While there’s a very possibility of a good market bounce after last week’s washout, the overall picture is still very weak and thus continued defensiveness is still advised.
This week’s recommendation is the world’s largest manufacturer of industrial robots, yet most U.S. investors don’t even know its name. It looks like a great low-risk buy here.

As for the portfolio, we’re selling one stock, a small company in the beleaguered technology sector.

Details inside.

Cabot Stock of the Week Issue: May 16, 2022

Market trends remain down, so I continue to recommend a cautious attitude, which means holding cash and favoring defensive stocks. As I mentioned last week, conditions are ripe for a rebound—sentiment is terrible, and the news has created plenty of fear—but until we actually see a new uptrend, any aggressive buying is no better than speculation. Today’s stock is a big company you’ve probably never heard of, and it’s got a good story! The stock was originally recommended by Carl Delfeld in Cabot Explorer and here are Carl’s latest thoughts.

Fanuc Corp. (FANUY)
There is growing anxiety in America and the world that industrial robots will take away many relatively high-paying skilled jobs.

Time will tell but it is interesting that low-wage China is already the world’s largest user of robots in manufacturing. I think they are ahead of the curve in understanding that coupling labor and robots can lead to higher productivity, economic growth, wages, and profits.

Increases in the quality of labor come from more and better education and training of employees. Capital drives labor and total productivity growth through investments in machines, computers and robotics that increase output. Robots are unquestionably making the machine-like aspect of production facilities more efficient. Even if the human productivity of factories remains constant, increased use of industrial robots makes sense, which is why both Amazon and Tesla use them in their warehouses and factories, respectively.

While you have seen a multitude of stories about the rise of robots in manufacturing as well as everyday life, you may not be aware of Fanuc, a Japanese blue chip with zero debt, a sterling reputation, and a storied past.

Based in Oshino, a village at the foot of Mount Fuji, Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. Fanuc claims to be the only company that uses robots to make robots.

Fanuc, whose name is an acronym for Fuji Automatic Numerical Control, has been a world leader in robotics since the early 1970s. It was founded as a wholly owned subsidiary of Fujitsu in 1955 after that electronics giant decided to enter the factory automation business.

Today Fanuc is as global as it gets with more than 240 joint ventures and offices in over 46 countries with a commanding 65% share of the world market. For example, industrial robot manufacturer Shanghai-Fanuc Robotics Co. Ltd. has a plant in Shanghai.

The company can churn out 10,000 industrial robots per month, double that of its closest competitor but while it stays on the edge of new technologies, it’s a conservative company. Watching costs carefully leads to exceptional operating margins of 25% while their competitions’ are around 10%.

Over time, Fanuc has become a key supplier to some of the world’s most important industries, selling some 500,000 robots overall. Major car manufacturers, including Tesla, often use their six-axis yellow robots for assembly and welding operations.

The frames of iPhones are made in its Robodrill machines and Fanuc’s robots also help with the production of aeronautical components and even apply the varnish on Fender guitars. CSLA estimates its U.S. market share at 50% and in China about 20%. Exports account for 90% of Fanuc’s sales.

Fanuc should benefit from robust demand from developed markets as well as China as manufacturing wages continue to increase and manufacturers look to robots to increase productivity. You can find Fanuc robots at Amazon warehouses as well as on the shop floor of General Motors.

Use of industrial robots has allowed companies like Panasonic to run factories that produce 2 million plasma television sets a month with just 25 people

Much of the company’s sales are channeled through GE Fanuc, a 50-50 automated machinery joint venture with General Electric Company. Fanuc does most of its manufacturing in Japan. Fanuc is building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts of smartphones.

Fanuc’s stock offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive, and Fanuc also bought back 72 million shares last month. In short, Fanuc is a high-quality play on what seems to be an unstoppable trend.

Now trading just above 15, the stock down is 30% from its 52-week high. My six-month target is 25.

Current Recommendations

The addition of FANUY brings the portfolio to 16 stocks (out of a maximum of 20), while the sale of TASK brings it back down to 15—which might be equated to a 25% cash position, though with the portfolio skewed toward lower-risk stocks, its defensiveness is actually higher. Details below.

