“Two Important Portfolio Changes” from Cabot

What's Cabot Market Letter buying now?

By Travis Johnson, Stock Gumshoe, April 16, 2015

A reader sent in a question about a recent low-key teaser letter from Cabot Market Letter, so we’re going to look into that today.

There’s some substance to the letter before they get to hinting and teasing about their current recommendations, including the note that they increased their cash position to 46% back in January (I built up my cash position over the last six months, too, but it has never been that high)… and that they recently reduced their cash position to 30% by adding two new holdings.

So that’s the “secret” meant to tantalize us into subscribing to their service, of course — that they’ll tell you what these two new buys are. I get squinty eyed and grumpy when I see “secrets” used to pitch a newsletter, so we’ll sniff these out for you in a moment… but first, here’s a brief excerpt about their “big picture” view of where things are going:

“… what, exactly, do we expect in the months ahead?

• Volatility will increase as the market climbs higher.
• Stocks will sell off the next time investors get nervous.
• Those investors who run to the sidelines will miss the bigger upside we see headed our way.
• While those who add our newest recommendations to their holdings could find themselves 50% richer or more in the next 12 months.”

And they list the big trends that they see raining down profits on investors:

“Along with increases in volatility, we also see many major trends taking place behind the scenes, including:

• Rapid growth in technology and security spending
• New biotech breakthroughs
• Lower oil prices driving consumer spending
• Greater stability in the housing sector
• Social media companies ready to soar
• Big profits for mobile applications
• New product breakthroughs”

So… nothing shocking there, I suppose, but that’s the lens through which they’re looking for stocks. What, then, are these two stocks they’ve just added to the Cabot Market Letter portfolio? Let’s check out the clues…

“The first company we added to our holdings is the clear leader in infotainment (navigation, multimedia, connectivity) and branded audio products for automobiles.

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“In effect, it’s leading the push toward ‘smart cars,’ integrated and automated with the latest infotainment products.

“Within a few years, as many as one in every five vehicles will have a wireless network connection, and this company should be the biggest beneficiary of that, thanks to best-in-class products and prudent acquisitions that have kept its technology in the lead.

“This is why the company’s quarterly sales have jumped 19% while its earnings have zoomed 62%–all while registering four earnings surprises in a row. So it’s no wonder that seven top analysts have revised upward EPS expectations not only for 2015 but for 2016 as well.”

Thinkolator sez: this is teasing us about Harman Int’l (HAR), which audiophiles used to know (back when I was a teenager) primarily for their Harman Kardon stereo components and speakers, but is now primarily an automotive supplier (both “infotainment” guts for OEM systems and branded premium audio equipment, they dominate the luxury car audio market — the car audio came first, including a buyout of JBL many decades ago, and they leveraged that into other auto electronics).

So this is kind of along the same lines as the Navellier recommendation of Methode (MEI) in terms of being driven by design wins in cars and the increasing automation/infotainment options in automobiles, but HAR is much larger ($9 billion market cap) and more of a brand and has a very strong market position (they’re not direct competitors, really — but they’re driven by the same car automation/display/controls trends).

Harman has been a strong growth stock, and a favorite of growth investors, for the past two years as it has finally recovered from its epic 2007-2009 collapse (the stock dropped by about 90% in those years, and floundered for a couple years after founder Richard Harman retired and passed the leadership baton to Dinesh Palliwall… among other things, a merger/buyout from KKR fell apart and that led to substantial restructuring).

It’s not cheap, and it’s a very competitive industry where spending on R&D is high, but they have a strong customer base that includes most automakers and they have been in the business of car automation/telematics/infotainment for several decades and have, from what I’ve read, at least a bit of a technological edge over many of their competitors. I can’t tell you whether they’ll continue to grow market share or not, but they’re continuing to invest in car connectivity (including the magical “cloud” buzzword) and analysts think they’ll be able to continue growing earnings at close to 20% a year.

If they can do that, then the current valuation (trailing PE of 30, forward PE of about 20) is reasonable — you’re definitely buying growth, this is not a beaten-down name or a value stock (and we knew that already — Cabot, like Navellier, hunts growth stocks and technical strength… they generally won’t like stocks that are falling or have no momentum). Interestingly, it was touted as a value stock in the fall of 2013 by Alexander Roepers at the Value Investing Congress, back when the stock was at about $65 and he saw it getting over $100. His Atlantic funds still own close to 4% of the stock, and a year later (last Fall) at the same conference he suggested that they remained cheap at $100 and should get taken over… and he said at the time that he thought the stock was worth $250, so presumably he’s not selling.

Sound interesting? In stereo? Let us know with a comment below… I’ve got to run for now, but I’ll get to checking that second stock of theirs and report back on what I find.


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jonomalley
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I personally prefer MEI and would much rather buy that at 14 p/e than Harmon at 20 p/e. Sounds like some decent potential but much better potential with MEI for long investors like me IMO. I think it’ll double again in the next two or three years with their medical device push.

Curtis logan
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Curtis logan

You sure this isn’t neonode they are taunting?