Plentiful Health
In this edition of the Smart Investor newsletter, we examine the stock of one of the key players in the global medical technology landscape. But first, let’s delve into the latest Portfolio news and updates.
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Portfolio Updates
❖ Taiwan Semiconductor Manufacturing (TSM) reported another stellar quarter. The world’s largest chip foundry posted higher-than-expected revenue and EPS results and issued strong guidance for the ongoing quarter and full-year 2024, with the increased outlook driven by surging demand for AI chips. The bullish outlook restored optimism in the AI trade, helping prominent AI firms to rebound from a slump induced by ASML’s (ASML) reduced guidance and reports about possible additional restrictions on chip trade. TSM’s CEO C. C. Wei further dispelled worries about the state of the semiconductor market, saying that in overall chip demand “everything has stabilized and is starting to improve,” while the surging demand for AI gear is “just a beginning” of the trend.
❖ ASML (ASML) dropped last Tuesday and Wednesday, just as we purchased it for the Portfolio. The stock fell as the Q3 report was mistakenly published a day early, adding to investor confusion and likely amplifying negative market reaction. ASML reported a beat on EPS and revenue, and a massive backlog of EUR 36 billion. However, new bookings came in at about half the expected amount, prompting the company to reduce full-year 2025 revenue guidance to the lower part of the previously provided range. It must be noted that ASML’s bookings are highly volatile: each of its machines costs hundreds of millions of dollars, with as little as two or three single orders strongly affecting quarterly booking amounts and altering the overall earnings picture. In the long term, ASML is the only company serving the growing demand for advanced lithography machines required in the production of high-performance and AI chips.
❖ Broadcom (AVGO): several leading Wall Street houses, including Mizuho Securities, Cantor Fitzgerald, Goldman Sachs, and JPMorgan, lifted their price targets on the stock in the past two months. AVGO’s collaboration with OpenAI on developing custom AI chips for the world’s most valuable startup is expected to provide a significant boost to its short-term revenue from providing OpenAI with specialized hardware. As OpenAI expands the use of its models, Broadcom could secure a significant long-term partnership and capture a significant share of the AI hardware market, which would further improve its revenue streams.
❖ Arista Networks (ANET) also saw several price-target upgrades in the past month from brokerages including Morgan Stanley, JPMorgan, Citi, and others. Citi analysts forecast a 40-50% surge in data center spending next year, benefiting the providers of data center interconnect (DCI) solutions, including Arista. Arista’s shares were under some pressure recently, as investors worried the Meta Platforms’ in-house networking hardware may reduce its reliance on external vendors like Arista going forward. However, the company said that the Facebook parent has deployed Arista’s switches in its latest Ethernet-based AI cluster, further deepening the long-standing cooperation between the tech giants and alleviating most of these fears.
❖ Alphabet (GOOGL) got a temporary relief after a federal judge in California granted its request to delay the October 7th injunction directing the Alphabet unit to overhaul its Android app store Google Play. The delay of the injunction enables the federal appeals court to review Google’s separate request to suspend the judge’s order.
❖ Microsoft (MSFT) announced that it will allow customers to build autonomous AI agents using its Copilot Studio, which utilizes several AI models developed in-house and by OpenAI. Autonomous AI agents are adaptable, learning, and goal-oriented programs that can perform tasks on their own without human intervention. These tools are seen as an important step in AI development and monetization.
Microsoft’s shares have been under some pressure recently, as investors weighed its high valuation against continued capex increases amid rising AI investments, as well as the prospects of monetization of these efforts. According to Morgan Stanley analysts, these concerns are temporary, as Microsoft’s GenAI leadership is expected to drive significant growth, particularly through its Azure platform, with strong growth beginning to transpire as soon as in the next quarter. In addition, 365 Copilot – Microsoft’s virtual AI assistant integrated into its apps – is showing signs of rising adoption and is expected to drive increased revenue per user in the years ahead.
