trying to maximize their Halloween hauls. The 1,000 pieces of candy I buy every year and the countless ghouls, skeletons, smoke-emitting jack-o’-lanterns and giant spiders I’ve accrued the last few years to adorn our lawn are almost like an annual tax.

Living in such a bustling Halloween hotbed is fun, and it’s certainly a blast for our two kids. But it’s a lot of work, and we’re always happy when the calendar flips to November. And in that way, it reminds me a bit of the market every October.

October hasn’t been accompanied by the type of stock selling we’ve witnessed the last two years, when U.S. markets fell sharply in October and reached a second-half-of-the-year bottom both times. Instead, this October has wrought a more subtle disappointment: rising interest rates.

Indeed, despite the Fed’s 50-basis point cut to the federal funds rate in mid-September ringing in a new era of rate slashing, 10-year Treasury yields have risen steadily since the calendar flipped to October, going from 3.80% to 4.24% – their highest level since July. In fact, Treasury yields are up 15% since September 18, the day the Fed cut rates for the first time in four and a half years.

We spend the vast majority of our time focused on U.S. stocks, and rightly so.

After all, although America has just 4% of the world’s population and generates 23% of the global GDP, 72% of worldwide investment capital is spent on U.S. stocks. That’s a stat our global investing expert, Carl Delfeld, relayed to me and my colleague Brad Simmerman on our latest Street Check podcast (click here to listen to the entire conversation). I knew the global investment axis tilted toward the U.S. – just maybe not that much.

Stocks have barely budged for three months.

The S&P 500 is a mere 1.5% above its mid-July highs, while the Nasdaq is actually down 2.5% since its July 10 peak. The Dow has made the most headway, up 2.1% since its July 17 apex. This type of multi-month lethargy is nothing new for an election year.

Value stocks are starting to play catch-up.

The Vanguard Value Index Fund ETF (VTV), a good proxy for value stocks, is up 9% since the first week of August, more than half its year-to-date gain of 16.6%. While value stocks still trail the S&P 500 (+20.9% YTD) and growth stocks (the Nasdaq is +22.4% YTD), the gap is narrowing. Now that the Fed is finally cutting interest rates from multi-decade highs, perhaps this “in name only” bull market will spread to more corners of the market beyond just the Magnificent Seven, artificial intelligence stocks, and the other mostly tech-related plays that have carried this 23-month rally.

The Fed went big!

Everyone knew Jerome Powell and company were going to (finally) cut the federal funds rate for the first time in four and a half years on Wednesday. The question was by how much – 50 basis points (0.50%) or 25 basis points (0.25%)? To my mild surprise (but not to Wall Street’s – the options market had swung to a 59% probability that it would be 50 bps prior to the announcement), the Fed opted for the larger cut, slashing rates from 5.25-5.5% to a 4.75-5.25% range. So far, the market seems unsure how to take the hefty cut – all three major indexes were up more than half a percent immediately following yesterday’s 2 p.m. ET announcement, but then were narrowly in the red by day’s end.

The Magnificent Seven have run into a brick wall in the second half of 2024.

After carrying the market in the first half of the year, and through much of 2023, the seven largest mega-cap tech stocks – Amazon (AMZN), Apple (AAPL), Google (GOOG), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) – have all seen the air let out of their balloons in the last two and a half months, or longer in some cases. On average, those seven stocks, which comprise roughly 30% of the S&P 500, are down 3.7% since the beginning of July. Not coincidentally, the S&P 500 as a whole is flat, after being up about 15% in the first six months of the year, during which six of the Mag. 7 (TSLA was down) performed even better.

It is a late-summer/early-fall rite of passage on Wall Street: After Labor Day, the institutional investors and hedge fund types return from their summer vacation homes in the Hamptons and immediately start selling. They sell out of their weakest positions that have been neglected and left to rot during the summer months, in the hopes of beefing up their quarterly returns before October brings a new quarter. The result is that September is, far and away, the worst month for stocks, with an average decline of -1.17% in the S&P 500 dating all the way back to 1928. The next-worst month is February, with a mere -0.14% decline.

