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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor 720

Today’s featured companies have sturdy financial conditions and attractive valuations, with appeal to buy-and-hold investors as well as traders.

The markets eked out a positive return for the month of June, with the S&P500 returning 1.99%, capping one of the strongest quarters (+20.5%) on record. In this month’s letter, I describe a bit more about the re-opening and how it might affect the markets.

Cabot Undervalued Stocks Advisor 720

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How to Learn More about the Companies You Own
As the new Chief Analyst for the Undervalued Stock Advisor, I’d like to thank you for reading this month’s letter. I know you have many sources of investment ideas and advice, and I appreciate your interest in our service.

Crista has been generous with her time and insights in transitioning this letter to my care. I share her enthusiasm for stock investing and for helping advance the knowledge of other investors. Over time, I hope to provide you with equally profitable stock ideas. Crista has a great start at her new fund and I’m certain she will do amazingly well. I wish her the best of continued success.

My brief experience with the Cabot team has been very positive. The people on both the research and business sides are pros who take their work seriously and honestly. Perhaps most important, they are pleasant people to work with.

My background is heavily focused on stock investing. I’ve managed mutual funds for two major investment firms, founded a hedge fund and led turnarounds of several investment platforms. My approach is grounded in research – understanding how companies make their profits, how the leadership teams run their companies, what condition the balance sheets are in, and what the stocks are worth. I tend to be a bit of a macro-economic junkie, which helps me understand the context in which we all must buy and sell stocks. Also, I enjoy learning about history – it often is quite useful for understanding the future.

Importantly, I welcome your questions and comments. There is only so much space available for writing. But, behind the words are usually multiples more in terms of color and perspective. Just as valuable, and perhaps a tad selfishly, I tend to learn a lot more by talking with others than by only writing. So, please, let me know what is on your mind and we can both benefit. And, I hope to meet many of you (virtually, of course) at our Cabot Wealth Summit in August.

The U.S. stock market peaked in June at 3,232 on the S&P 500 (essentially spot-on with Crista’s call for a peak at 3,200) then turned down with recent news of increases in Covid-19 cases. The economy is only in about the third inning of the pandemic, so there is a wide range of possible outcomes. From here, I anticipate that the markets, and economy, will muddle along yet gradually improve as more efficient methods of controlling virus transmissions, and more effective detection and treatments, ease re-opening concerns. There will almost certainly be more market volatility in both directions – helping value-focused buyers find long-term opportunities, and helping traders make more short-term profits.

When I speak with investors, many ask where I get my information about companies that I recommend. Professional money managers often get access to some of the sharpest and best-funded research teams in the industry, but few outside of that elite group have that luxury. As a former fund manager at two major buy-side firms, I’ve seen the inner workings of this access, from “one-on-one” meetings with CEOs to private hour-long discussions with top analysts spent digging through the details of company fundamentals. How can private investors attempt to replicate this?

A good place to start is the company’s investor relations website. Most companies have an extensive array of materials that you can use to quickly expand your knowledge. Start with a presentation from the most recent earnings release or investor presentation – these usually describe how the company produces its revenues and profits, what strategies it is undertaking and what metrics it uses to evaluate its performance. For the more intrepid researcher, the annual 10-K and quarterly 10-Q documents filed with the SEC provide more details on the company. You don’t have to print and study these with a pen and calculator (although I often do!) – with a little practice you can quickly find what you are looking for. And, these documents must meet strict disclosure regulations so they are devoid of most of the hype that other materials may have. Check out the websites of peer companies, as well. They might provide industry information and perspective that your company does not.

Another good source is conference calls and transcripts. Most companies allow anyone to listen “live” to their quarterly calls with Wall Street analysts. If you would rather read a transcript, the Seeking Alpha website provides these for free. The stay-at-home restrictions have produced a useful side-effect: many companies now allow open web access to their presentations at investor conferences. Private investors often aren’t aware of key issues facing companies – they can find out a lot by hearing what questions the analysts ask and how management answers them.

