March 9, 2022

The world has clearly changed in the past two weeks. We see an exceptionally wide range of possible outcomes, which makes predictions about the future (already a low success rate endeavor) basically futile. We offer our timeless investing advice that can be readily applied in such situations.

In the letter, we also provide updates on all of our Recommended Stocks.

Market Overview

Exceptionally Wide Range of Possible Outcomes
Your chief analyst returned on Sunday from a long-scheduled weeklong vacation outside of internet/cell coverage. While being without communication was initially unsettling, it became easier to set aside all of the world’s troubles. The break provided a brief period of relative tranquility and I returned recharged, knowing that Ukraine was on fire but having no idea about anything else. No war/political/business news, no sports (not even an update on the baseball lockout), no stock prices, no commodity prices. Nothing.

The return to the real world was shocking. At the top of the heap was, of course, news that Russia’s invasion turned even darker with its deliberate attacks on unarmed civilians. Yet, it also offered hope as the invasion is getting bogged down by insufficient Russian planning, surprisingly effective Ukraine resistance and some help from plain old mud. Russia, of all countries, should know better than to launch a land war against a determined neighbor, having itself blunted at least two such assaults on its own turf: by Napoleon in 1812 and then over a century later in World War II.

While it was surprising that major stock indices and bond yields had moved little, the arrival of $125/barrel oil, along with almost surreal gap-ups in nickel (+100%) and other metals and agricultural commodities, was disorienting. And I would have thought that gold would be higher than the roughly $2,035/ounce price given the jump in other metals prices.

So, now, as I sit in my seat, what do I see as I survey this new wilderness?

Perhaps most starkly, I see an exceptionally wide range of possible outcomes. On the downside, the conflict could easily deteriorate into a wider and deeper war. Russia is recruiting Syrians and other third-country fighters, and it wouldn’t take much of a step for an expansion of bombing into Moldova, a defenseless, non-NATO country that is housing Ukrainian refugees. The United States and the European allies are moving toward strong indirect support, including channeling fighter jets and other material to Ukraine. Sanctions by a growing number of Western nations against Russia and its elite are rapidly approaching all-out levels. Several highly credible news publications are mentioning the remote but not-zero chance that Putin unleashes his nuclear weapons. That would produce a downside rivaling any that mankind has ever experienced.

On the upside, this invasion could lead to a major positive shift in the world order. It wouldn’t take much for a quagmire war to drain Russia’s already-stressed military capabilities and morale. From there, a military humiliation and intense economic sanctions could increasingly tarnish Putin’s halo, leading to domestic rebellion and revolution by the majority against the corrupt elite – like what happened only a century ago. Such a regime change might further constrain an ambitious China (already it must be having second thoughts about the downside of invading Taiwan) while toppling corrupt leaders in Belarus, Syria, Venezuela and other countries as they lose their patron. A democratized Russian government could open up a vast reservoir of untapped domestic prosperity while greatly easing security concerns across Europe and Asia.

What does one do with this exceptionally wide range of possible outcomes? My initial response has been… to do very little. Prior to departing on vacation, I fractionally trimmed my oil-related equity exposure. But the conditions are changing so quickly, as are stock and commodity prices, that chasing stocks up or down seems more reactionary than productive. Today, oil looks to be on its way to $200/barrel and stocks look wobbly. Hyper-moves in stock and commodity prices usually produce big losers, and it is readily possible that a hedge fund or bank somewhere will get caught out, leading to a financial accident that could send share prices tumbling further.

But, tomorrow, some other unpredictable shift in the war or the economic landscape, or elsewhere, could bring a legitimate relief rally that drives shares sharply higher and commodity prices sharply lower.

For investors, the war consumes much attention. Yet we still have a Federal Reserve Bank that is wondering how to narrow the gap between the surging inflation rate and too-low interest rates, a sharply recovering unemployment picture, a tight housing market, weakening consumer sentiment and important mid-term elections in eight months, among other domestic issues.

There is simply too much unpredictability, too many possible outcomes, to take aggressive bets. Predicting is already a low-success-rate endeavor: If someone in July 2019 predicted that just around the corner was a devastating global pandemic, followed by the largest land war in Europe since the Second World War, that person would have been professionally and personally discredited and perhaps sent away to a padded room. But, here we are.

Our investing advice is the same as it has always been: Own pieces of companies that produce things of real value, with capable leadership, whose shares are undervalued. Own as much stock as you can yet still sleep well at night, yet hold some cash in reserve to buy when opportunities arise.