Changes Since Last Week’s Update
Portillo’s (PTLO) to Hold
TaskUs (TASK) to Sell

Big Lots (BIG), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, operates 1,431 stores across 47 states and generates about $6.1 billion in annual revenues. In last week’s update, Bruce wrote, “We are intrigued enough by the shares’ remarkably low valuation to make this stock a Buy. On conservative fiscal 2022 (ending in January 2023) estimates, the shares currently trade at 3.1x EV/EBITDA and 7.3x per-share earnings. These multiples imply a dour recessionary future for the company. The EV/EBITDA multiple is sharply below an average of perhaps 5x-9x for its peers. Even adjusting for scale and quality, a discount of this size for BIG is unwarranted. Big Lots’ shares trade unchanged from their 2007 price level and are down 50% from their stimulus-boosted peak at over 70 last year. Activist investor Mill Road Capital (5.1% stake) recently highlighted the shares’ deeply discounted valuation. All-in, while BIG shares carry higher risk, the risk/return trade-off appears compelling.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has bounced off its 200-day moving average several times in recent weeks, which is constructive, technically. In his update last week, Tom wrote, “Broadcom is a late earnings reporter. Earnings aren’t due until the beginning of June. I have no doubt that the report will be stellar, and the stock will get a boost on the news. How long the momentum last will depend on the market. This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. It will have its day in the sun again and patience should be rewarded.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell through its 200-day moving average last week but is back above it today. In his update last week, Tom wrote, “You know the market is getting ugly when BIP sells off. Recent selling has taken everything down. Even a defensive company with bankable and growing earnings with a strong dividend hasn’t been safe. The stock is down 16% from the recent high. Earnings were up 3% on a per-share basis but 22% excluding weather-related effects for last year’s quarter. Everything is still solid. This stock tends to pull back after a surge and then slowly recover, on a slow longer-term uptrend. (This security generates a K-1 form at tax time).” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, hit another low last week, so the chart is not pretty—but the stock is cheap! In his update last week, Bruce wrote, “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. CSCO shares have 34% upside to our 66 price target. The dividend yield is an attractive 3.1%.” HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, bounced off its 200-day moving average two weeks ago and is higher today. In his update last week, Carl wrote, “CVS recently reported first-quarter sales were up 11% and the company raised its 2022 earnings outlook slightly, now expecting per-share earnings between $8.20 a share and $8.40 a share. CVS reported that it expects demand for Covid testing and vaccines to continue to lift sales throughout 2023. CVS stock remains a conservative buy as it sells for less than 12 times forward earnings.” BUY

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, remains below all its moving averages so the stock is definitely not strong. On the other hand, Carl says it’s a great bargain. In his update last week, he wrote, “F shares were off half a point on Wednesday to close at 12.8 as the company disclosed that it sold 8 million of its shares in electric vehicle (EV) maker Rivian in the open market on May 9, at a price of $26.80, to raise $214.4 million. Ford’s sale represented 7.85% of its total stake in Rivian, and Ford still owns 93.95 million Class A shares, or about 10.5% of the Class A shares outstanding. Rivian still has plenty of cash so for the near term my guess is that they will trade in some sort of symbiotic relationship. Ford already sells 900,000 F-Series trucks per year, bringing in more than $40 billion in annual revenue, which is more than companies like McDonald’s, Nike and Coca-Cola. The Ford Lightning starting price is half of the Rivian pickup and far less than the six-figure Hummer, putting it at a sweet spot for pickups. Trading at about four times trailing earnings, this is perhaps the best value of the leading EV makers so I encourage you to buy if you have not already done so. This is my #1 pick.” BUY

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new low last week, so this great company is now an even better value. In his update last week, Tom wrote, “Intel is a technology company, and this has been an awful market for technology stocks. Most are already in a bear market. I would have been nearly impossible for this stock to thrive over the last couple of months. But INTC already has the stuffing knocked out of it and was dirt cheap before this tech selloff. As a result, INTC is down significantly less than the sector YTD (11% versus 25%). It has marvelous prospects for growth over the next few years. In the meantime, it pays a great dividend and has limited downside.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, is trading above all its moving averages, in part due to a great quarterly report two weeks ago. In his update last week, Bruce wrote, “On May 5, Organon reported adjusted earnings of $1.65/share, down 7% compared to the pre-spinoff, year-ago period and about 27% above the consensus estimate. Revenues rose 4% and were about 3% above estimates. Adjusted EBITDA rose 14% and was 26% above estimates. We take the earnings comparisons vs a year ago with a grain of salt as the company was still part of Merck and as such its true costs can only be estimated. Still, the report was encouraging, the company maintained its full-year revenue and profit guidance, and the shares rose 5% on a day when the stock market slid over 3%. The solid results were driven by relatively steady sales of the Nexplanon contraceptive (-7%), as well as growth in the Biosimilars (+22%) and Established Brands (+10%) segment. There was no effect from China’s volume-based procurement program which had previously been a drag on sales. All-in, Organon’s revenue stability helps establish a floor to profits, which if sustained would lead to a higher valuation for the company’s shares. Organon’s balance sheet has improved from the spinoff date but was essentially unchanged in the quarter. OGN shares have about 35% upside to our 46 price target and offer an attractive 3.3% dividend yield.” BUY

Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of COVID-related products and transformative M&A. The stock has just climbed back above its 200-day moving average, so looks like a fine buy here. And it yields 3.2%! BUY

Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities, is a Chicago-based restaurant chain that came public last October and is planning on using the proceeds from that offering to expand from its current nine states to many more. Business is good, but the rotten stock market combined with fears of rising costs brought the stock to new lows last week. I could sell now, because our loss is growing uncomfortably large, but our next holding (TASK, also one of Tyler’s stocks) is in worse shape, and Tyler is selling that one, so PTLO gets to live at least another week–though I’ll downgrade it to Hold. HOLD

TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, released its first-quarter report last week, and here’s what Tyler wrote. “TaskUs surpassed expectations delivering Q1 revenue of $239.7 million (+57%), beating by $8.9 million, and adjusted EPS of $0.34, which beat by $0.03. Management left the outlook unchanged as it cited some uncertainty from fintech customers and a faster than expected offshoring trend with its largest customer, which is leading to lower billing rates. That said, TaskUs still added 5,700 net new employees this quarter and sees adding 16,000 this year, so this is far from a shrinking business. It’s more a reallocation of resources. All things considered, I’m still moving TASK to sell today. Shares dipped below support a couple days ago and in this environment, I suspect investors will feel no urgency to buy names where management has cited any uncertainty for the balance of the year. Best to move to the side and keep an eye on TASK for now.” SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell to 700 last week (the level where it bottomed in February) before buyers stepped in, but the stock is still weak, trading well below its 200-day moving average. Still, I’ve got it on a long-term hold, thinking that while the automobile aspect of the business may be overvalued, the company has great, underappreciated growth potential in the energy business—and the energy industry is getting very interesting, globally! HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is the largest beauty retailer in the U.S., with north of 1,300 stores as well as more than 100 “store in store” locations at certain Targets. The company has a dependable long-term growth story and proven management that gives big investors confidence to hold what they own, despite the bearish action in the market. First-quarter results will be reported on May 26. BUY

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been building a base at 190 for nearly six months now, so there’s good support in this area. In his update last week, Tom wrote, “This global payments company stock is getting creamed in this market. Growth concerns damage this stock whenever the market selling gets intense. But this stock should recover and remain strong this year. The tremendous earnings boost it gets globally from the removal of Covid restrictions easily outweighs slower global growth or geopolitical uncertainty. The real risk is that Covid blows up again and those restrictions return outside of China. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth.” HOLD

The next Cabot Stock of the Week issue will be published on May 23, 2022.

Analyst Bio

Timothy Lutts

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.

Timothy is also the chief analyst for Cabot Stock of the Week and chief analyst of Cabot Marijuana Investor.

Under his leadership, Cabot advisories have been honored numerous times by Hulbert Financial Digest, Dow Jones MarketWatch and Timer Digest as the top investment newsletters in the industry.

After working in this business for more than 33 years, Timothy says, “There are 8 things I know.

1. The business of investing can provide great rewards to those who work at it and are willing to learn. Those who refuse to learn will lose money.
2. To succeed as an investor in growth stocks, it’s best to buy when upside potential dwarfs downside potential, to cut losses short, and to let winners run.
3. To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
4. Your greatest enemies are your own emotions and the daily news (generally bad) which distracts you from a long-term focus. Try to ignore them both.
5. On the other hand, use your imagination to consider how great companies might evolve, remembering the power of the unforeseeable and the incalculable. When it began renting DVDs by mail, did anyone imagine Netflix could become a leading producer of content? When it began selling books, did anyone imagine Amazon would eventually sell almost everything?
6. For over two centuries, the long trend of the markets has been up, reflecting the growth of asset values, and I recommend that you invest in synch with that trend. Your greatest ally is time.
7. However, there will always be bull markets and bear markets, and you can use these to your advantage, particularly if you pay close attention to both chart patterns and investor sentiment.
8. Lastly, have faith in the ability of intelligent, innovative men and women to adapt, as they always have, and to solve the problems of the future in ways that are unimaginable to people of today. Invest in these people when you can.

Timothy has appeared on numerous podiums as an investing expert, including Bloomberg TV and the World Money Show, led Investor’s Business Daily discussion groups and been interviewed by Dow Jones MarketWatch,TopStockAnalysts.com, VoiceAmerica.com, AOL Finance and numerous other business news organizations.