In other news related to AI investment monetization, MSFT is reportedly in talks with OpenAI over converting the former’s $14 billion investment in GenAI leader into equity. As was previously revealed, OpenAI is shifting from a non-profit to a for-profit firm, which means that investors in the startup now expect to receive equity. In addition, according to media reports OpenAI aims to reach $100 billion in revenue by 2029, a number that would translate into a massive growth in demand for GPU and cloud infrastructure. Since OpenAI fully relies on Microsoft’s computing infrastructure, its growth plans portend a significant jump in Azure’s revenue outlook. According to UBS analysts, income from OpenAI will amount to around 40% of Azure AI revenue already this year.
❖ Super Micro Computer (SMCI) announced the launch of a new optimized storage system for high-performance AI training, inference, and HPC workloads. This system, called JBOF (Just a Bunch of Flash), contains up to four NVIDIA BlueField-3 units in a compact size. These units are powerful and capable of handling fast networking and complex tasks like encryption and data compression. The system is built to be very reliable, supporting applications that require constant uptime and can manage massive amounts of data, whether it’s growing in size or spreading across multiple locations. Supermicro’s new systems offer superior performance, and greater reliability, and are better suited for evolving technological demands, particularly in AI and data-heavy environments.
In addition, Super Micro is launching a line of new liquid-cooled AI servers powered by Nvidia’s Blackwell line of processors, specifically by GB200 NVL72 and HGX B200 systems. SMCI said it has started sampling the new servers to customers, and full-scale production will start late in the fourth quarter.
Both the JBOF system and the new AI servers are targeted at advanced computing tasks such as AI training and inference. This suggests a strategic alignment within Supermicro to strengthen its portfolio in the AI and HPC sectors. Both systems also leverage Nvidia’s technology, indicating a strong partnership with the AI leader.
❖ GE Aerospace (GE) delivered mixed results in its Q3 2024 report. Revenue missed expectations despite a 28% YoY jump in total orders, while EPS grew more than expected. The company reconfirmed its 2024 revenue forecast while raising its EPS, operating profit, and free cash flow guidance.
❖ Pentair (PNR) reported strong third-quarter results, beating analyst estimates on both the top and bottom lines. The company lifted its full-year 2024 EPS guidance above analyst consensus.
❖ Verizon (VZ) released mixed results for Q3 2024, reporting a slight miss on revenue while marginally exceeding analysts’ EPS expectations. In the third quarter, Verizon’s wireless subscriber numbers exceeded expectations. The company reaffirmed the previously provided full-year guidance.
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Portfolio Stocks Under Review
❖ Super Micro Computer (SMCI) remains under review, although we have begun to observe a tentative, positive change in sentiment towards the stock. The company’s shares strongly rebounded following the announcement of the release of a new liquid cooling solution for data centers, positioning Super Micro for further expansion in this rapidly growing market. SMCI is a leader in the direct liquid cooling (DLC) market; its competitors such as Dell Technologies (DELL) are just starting to ramp up, while Super Micro is already churning out its offerings at a large scale. The company’s servers are designed to reduce power and infrastructure costs in data centers. In addition, following the strong declines, Super Micro’s shares are now trading at very attractive valuations, gaining new buyers each time the company releases positive news.
Still, SMCI is about eleven weeks behind in filing with the SEC and over 50% below its March high. As a reminder, Super Micro underwent an extremely turbulent period, which included strong hits to investor sentiment stemming from a short-seller’s report and an SEC filing delay. The hit was exacerbated by media reports of a U.S. Department of Justice probe. Although many analysts have cut their ratings and price targets on SMCI, citing the heightened uncertainty, some remained bullish, seeing it as a major beneficiary of the rapidly accelerating investments in AI infrastructure due to its first-mover advantage in liquid-cooled rack-level solutions.
This advantage came into the spotlight earlier this month when SMCI surged by almost 16% after it disclosed shipments of more than 100,000 GPUs with its liquid cooling solution system to “some of the largest AI factories ever built, as well as other cloud service providers.” The announcement underscored surging demand for Super Micro’s servers, driven by AI data center proliferation, which could translate to billions of dollars in revenue.