Share prices in the table reflect Tuesday (March 8) closing prices. Please note that prices in the discussion below are based on mid-day March 8 prices.

Note to new subscribers: You can find additional color on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Undervalued Stocks Advisor on the Cabot website.

Send questions and comments to Bruce@CabotWealth.com.

Today’s Portfolio Changes
The Coca-Cola Company (KO) – From Buy/Under review (approaching price target) to Buy with no price target change.

Portfolio changes during the past month
Allison Transmission Holdings (ALSN) – New Buy.
The Coca-Cola Company (KO) – From Buy to Buy/Under review (approaching price target).
Arcos Dorados (ARCO) – From Buy to Buy/Under review (approaching price target).
Arcos Dorados (ARCO) – Raising price target from 7.50 to 8.50.
ConocoPhillips (COP) – Move from Buy to Hold.
ConocoPhillips (COP) – Move from Hold to Sell.

Upcoming Earnings Reports
Wednesday, March 16: Arcos Dorados (ARCO)

Growth & Income Portfolio

A

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.

*Note: DOW price is based on April 1, 2019 closing price following spin-off from DWDP.

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

Bristol Myers Squibb Company (BMY) shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry. The likely worst-case scenario is flat revenues over the next 3-5 years. Bristol should continue to generate vast free cash flow, has a solid, investment-grade balance sheet, and trades at a sizeable discount to its peers.

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

BMY shares were flat in the past two weeks and have about 15% upside to our 78 price target. Valuation remains low at 8.7x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.2x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.

Assuming an average of $15 billion/year in free cash flow, the shares trade at a 10% free cash flow yield.

Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 3.2% dividend yield that is well covered by enormous free cash flow make a compelling story. BUY

Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

Cisco said about a quarter of its Ukraine employees have left the country, but the balance remain and Cisco said it is providing a range of cash, telecom and other support to them. Separately, the company is presenting at the Morgan Stanley Technology, Media and Telecom Conference at 4:50 p.m. ET this Thursday, March 10. The presentation will be available to the public though the Cisco investor relations website.

CSCO shares fell 2% in the past two weeks and have 20% upside to our 66 price target. The dividend yield is an attractive 2.8%. BUY

The Coca-Cola Company (KO) is best-known for its iconic soft drinks yet nearly 40% of its revenues come from non-soda beverages across the non-alcoholic spectrum. Its global distribution system reaches nearly every human on the planet. Coca-Cola’s longer-term picture looks bright but the shares remain undervalued due to concerns over the pandemic, the secular trend away from sugary sodas, and a tax dispute which could cost as much as $12 billion (likely worst-case scenario). The relatively new CEO James Quincey (2017) is reinvigorating the company by narrowing its over-sized brand portfolio, boosting its innovation and improving its efficiency, as well as improving its health and environmental image. Coca-Cola’s balance sheet is sturdy, and its growth investing, debt service and dividend are well-covered by free cash flow.

Bottler/distributor Coca-Cola HBC, which is listed in London, closed its Ukraine production plant. Separately, Activision Blizzard CEO Bobby Kotick will depart Coke’s board following the upcoming annual shareholder meeting.

KO shares slipped 5% in the past two weeks. The shares have dipped far enough below our 64 price target (now about 8% upside) that we are no longer reviewing the shares, and are keeping them at a Buy with no change in the target for now. BUY

Dow Inc. (DOW) merged with DuPont to create DowDuPont, then split into three companies in 2019 based on product type. The new Dow is the world’s largest producer of ethylene/polyethylene, the most widely-used plastics. Investors undervalue Dow’s hefty cash flows and sturdy balance sheet largely due to its uninspiring secular growth traits, its cyclicality and concern that management will squander its resources. The shares are driven by: 1) commodity plastics prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; 2) volume sold, largely driven by global economic conditions, and 3) ongoing efficiency improvements (a never-ending quest of all commodity companies). We see Dow as having more years of strong profits before capacity increases signal a cyclical peak, and expect the company to continue its strong dividend, reduce its pension and debt obligations, repurchase shares slowly and restrain its capital spending.

Industry conditions will likely be strong for a while. Dow remains well positioned to generate immense free cash flows over the next few years, even as the stock market cares little about cash but rather is focused on the incremental news flow related to economic growth, energy prices and any industry capacity changes. In the meantime, Dow shareholders can collect a highly sustainable 4.8% dividend yield while waiting for more share buybacks, more balance sheet improvement, more profits and a higher valuation.