Respected news outlets like The Wall Street Journal, Barron’s, Bloomberg, Forbes, Fortune and others often write about large-cap companies and their industries. Many of these articles are free. These stories can provide historical context and the current “narrative,” helping private investors understand the challenges that their companies face.

The internet offers a treasure trove of free and useful statistics about economic and industry trends. All government statistics are free, and most industries have trade groups that provide color on trends as well as blogs and commentary on key issues. Google your topic or question – you might be amazed at what is available.

I’m a moderate user of free newsletters and blogs from respected investment and research firms. Half of every job is marketing, and these firms will often provide insights into their ideas for free, just for the marketing exposure.

You don’t have to use all of these resources, just the ones that fit your needs. By providing you with a range of ideas, information and opinions, they can help you become a more informed investor. And, with more information, you can increase your conviction in your ideas to take either larger positions or hold firmly during the inevitable downdrafts in price before the shares rebound. These can increase your profits, and enjoyment, from the investing process.

Share prices reflect Tuesday (June 30) closing prices. Send questions and comments to Bruce@CabotWealth.com.

Portfolio Notes
Be sure to review the Bulletin from June 24 in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE), Amazon.com (AMZN) and Netflix (NFLX).

Quarterly Earnings Release Calendar
July 16: Netflix (NFLX)
July 23: Dow Inc (DOW)
July 23: MKS Instruments (MKSI)
July 27: Amazon (AMZN)
July 29: General Motors (GM)
Jul 30: Total S.A. (TOT)
Jul 30: Columbia Sportswear (COLM)

Today’s Portfolio Changes
Columbia Sportswear (COLM) new Buy.
Quanta Services (PWR) moves to Buy from Hold.
Marathon Petroleum (MPC) moves to Hold from Buy.

Last Week’s Portfolio Changes
Adobe Systems (ADBE) moved from Buy to Hold.
Amazon.com (AMZN) moved from Buy to Hold.
Netflix (NFLX) moved from Strong Buy to Hold.

Growth Portfolio

Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es (price/earnings ratios) and low-to-moderate debt levels.

Growth Portfolio
Stock (Symbol)Date AddedPrice AddedPrice 6/30/20Capital Gain/LossCurrent Dividend YieldRating
Marathon Petroleum (MPC)09-04-1884.0037.40-55%6.6%Hold
MKS Instruments (MKSI)02-19-20116.62113.16-3%0.7%Hold
NVS Global (NVEE)04-08-2042.0050.83-3%Retired 6/17/20
Quanta Services (PWR)12-03-1940.5839.24-3%0.52%Buy
Tyson Foods (TSN)12-10-1989.1059.69-33%2.8%Buy
Universal Electronics (UEIC)11-04-1657.2046.96-18%Strong Buy
Voya Financial (VOYA)05-31-1852.1246.68-10%1.3%Strong Buy

Featured Stock: Quanta Services (PWR 39.24 – yield 0.5%)
Quanta Services is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, with 65% of revenues coming from regulated electric, gas and other utility companies. Quanta achieved record annual revenues, operating income and backlog in 2019, and is pursuing a multi-year goal of increasing margins. Dividend payouts and share repurchase activity have continued uninterrupted during the pandemic. We view this company as high-quality, well-run and resilient. The market views PWR shares as a safe haven in an unpredictable market and economy, helping the shares to fully recover from their March 2020 lows. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.

On June 22, Quanta’s LUMA LLC joint venture (Quanta owns 50%) was awarded an historic, 15-year contract to operate and modernize Puerto Rico’s electric grid, which was heavily damaged in the 2018 hurricane. This advances Quanta’s strategy of shifting its business toward operations that provide recurring revenues and cash flows without tying up capital.