That’s the bad news as we enter September. Here’s the good news.

The success of headliners Walmart and Target in the last week has helped drive consumer staples stocks as a group up nearly 5% in August. No other S&P 500 sector has performed better this month. And yet, consumer staples are “only” up 14% year to date, trailing the gains in the S&P 500 (17.3%).

Thus, the sector as a whole is still undervalued. That spells opportunity.

Inflation is dead.

OK, it’s not “dead.” But at 2.9% in July, as reported Wednesday morning, it has now (narrowly) reentered the Federal Reserve’s magical 2% realm for the first time in nearly three and a half years – since March 2021. For all the inflation angst during those past three and a half years, the market has fared pretty well overall – the S&P 500 is up 30% since the first CPI print north of 3% was reported in mid-May of 2021. On a per-year basis, that only slightly trails the average annual return in the large-cap index of 9.9% since its inception in 1928.

We are recommending shares of CNH Industrial (CNHI) as a new Buy. The company is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment for customers around the world and is the #2 ag equipment producer in North America (behind Deere). It also provides related supplies, services and financing.

We are recommending shares of CNH Industrial (CNHI) as a new Buy. The company is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment for customers around the world and is the #2 ag equipment producer in North America (behind Deere). It also provides related supplies, services and financing.

We are moving shares of Molson Coors Beverage Company (TAP) from Buy to Sell. The shares are approaching our 69 price target, with only about 4% upside remaining.

Today we are moving shares of Dow (DOW) from Buy to Sell. As the shares have reached our 60 price target, and with no compelling reason to raise that target, we are moving the shares from Buy to Sell. This change will also be made in the Cabot Turnaround Letter.

Today we are raising our price target on Arcos Dorados (ARCO) from 7.50 to 8.50. The company is recovering from the pandemic and looks well-positioned to expand its franchise and profits while continuing to improve its balance sheet. The shares remain undervalued.

Conoco’s earnings report, released earlier today, displayed the company’s strengths. Fourth-quarter profits of $3.0 billion compared to a $(0.2) billion loss a year ago and were 25% higher than the impressive third-quarter profits of $2.4 billion. Rising oil prices combined with restrained spending helped drive earnings higher.

General Motors has made a remarkable transition from bankruptcy in 2009 to a highly-profitable and innovative contender in the rapidly changing global auto industry, driven by CEO Mary Barra.

With today’s 9% intra-day price drop following a disappointing near-term outlook, Cisco (CSCO) shares look more attractive and we would buy/add to positions here, as the long-term fundamental picture remains healthy.

Our interest in oil and natural gas exploration and production (E&P) companies has been warming up lately. Many of these stocks are beaten down, yet oil prices have remained resilient, leaving producers like ConocoPhillips meaningfully undervalued.

We are initiating coverage of Organon (OGN) with a BUY rating.

With the shares continuing to surge past our recently raised 65 price target, and now being priced at a premium to even our upgraded valuation metrics

Bruce is selling three portfolio stocks.

I want to point out a problem that I foresee, potentially on the scale of the technology bubble in 2001 and the housing bubble in 2007. I think we’re going to have an “inverse ETF bubble.”

My stock-picking strategy has been refined over the course of 28 years, and has been quite stable for the last six years. My investment goals are (1) minimize stock market risk, (2) achieve capital gains, with dividends as a welcome addition to total return and (3) outperform the U.S. stock markets.

I was talking with an investor recently about the latest stock market downturn. He was puzzled; if General Motors (GM) is supposedly such a great stock and vastly favored among portfolio managers, why would it fall 30% during a market correction?

Our instincts warn us that stocks reaching all-time highs are invariably overdue to fall. Sometimes yes, sometimes no. We examine two common scenarios involving stocks that are about to rise—or fall—from new high prices.

If professional investment companies are not making their decisions based on the price of the stock, neither should you.