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

Dow shares fell 3% in the past two weeks and have 34% upside to our 78 price target. BUY

Merck (MRK) shares are undervalued as investors worry about Keytruda, a blockbuster oncology treatment (about 30% of revenues) which faces generic competition in late 2028. Also, its Januvia diabetes treatment may see generic competition next year, and like all pharmaceuticals it is at-risk from possible government price controls. Yet, Keytruda is an impressive franchise that is growing at a 20% rate and will produce solid cash flow for nearly seven more years, providing the company with considerable time to replace the potential revenue loss. Merck’s new CEO, previously the CFO, is accelerating Merck’s acquisition program, which adds return potential and risks to the story. The company is highly profitable and has a solid balance sheet. It spun-off its Organon business last June and we think it will divest its animal health segment sometime in the next five years.

In Merck’s recent 10-K filing, the company showed a net debt balance of $25.0 billion, up about $1.5 billion from a year ago. Higher profits and the $9 billion in proceeds from the Organon spin-off were more than offset by its Acceleron Pharma and Pandion Therapeutics acquisitions, as well as its $6.6 billion in dividends. In essence, Merck traded Organon for two higher-risk, higher-potential-return companies. Separately, Merck said it is donating 135,000 courses of its Covid anti-viral treatment to Ukraine.

Merck shares rose 2% in the past two weeks and have about 28% upside to our 99 price target. The company has a strong commitment to its dividend (3.6% yield) which it backs up with generous free cash flow, although its shift to a more acquisition-driven strategy will slow the pace of dividend increases. BUY

Buy Low Opportunities Portfolio

Buy Low Opportunities
Portfolio

Buy Low Opportunities Portfolio stocks include a wide range of value opportunities, often with considerable 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.

Current price is yesterday’s mid-day price.
CSCO: Estimates are for fiscal years ending in July

Allison Transmission Holdings, Inc. (ALSN) – Allison Transmission is a mid-cap ($6.4 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. About 76% of sales are produced in North America. Many investors reflexively dismiss this company, viewing it as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. However, this view would be incorrect. Allison produces no car and light truck transmissions; instead it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its 35% EBITDA margin is sharply higher than its competitors and on par with many specialty manufacturers. And it is a leading producer and innovator in electric axles which all electric trucks will require. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle.

The company generates considerable free cash flow, which has helped it maintain a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years. The shares were highlighted in our latest Cabot Turnaround Letter as a “like watching paint dry” stock, and it fit our 13F criteria, as noted value investment firm Polaris Capital Management recently took a sizeable position (1.5% stake) in the company.

Valuation at 6.5x estimated 2022 EBITDA is below the company’s historical average and undervalues its franchise and financial strength. We are putting a 48 price target on ALSN shares. From a tactical perspective, investors may want to establish a starter position here, then add if the shares exhibit significant weakness.

On February 24, the company announced an 11% increase in its quarterly dividend to $0.21/share and raised its share repurchase authorization by $1.0 billion.

Allison shares were flat over the past two weeks and have 21% upside to our 48 price target. BUY

Arcos Dorados (ARCO), which is Spanish for “golden arches,” is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina and Chile. The shares are depressed as investors worry about the pandemic, as well as political/social unrest, inflation and currency devaluations. However, the company has a solid brand and high recurring demand and is well-positioned to benefit as local economies reopen. The leadership looks highly capable, led by the founder/chairman who owns a 38% stake, and has the experience to successfully navigate the complex local conditions. Debt is reasonable relative to post-recovery earnings, and the company is currently producing positive free cash flow.

Macro issues, including issues in Brazil including its economic conditions (in particular, inflation, running at a 10.1% rate), currency and the chances that a socialist might win next year’s Brazilian presidential elections will continue to move ARCO shares. Brazil is one of the most Covid-vaccinated countries in the world, which reduces pandemic-related demand risks.

A favorable report from Credit Suisse on February 23, in which the analyst moved the shares to Outperform from Neutral with a 9.50 price target, helped push the shares sharply higher, although the shares have slipped back in recent days.

All in, ARCO shares rose 1% in the past two weeks and have 17% upside to our recently-increased 8.50 price target. BUY

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc was hired as the new CEO in July 2020 to revitalize Aviva’s laggard prospects. She divested operations around the world to re-focus the company on its core geographic markets (U.K., Ireland, Canada), and is improving Aviva’s product competitiveness, rebuilding its financial strength and trimming its bloated costs. Aviva’s dividend has been reduced to a more predictable and sustainable level with a modest upward trajectory. Excess cash balances are being directed toward debt reduction and potentially sizeable special dividends and share repurchases.