PWR is an undervalued, mid-cap growth stock. Analysts estimate that Quanta’s earnings per share will dip about 5% in 2020 to $3.16, due to disruption costs related to the pandemic, then rebound over 20% to $3.83 in 2021. On 2021 estimated earnings, the P/E is a reasonable 10.2x. The shares have mostly recovered from their March lows, yet are essentially unchanged compared to three years ago. Traders may consider exiting near $44. For long-term holders, Quanta stock looks well-positioned to continue to prosper. New investors should establish a starter position now and look to add on weakness. Buy.

PWR-063020

Marathon Petroleum (MPC 37.40 – yield 6.2%) is a leading integrated downstream energy company and the nation’s largest oil refiner, with 16 refineries, a majority interest in midstream company MPLX LP, over 10,000 miles of oil pipelines, and product sales in 11,700 retail stores. Wall Street analysts are forecasting a 2020 full-year loss of -$1.86 per share, followed by a 2021 profit of $2.30 per share. Share repurchases have been suspended but the dividend payout remains intact.

Since the stock bottomed at 15 during the March stock market correction, MPC shares nearly tripled to over 44 in early June on rising oil prices and encouraging news about the economic re-opening. MPC has faded a bit since, as both of these drivers have modestly weakened. MPC shares jumped briefly on renewed talks for a sale of their Speedway retail gas/convenience chain (for up to $18 billion) but investors had somewhat already anticipated an eventual sale or spin-off. Like most energy stocks, MPC offers a useful vehicle for traders: its economics are closely tied to oil prices yet the company has a more stable business, with its refining, MPLX midstream, and retail operations that dampen its volatility and provide more downside protection relative to pure exploration or energy service companies. Dividend investors should also buy MPC as its generous yield appears sustainable at current oil prices. However, we are somewhat skeptical about the potential for rising oil prices, and as such are hesitant to recommend new purchases. Hold.

MPC-063020

MKS Instruments’ (MKSI 113.16 – yield 0.7%) core business, which generates about 49% of its revenues, is producing critical components that become part of equipment used to make semiconductors. MKS’ products are generally in the stronger segments of this currently healthy market. While MKSI shares rather closely track the broad semiconductor indices, the expansion of its Advanced Markets segment, including its 2016 acquisition of Newport Corporation, as well as its 2019 acquisition of semiconductor-related Electro Scientific Industries, may allow its shares to break out. The company recently elevated 13-year company veteran Dr. John T.C. Lee to CEO. MKS Instruments was featured in the February 19 issue of Cabot Undervalued Stocks Advisor.

MKSI is an undervalued, small-cap growth stock, making it a good choice for growth investors and traders. Analysts’ consensus estimates point toward EPS growth of 12% and 37% in 2020 and 2021, respectively. MKSI shares broke out of their trading range this month, reaching over 115, but there is resistance at this year’s high of 120. Traders should consider exiting near 120. Buy-and-hold growth investors should be comfortable holding the stock longer term and accumulating shares near 100 if the opportunity presents itself. Hold.

MKSI-063020

Tyson Foods (TSN 59.69 – yield 2.8%) is one of the world’s largest food companies, with over $42 billion in revenues last year. Beef products generate about 36% of total revenues, while chicken (31%), pork (10%), and prepared/other contribute the remaining revenues. It has the #1 domestic position in beef and chicken with roughly 21% market share in each. Its well-known brands include Tyson, Jimmy Dean, Hillshire Farms, Ball Park, Wright and Aidells. As only 13% of its sales come from outside the United States, Tyson’s long-term growth strategy is to participate in the growing global demand for protein. Tyson Foods was featured in the January, April and June issues of Cabot Undervalued Stocks Advisor.

Unlike many of its food company peers whose shares have fully recovered this year, or more, Tyson’s shares remain 35% below their year-end price and seemingly stuck in a 58-65 range, although they briefly broke out to over 68 before falling back. Much of this is due to absentee issues surrounding its processing facilities (there is no evidence that the virus is transmissible to meat products), oversupply conditions in the poultry industry and global trade issues. Also, Tyson is more of a commodity company than a diversified branded food company, so its exposure to weaker commodity prices and its much lower profit margins make it a less-defensive stock than its peers.