We at Smart Investor see SMCI’s current difficulties as temporary, while its immense long-term potential remains intact. However, we are mindful of the risks faced by the company, particularly the fragility of investor sentiment due to its compliance issues, and hope that the company will soon shed some light on these questions.
Barring some unforeseen negative developments, we are awaiting the company’s FQ1 2025 earnings report release, scheduled for October 29th, 2024, after which we will decide whether to retain SMCI in the portfolio. Analysts project that the company will see its EPS rise by about 115% year-over-year as the underlying demand for AI hardware remains strong and SMCI has demonstrated an ability to capitalize on this trend. If the company can meet or exceed analyst expectations, it could provide a catalyst for a further strong rebound in the stock price.
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❖ Adobe (ADBE) remains under review. The company’s stock has been under pressure after the release of its FQ3 2024 report on September 12th. Despite reporting strong FQ3 results that beat analyst expectations, ADBE provided weaker-than-expected guidance for FQ4 2024 (expected to be reported on December 11th). Investors were concerned about signs of decelerating growth at Adobe, including projected FQ4 growth of only 9% year-over-year, which would be its lowest growth rate in nearly a decade. There were also worries about Adobe’s competitiveness in the rapidly evolving AI-powered software market. While Adobe remains a leader in its field with strong financials, these factors combined to create uncertainty about its near-term growth prospects, leading to declines in recent months.
However, the company’s annual Adobe Max conference on October 14th was rife with exciting news, which created some tailwinds for the stock. ADBE made several major announcements, highlighting significant advancements across Adobe’s Creative Cloud suite, including a launch of over a hundred new features. Putting a strong emphasis on AI-powered tools, the company unveiled new AI-enhanced tools in Illustrator and InDesign, updates to the Substance 3D content creation tool, and a beta version of a new web-based app for in-browser creation and editing of 3D content.
In addition, Adobe introduced significant updates enabled by its highly successful AI model, Adobe Firefly, which has already gained widespread adoption. The most notable development was the launch of Firefly Video, a new AI video-generation tool, which confirmed Adobe’s capability to pose strong competition to OpenAI’s Sora, as well as generative tools offered by Meta Platforms, TikTok, Alphabet, and other current or potential rivals. Adobe’s generative video AI is differentiated by its integration into its creative tool suite, as well as by its focus on commercial safety (i.e., its models are trained on data to which ADBE has commercial rights). The integration is expected to enhance user retention and platform consolidation, increasing product stickiness and revenue growth. This approach is viewed by analysts as a path to fortify ADBE’s market position while streamlining its AI monetization process.
Most leading Wall Street brokerages were positive on the stock before the announcement, with several analysts positively opining on ADBE’s prospects after the details on the new tools were released. Thus, according to Goldman Sachs, the launch of Firefly Video underscores Adobe’s competitive edge in various creative domains, with AI technology expected to support its growth trajectory. Bank of America Securities added that Generative AI tools will be a meaningful component to Adobe’s growth. The average analyst price target for ADBE implies a potential upside of about 24% in the next 12 months.
While the recent developments around GenAI tools are positive for Adobe, we remain watchful as to whether they provide a sufficient catalyst to break the negative sentiment cycle and propel ADBE toward further gains.
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❖ We are placing Applied Materials (AMAT) under review for possible deletion from the Portfolio. The company’s shares have generally followed the market trends for the wider semiconductor sector, rising and falling in tandem with its peers in the industry. In October, AMAT’s shares continued to mirror the sector trend but opened a large down gap versus iShares Semiconductor ETF since October 14th.