Much of our interest in Aviva is based on its plans for returning its excess capital to shareholders, including share repurchases and dividends. These distributions could be substantial. We also look for incremental shareholder-friendly pressure from highly regarded European activist investor Cevian Capital, which holds a 5.2% stake.

On March 2, Aviva reported second half and full-year 2021 results that were in line with consensus estimates, but said it will be returning more-than-expected cash to investors. We have had only a brief amount of time to fully digest the numbers and the updates (more to follow next week), but are encouraged that the company has largely completed its portfolio and balance sheet upgrades such that it can focus heavily on efficiency and growth initiatives.

Aviva shares fell 12% in the past two weeks. Like all financial stocks, Aviva’s are sensitive to capital market volatility given the leveraged balance sheets, with its principal tangible assets being investments and securities. Additionally, the company is exposed to potentially elevated insurance losses, an evaporation of the value of its Russian investments, higher cyber-attack risks, and elevated compliance costs and risks, among others.

Aviva shares have about 36% upside to our 14 price target. The dividend, which produces a generous 5.9% yield, looks fully sustainable. BUY

Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest-quality gold mining companies. About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%). Barrick will continue to improve its operating performance (led by its new and highly capable CEO), generate strong free cash flow at current gold prices, and return much of that free cash flow to investors while making minor but sensible acquisitions. Also, Barrick shares offer optionality – if the unusual economic and fiscal conditions drive up the price of gold, Barrick’s shares will rise with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work – it offers extra upside. Barrick’s balance sheet has nearly zero debt net of cash. Major risks include the possibility of a decline in gold prices, production problems at its mines, a major acquisition and/or an expropriation of one or more of its mines.

Over the past two weeks, commodity gold rose 7% to $2,035/ounce, breaching the high end of the $1,700 to $1,900 trading range. The 10-year Treasury yield slipped to 1.87%, a surprisingly mild move despite the likelihood of even higher inflation. The US Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), rose 3% to 98.84, although it fell sharply mid-day Tuesday from around 99.24. The index has fully returned to its pre-Covid level.

Barrick shares rose another 9% over the past two weeks and have about 9% upside to our 27 price target. The price target is based on 7.5x estimated steady-state EBITDA and a modest premium to our estimate of $25/share of net asset value. 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.

Citigroup shares have slid about 18% since mid-February. Initially, the shares slipped due to the removal of incremental momentum from rising interest rates. Since the Ukraine invasion, the share price decline accelerated as the prospects for higher interest rates dimmed and as global capital market risks jumped. Adding further weight: The sale of Citi’s Mexico operations now seems likely to take years, rather than months; sanctions against Russia will raise Citi’s compliance costs and risks; the bank seems likely to lose revenues as it may not be able to do bond issuances and other deals for Russian clients; its Russian wealth management and other banking revenues may dry up; the closing of the U.S. IPO window and narrowing of the global merger and acquisition window removes important sources of revenue; its inventory of Russian assets and loans could become worthless (estimated loss of about $10 billion), and the risk of crippling cyber-attacks is now higher.

In the bank’s Investor Day presentations on March 2, the bank provided a roadmap and details of how it will reach a return on tangible common equity (RoTCE) of between 11% and 12% over the mid-term, compared to an adjusted 8.9% RoTCE for 2021. We like the goal, as it would likely drive the shares to well above the current 0.70x tangible book valuation. But, the roadmap shows that Citi needs a boost from uncontrollables like rising interest rates and a benign lending and credit environment, along with controllables like more efficient operations and divestitures of lower-return businesses. Near-term, the bank said its expenses would rise faster than its revenues (leading to stagnant or weaker profits).

We think the bank is being conservative in its outlook, as failing to meet its goals would likely entice investor demands for a more aggressive plan including management change and possibly a break-up. CEO Jane Fraser emphasized the bank’s capital return priorities, which helped assuage investor concerns.

Nevertheless, investors and the sell-side community were uninspired, and Citi shares slipped on the day.

Citi shares have about 54% upside to our 85 price target. The valuation remains attractive at 70% of tangible book value and 7.5x estimated 2022 earnings. We note the dip in earnings estimates following the Investor Day presentations. Our set of peer banks currently trade at an average of 1.8x tangible book value and 12.0x estimated 2022 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 continue to lift.