Tyson’s profits are expected to fall 19% in 2020 due to pandemic business disruptions, then rise 32% in 2021. The 2020 P/E is 13.5x. The company’s business is starting to improve, particularly from its food service segment that suffered from stay-at-home restrictions, as well as from its emerging and higher-margin prepared foods business. With the stock trading below its 58-65 range, traders, growth investors and dividend investors should buy TSN now. Buy.

TSN-063020

Universal Electronics (UEIC 46.96) is a dominant producer of universal remote controls that subscription broadcasters (cable and satellite), TV/set top box/audio manufacturers and others provide to their customers. The company pioneered the “universal” remote, named the All For One, which was quickly adopted by consumers after its launch in 1986. Since then, the company has expanded into a range of remote control devices for smart homes, safety and security and other residential and commercial applications, driven by its extensive and valuable proprietary technology. Clients include every major cable and satellite company: AT&T, Cox, Dish, Comcast, Samsung, LG, Sony, Liberty, Daikin, Sky and more. Universal Electronics was featured in the February monthly issue and the February 26 issue of Cabot Undervalued Stocks Advisor.

Strong and steady revenue and earnings growth drove the shares to over 80 by mid-2016, from only about 12 in mid-2012. However, the shares have stumbled and remain down about 45% from their peak. UEIC is a volatile, undervalued, micro-cap growth stock, appropriate for risk-tolerant investors and traders. Over the short-term, its shares generally correlate with overall market and economic re-opening sentiment. Attractive buying opportunities are appearing as the shares remain near the low end of their recent range. Strong Buy.

UEIC-063020

Voya Financial (VOYA 46.68 – yield 1.3%) is a U.S. retirement, investment and insurance company serving 13.8 million individual and institutional customers. Voya has $603 billion in total assets under management and administration. The company previously was the U.S. arm of Dutch financial conglomerate ING Group, from which it was spun off in 2013. Voya has several appealing traits. Even though it is well-capitalized, it is migrating toward a capital-light model, taking a major step in this direction by selling its life insurance business, which should close in the third quarter. Some of the released capital could be used to repurchase shares. Also, it won’t be a cash tax payer for as many as five years due to its deferred tax assets. Voya is generating considerable free cash flow. And, its diversified and highly-regarded product base offers steady long-term revenue strength.

VOYA shares trade at an attractive 7.9x estimated 2021 earnings and 0.8x book value. Per share earnings in 2021 are expected to jump 41% compared to 2020. VOYA is a mid-cap stock, appropriate for growth and value investors and traders. Buy now while the stock remains in the lower end of its trading range. Strong Buy.

VOYA-063020

Growth & Income Portfolio

Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es (price/earnings ratios), and low-to-moderate debt levels.

Growth & Income Portfolio
Stock (Symbol)Date AddedPrice AddedPrice 6/30/20Capital Gain/LossCurrent Dividend YieldRating
Bristol-Myers Squibb (BMY)04-01-2054.6158.778%3.1%Strong Buy
Broadcom (AVGO)12-17-19323.35315.60-2%4.1%Hold
Dow Inc (DOW)06-05-1868.3740.75-40%6.9%Buy
Total S.A. (TOT)09-04-1862.1238.46-38%6.5%Hold

Featured Stock: Dow Inc. (DOW 40.75 – yield 6.9%)
Dow Inc. is a commodity chemicals company with manufacturing facilities in 31 countries. In 2017, Dow merged with DuPont to temporarily create DowDuPont, then split into three parts in 2019 based on the newly-combined product lines. Today, Dow is the world’s largest producer of ethylene/polyethylene, which are the world’s most widely-used plastics. Dow is primarily a cash-flow story driven by petrochemical prices, which often are correlated with oil prices and global growth, along with competitors’ production volumes.

Analysts expect full-year EPS of $1.18 and $2.32 in 2020 and 2021, respectively. The high dividend yield is particularly appealing to income-oriented investors. Management makes a convincing case that the dividend will be sustained. After a healthy surge from the market’s lows in March, Dow shares reached 44.40 in early June on optimism about the economic re-opening. Since then, they have pulled back on rising numbers of Covid-19 cases, which suggest a slower re-open and thus slower demand for plastic-based products. However, with its low valuation and appealing yield, we are featuring Dow Inc. today. Buy.

DOW-063020

Bristol-Myers Squibb Company (BMY 58.77 – yield 3.1%) is a global biopharmaceutical company. Following its controversial acquisition of Celgene for $74 billion in November 2019, the merged company markets a long list of pharmaceuticals, including Revlimid, Eliquis and Opdivo, which treat cardiovascular, oncology and immunological diseases. The company expects revenue and profit growth to come from four areas: sales volume increases from current products, development and launch of new medicines, life cycle management and synergies from the Celgene acquisition. Investors will want to be aware that the Celgene deal raised Bristol-Myers’ debt to over $46 billion – a manageable sum yet elevated compared to peers. Bristol-Myers was featured in the April issue of Cabot Undervalued Stocks Advisor.

Earlier this month the company hosted a three-day investor series, highlighting its impressive pipeline of new treatments. This series helped to alleviate some concerns over potential generic competition for Revlimid, lower market share for Opdivo, and other risks. The company is expected to increase its EPS by 32% and 20% in 2020 and 2021, respectively, in large part due to the benefits from the Celgene deal. Its 2020 P/E is a modest 9.5x. Bristol-Myers’ financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases.

BMY is appropriate for growth and income investors as well as traders. The shares have price and valuation support at around 55-56, and offer defensive traits during “risk-off” trading days. Strong Buy.

BMY-063020

Broadcom (AVGO 315.60 – yield 4.2%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. CFO Tom Krause expects to continue paying the dividend and paying down debt in 2020 (none of which is maturing this year), even under poor economic conditions. Share buybacks and M&A activity are on the back burner for now. Broadcom was featured in the December 17 and January issues of Cabot Undervalued Stocks Advisor.

AVGO is an undervalued growth and income stock as well as a useful trading stock. Despite its shares losing half their value in the market sell-off, Broadcom’s stock price has fully recovered. Other than that sell-down, the stock has remained in a range of roughly 270-320 for over a year, and is just below its all-time high of 331. Full-year profits are expected to grow 1% and 12% in 2020 and 2021, respectively, and the 2020 P/E is 14.7x. Hold.

AVGO-063020

Total S.A. (TOT 38.46 – yield 7.7%), based in France, is among the world’s largest integrated energy companies, with a global oil and natural gas production business, one of Europe’s largest oil refining/petrochemical operations, and a sizeable gasoline retail presence. The company is also expanding somewhat aggressively into renewable and power generation business lines, which may either be highly profitable or value-destructive. While low energy prices have hurt Total like all integrated producers, the company’s low production costs (below $30/barrel), efficient operations and sturdy balance sheet position it well relative to its peers. Also, the company’s production growth profile may still be among the best in the industry despite sharp capital spending reductions.

Total remains attractive to income investors with its high dividend yield that is likely to be sustained. Management has chosen to maintain their quarterly dividend of 66 euros, even if they need to raise debt or trim assets to do so. Total SA was featured in the May issue of Cabot Undervalued Stocks Advisor.

The most recent consensus estimates indicate full-year EPS of $1.26 and $2.30 in 2020 and 2021, respectively. The P/E multiple of 16.7x estimated 2021 earnings reflects only partial recovery toward normalized earnings of around $4.00. The shares remain rangebound. Growth and income investors should add to positions below 38. Hold.

TOT-063020

Buy Low Opportunities Portfolio

Buy Low Opportunities Portfolio stocks appear capable of a big rebound from recent lows. They have strong projected earnings growth; low-to-moderate price/earnings ratios (P/Es); no dividend requirement and low-to-moderate debt levels. Investors should expect volatility as the stock market alternately embraces the companies’ current successes and remains wary of the stocks’ recent downturns.