Citigroup investors enjoy a 3.7% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program. BUY

ConocoPhillips (COP)is the world’s largest independent E&P company. We recently moved COP from a Buy to Hold and then Hold to Sell. The company is well managed, has strong oil and natural gas assets and a healthy balance sheet. Conoco generates considerable free cash flow at current commodity prices, of which it is returning much to shareholders. However, the risk/return trade-off was no longer favorable following the sharp run-up in the share price. The COP recommendation produced a 41% total return since our original Buy recommendation last September. SELL

Post-note: In our detailed comments on the Conoco sale, we said, “We recognize that we could be terribly wrong. Oil prices might continue to rise to $100/barrel, or higher. This would push Conoco shares to well over 100 or more, as well. Investing is a game of balance.”

It turned out we were in fact terribly wrong, at least for now, as the war is lifting oil to over $120/barrel and COP shares to about 102, compared to our exit price of around 91. SELL

Molson Coors Beverage Company (TAP) is one of the world’s largest beverage companies, producing the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its revenues come from the United States, where it holds a 24% market share. Investors worry about Molson Coors’ lack of revenue growth due to its relatively limited offerings of fast-growing hard seltzers and other trendier beverages. Our thesis for this company is straight-forward – a reasonably stable company whose shares sell at an overly discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently reinstated its dividend.

Molson Coors reported a good quarter and remains on track with/fractionally ahead of our 69 price target assumptions. In the quarter, revenues rose 14% and were about 3% above the consensus estimate. Adjusted earnings of $0.81/share more than doubled from a weak year-ago profit but fell about 6% shy of the $0.86/share consensus estimate. The $457 million in adjusted EBITDA rose 22% yet also fell about 5% below estimates. Molson raised its dividend by 12%.

The company is recovering from the pandemic slowdown in beer consumption, particularly as sales outside of the Americas rose 57% compared to a year ago. In those regions, volumes rose 21% (including contract brewing for third-party brands) as consumers returned to pubs and other drinking establishments, and paid 17% higher per-unit prices. Consumers also traded up to higher-priced Molson beverages, further boosting revenues. Globally, sales rose 14%, helped by 7% volume gains and 4% price increases. EBITDA profits rose 22%, as rising input costs were more than offset by price increases, and as overhead costs were restrained to only a 3% increase.

For the full year 2021, the company’s strong fourth quarter was able to offset much of the weakness earlier in the year: sales increased 5% as higher prices (+4%) and favorable mix offset flattish volumes. Free cash flow was $1.1 billion.

Looking into 2022, the company is optimistic that it can continue to incrementally increase its sales about 5%, lift its profits by perhaps 8%, and generate around $1.0 billion in free cash flow. This $1 billion has been and will likely continue to be a steady-state outcome for Molson – seemingly no matter how good or bad profits are, it generates this amount of cash. The company is remarkably stable in this regard, and provides us with the confidence to ride through periods of weak stock performance. From here, it is only a matter of the broad market joining us in that confidence and lifting the stock to our 69 target.

TAP shares rose 5% in the past two weeks and have about 35% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.6x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.7% dividend only adds to the appeal. BUY

Organon & Company (OGN) was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings.

Organon’s CEO and CFO will be presenting on Wednesday, March 9 at 9:10 a.m. ET at the Cowen 42nd Annual Healthcare Virtual Conference. The presentation can be viewed on Organon’s investor relations website.

OGN shares rose 4% in the past two weeks and have about 23% upside to our 46 price target (using the same target as the Cabot Turnaround Letter). The shares continue to trade at a remarkably low valuation while offering an attractive 3.0% dividend yield. BUY

Sensata Technologies (ST) is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. As the sensors’ reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market.

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

ST shares slipped 2% in the past two weeks and have about 35% upside to our 75 price target. BUY

Disclosure: The chief analyst of the Cabot Undervalued Stocks Advisor personally holds shares of every recommended security, except for “New Buy” recommendations. The chief analyst may purchase or sell recommended securities but not before the fourth day after any changes in recommendation ratings has been emailed to subscribers. “New Buy” recommendations will be purchased by the chief analyst as soon as practical following the fourth day after the newsletter issue has been emailed to subscribers.

Strong Buy – This stock offers an unusually favorable risk/reward trade-off, often one that has been rated as a Buy yet the market has sold aggressively for temporary reasons. We recommend adding to existing positions.
Buy – This stock is worth buying.
Hold – The shares are worth keeping but the risk/return trade-off is not favorable enough for more buying nor unfavorable enough to warrant selling.
Sell – This stock is approaching or has reached our price target, its value has become permanently impaired or changes in its risk or other traits warrant a sale.

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

The next Cabot Undervalued Stocks Advisor issue will be published on April 6, 2022.