Buy Low Opportunities Portfolio
Stock (Symbol)Date AddedPrice AddedPrice 6/30/20Capital Gain/LossCurrent Dividend YieldRating
Alexion Pharmaceuticals (ALXN)08-01-17137.77112.24-19%Retired 6/17/20
Baker Hughes (BKR)12-19-1731.4815.39-51%4.7%Sold 6/17/20
Columbia Sportswear (COLM)6-30-2080.0080.68Buy
General Motors (GM)12-31-1936.5325.30-31%Strong Buy
Mercury General Group (MCY)10-01-1955.5840.75-27%6.2%Sold 6/10/20

Featured Stock: Columbia Sportswear (COLM 80.57)
Columbia Sportswear, with over $3 billion in revenues generated from 90 countries, produces the highly-recognizable Columbia brand outdoor and active lifestyle apparel and accessories, as well as SOREL, Mountain Hardware, and prAna products. For decades, the company was successfully led by the one-of-a-kind Gert Boyle, who passed away late last year. The Boyle family retains a 36% ownership stake and Gert’s son Timothy Boyle remains at the helm. First-quarter sales fell 13% from a year ago, as 64% of sales are produced in the U.S., where its reliance on wholesale distribution, and the longer lockdown periods relative to other countries, hurt results. However, the company is rapidly improving its online operations, both through its own websites and through third-party online retailers, which combined generate over 20% of sales. Columbia’s balance sheet remains solid, with $707 million in cash and only $174 million in debt. The company is likely to remain healthy as consumers seek its highly relevant products.
Columbia’s shares have declined 20% this year, and trade at the same price as they did in early 2018. Analysts’ earnings per share consensus estimates are $2.23 and $4.04 for 2020 and 2021, respectively. For comparison, the company earned $4.83/share in 2019. On next year’s estimates, the shares trade at a P/E of 20x. The stock has appeal for value investors and for growth investors with patience for what might be a slower recovery than other growth stocks. Traders will find COLM shares appealing given their sensitivity to consumer and economic re-opening trends. Buy.

COLM-063020

General Motors (GM 25.30) under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well-run and (almost) respected auto maker. The company has smartly exited many chronically unprofitable geographies (notably Europe) and trimmed its passenger car roster while boosting its North American market share with increasingly competitive vehicles, particularly light trucks. We consider its electric and autonomous vehicle efforts to be near industry-leading. GM’s much-improved North America cost structure allow it to remain profitable at perhaps an 11 million vehicle industry volume. Its GM Credit operations are well-capitalized but will likely be tested in the pandemic. The shares will remain volatile based on the pace of the economic re-opening, U.S.-China relations and customer credit quality. GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor.

Wall Street is projecting EPS of $1.05 and $3.98 in 2020 and 2021, respectively. The 20% share price decline since June 8 has made GM stock more attractive for investors and traders. Strong Buy.

GM-063020

Special Situation & MOVIE STAR PORTFOLIO

This is a portfolio for capital gain opportunities that do not conveniently fit into the other three portfolios. These stocks will often be glamorous companies, which I call “movie star stocks,” that investors love to own and follow, such as Amazon.com, Apple Inc. and Walt Disney Co. These movie star stocks currently have relatively low prices or valuations in comparison to their trading histories.

Special Situation and Movie Star Portfolio
Stock (Symbol)Date AddedPrice AddedPrice 6/30/20Capital Gain/LossCurrent Dividend YieldRating
Adobe Systems (ADBE)05-07-19277.16435.2557%Hold
Amazon (AMZN)11-07-191,802.132756.1253%Hold
Equitable Holdings (EQH)11-15-1923.6919.30-19%3.5%Strong Buy
Netflix (NFLX)01-23-20337.45454.9035%Hold
Nvidia (NVDA)03-04-20276.05379.3137%0.17%Strong Buy
VanEck Vectors Oil ETF (CRAK)10-15-1928.6121.74-24%Buy

Featured Stock: Equitable Holdings (EQH 19.30 - yield 3.5%)
We are featuring Equitable Holdings again this month. With our fresh set of eyes, we find this company to have many appealing traits worthy of a repeat recommendation: solid position in its industry, strong finances and undervaluation. Also, there is a potential catalyst to the stock: a possible sale/spin-off of its AllianceBernstein business.

Equitable Holdings (EQH 19.30 - yield 3.5%) owns two principal franchises: Equitable Financial Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), a highly respected investment management and research firm. Equitable, with a 161-year history, was acquired by French insurer AXA in 1992. Starting in 2018, AXA began to spin off Equitable with an initial public offering of part of its ownership. Part of the motivation behind the spin-off was to fund AXA’s $15 billion acquisition of insurer XL Group Ltd. Through subsequent stock sales, AXA currently owns less than 10% of Equitable. With its new-found independence, Equitable may be considering strategic changes for its 65% ownership in AllianceBernstein.

Equitable Holdings is well-capitalized and has significant liquidity. Its diverse, high-quality investment portfolio is hedged against adverse changes in interest rates and equity markets. AllianceBernstein’s assets under management (AUM) as of May was $596 billion. Equitable expects to continue delivering a 50-60% payout ratio via dividends and share repurchases. The stock was featured in the February and June issues of Cabot Undervalued Stocks Advisor.

Profits are expected to fall 14% in 2020, then rise 18% in 2021. Equitable shares are undervalued, with a 2020 P/E of 4.6x. Like many insurance companies, investors also value Equitable on a book value basis. With its $37.78 in per-share book value, EQH trades at .50x P/BV, which is a significant discount. This low valuation may be prompting management to consider reducing or exiting its AllianceBernstein stake.

At 19, EQH shares trade below their 20 IPO price, which was then a disappointment relative to the 24-27 price range that bankers had targeted. Since then Equitable has arguably become a better company and any sale of AllianceBernstein is likely to unlock further value. EHQ shares are appropriate for dividend investors, growth investors and traders. While the shares may trade in sync with the overall stock market, given its investment-driven operations, we see more upside than downside. Strong Buy.

EQH-063020

Adobe Systems (ADBE 435.25) is a software company that dominates the content creation software industry. Much of its financial success (beyond its powerful product successes) was produced by its adoption of bundling and subscription-based revenue models, partly guided by respected activist investor Value Act. With operating profit margins of 40% and minimal debt, the company generates prodigious amounts of free cash flow. The shares have appreciated 14x since the start of 2012, making it one of the strongest stocks in the market during that period.

Analysts expect full-year EPS to increase by 44% and 14% in 2020 and 2021, respectively. The 2020 P/E is 45x, reflecting Adobe’s immense profits and cash flow as well as its dominant position in a growing industry. ADBE stock now trades at essentially all-time highs. Traders may want to take some profits, while longer-term investors should hold their shares but be prepared to exit upon weakness. Hold.

ADBE-063020

Amazon.com (AMZN 2756.12) remains nearly perfectly positioned for a pandemic world. Its iconic to-your-doorstep shopping marketplace allows consumers to safely shop for just about anything without leaving their homes. As the world accelerates its transition to the digital world, the Amazon Web Services (AWS) cloud business will continue to produce vast and growing profits ($20 billion in operating profits next year, up 20% from the prior year and comprising nearly 65% of total company operating profits). Also, Amazon’s innovations and forays into new industries are disrupting established global businesses, including freight companies, retailers, entertainment and technology companies. The company announced last Friday that it is acquiring autonomous car startup Zoox for about $1.2 billion. Amazon.com was featured in the April issue of Cabot Undervalued Stocks Advisor.

Analysts expect per-share earnings to fall from $23.01 in 2019 to $19.97 in 2020, then rise 92% to $38.40 in 2021. The decline in 2020 profits results from Amazon’s plans to spend much of its profits (essentially all of its second-quarter profits) on Covid-related expenses, including new hires and wage increases. AMZN shares trade just below their all-time highs, are up 46% so far this year, and tend to be inversely correlated with the market: on economically optimistic days, the shares trade down. On pessimistic days, investors buy AMZN as a safety stock. Hold.

AMZN-063020

Netflix (NFLX 454.90) is the world’s leading streaming entertainment service with more than 183 million paid subscribers in over 190 countries. Viewers can enjoy unlimited access to TV series, documentaries and feature films across a wide variety of genres and languages, all without commercial interruptions. The company is experiencing rapid international subscription growth and creating original foreign language content for international markets. Netflix was featured in the January 22 issue of Cabot Undervalued Stocks Advisor.

Netflix is a widely popular, aggressive growth/momentum stock. Its shares have surged to nearly 45x their year-end 2011 price – producing a 52% annualized rate of return – a stunning rate that reflects the power of an innovative idea launched at the right time. The stock now rests just below its all-time high of 468. Its 70.4x P/E on estimated 2020 earnings and 52.9x P/E on estimated 2021 earnings, as well as its 8.4x multiple of revenues, implies that it is only in the early stages of its profit growth - a view we don’t entirely agree with. And, earnings estimates suggest that its growth will decelerate as the company is facing increased streaming competition from a wide array of well-financed competitors including Disney. Its growth isn’t likely to continue forever, nor is its ability to fund its growing cash flow deficit. For now, we’re keeping NFLX as a Hold, suggesting a stop-loss order to protect the downside. Hold.

NFLX-063020

NVIDIA (NVDA 379.31 – yield 0.17%) is the pioneer and leading designer of graphics processing unit (GPU) chips, which initially were built into computers to improve video gaming quality. However, they were discovered to be nearly ideal for other uses that required immense and accelerated processing power, including data centers and artificial intelligence applications such as professional visualization, robotics and self-driving cars. In April, NVIDIA completed the $6.9 billion acquisition of Mellanox Technologies, an innovator in high-performance interconnect technology routinely used in supercomputers and hyperscale data centers. NVIDIA’s data center business now represents about 50% of total revenues. NVIDIA was featured in the March and May issues of Cabot Undervalued Stocks Advisor.

NVDA is a high-P/E, aggressive growth/momentum stock. Its shares have increased 17x since the start of 2015 and now rest near their all-time high of 385. Yet, part of the reason behind the gains is that cloud-based computing is the biggest secular trend in technology, and the most powerful. No one knows how large the industry will ultimately become, but “larger than it is today” seems like the correct answer for many days and years into the future. Until this open-ended growth appears to peak, it would be difficult to bet against it. The only question for momentum investors is when to stop betting on it. The valuation of 38.6x estimated fiscal year 2022 earnings is high but not astronomical.

Wall Street now expects EPS to grow 34% and 36% in fiscal 2021 and 2022 (January year-end). For now, we’re staying with our Strong Buy recommendation.

NVDA-063020

VanEck Vectors Oil Refiners ETF (CRAK 21.74) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Oil Refiners Index (MVCRAKTR). This index includes refiners from around the world, not just in the United States, so it may trade out of sync with major domestic refiner stocks from time to time. The global mandate (IMO 2020) for ocean-bound ships and tankers to use scrubbers or low-sulfur diesel fuel provides a profit tailwind for refiners, but has been more than offset near-term by sharply reduced demand for gasoline and aviation fuel due to the pandemic. However, as global economies continue to re-open, perhaps haltingly, rising demand for gasoline (and eventually aviation fuel) should help restore some profits. Traders should buy CRAK now. Buy.

CRAK-063020

Strong Buy and Buy – This stock meets most of my fundamental investment criteria.
Hold – Do not add to your position in this stock until a particular issue is resolved.
Retired – This stock has been removed from the portfolio for a specific reason, yet remains an attractive holding for long-term investors who would rather minimize portfolio turnover.
Sell – This stock has a problem that increases portfolio risk. Sell it.


The next Cabot Undervalued Stocks Advisor issue will be published on August 5, 2020.

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