Applied Materials continues to perform well fundamentally, as seen in its solid revenue and earnings reports, and most of its recent stock underperformance can be attributed to semiconductor sector cyclicality, discussions about new U.S. regulations on chip exports to specific countries, and other external factors. However, one company-specific factor weighing down the stock remains in focus: the company’s exposure to the Chinese market. Applied Materials has reduced its exposure to China, with sales in China dropping from 43% of total sales in FQ2 to 32% in FQ3. This reduction was part of a strategic decision to mitigate risks associated with the geopolitical tensions and trade restrictions involving China. However, the shift had a mixed impact, as the Chinese market was a major source of revenue for the company. While AMAT’s long-term prospects are bright, it remains to be seen whether AI-related revenue can replace the lost Chinese sales in the short term.
Adding to uncertainty regarding AMAT stock performance outlook, Hedgeye, a research and financial media company known for its detailed market analysis, has added Applied Materials to its list of short ideas. According to Hedgeye, the market for wafer fabrication equipment (WFE), which is crucial for making semiconductors, will grow much slower than other analysts expect in 2025-26, negatively impacting AMAT’s revenue. Since Applied Materials’ stock carries loftier valuations than those of comparable peers, it is at risk of larger declines.
We are planning to wait for the company’s FQ4 earnings release, scheduled for November 14th, to decide whether to retain the stock in the Portfolio. However, given AMAT’s apparent vulnerability to negative market news, we will follow the stock closely, watching for any sign of trouble.
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Portfolio Earnings and Dividend Calendar
❖ The Q3 2024 earnings season is in full swing, and several Smart Portfolio holdings are scheduled to release their quarterly results in the next few days. The reporting Portfolio companies are General Dynamics (GD), Amphenol (APH), KKR & Co (KKR), Check Point (CHKP), ITT Corp. (ITT), Super Micro Computer (SMCI), PayPal Holdings (PYPL), Alphabet (GOOGL), Arch Capital Group (ACGL), and Microsoft (MSFT).
❖ The ex-dividend date for ASML Holding (ASML) is October 29th.
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New Buy: Abbott Laboratories (ABT)
Abbott Laboratories is an American multinational company that develops, manufactures, and markets a broad range of healthcare products, with a focus on medical devices, diagnostics, nutrition, and branded generic pharmaceuticals. Abbott is one of the key players in the global medical technology landscape, driving innovation in healthcare diagnostics and treatment solutions.
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History of Medical Progress
The company, established in 1888, initially focused on the formulation of medicinal products. In 1929, Abbott’s shares began trading on the Chicago Stock Exchange, marking the beginning of its expansion as a public company. The company began its international expansion in the 1950s, starting with Europe and Latin America.
Abbott was behind many medicinal breakthroughs in various fields, such as antiseptics, anesthetics, vitamins, infant nutrition, dietary nutrition, and more. Thus, as it began to diversify its product portfolio beyond pharmaceuticals in the 1980s, it introduced Ensure and Similac, which have become instant hits and major brands in the company’s nutrition division. In the same decade, the company established its leadership in the diagnostics space, pioneering several advanced tests which included the world’s first licensed diagnostic test for HIV.
Abbott underwent two major reorganizations, which helped it streamline its business and positioned it for growth in its core competence areas. In 2004, Abbott spun off its hospital products division into a new company, which was later acquired by Pfizer. In 2013, Abbott’s research-based pharmaceuticals business was spun off and began publicly trading as AbbVie Inc. This marked a strategic shift, with Abbott focusing on its diversified healthcare business, including medical devices, diagnostics, and nutrition, while AbbVie took over the pharmaceutical segment.
Abbott played a pivotal role in the global fight against COVID-19, launching BinaxNOW, one of the most widely used rapid COVID-19 tests. This boosted its diagnostics division and provided substantial revenue growth during the pandemic. As the demand for COVID-19 tests declined post-pandemic, Abbott refocused on its core growth drivers, particularly in medical devices and diagnostics, adding breakthrough inventions and extensive expertise across the areas of cardiovascular solutions, neuromodulation therapies, various diagnostics technologies, and more.
Throughout its history, ABT expanded its product portfolio internally and through acquisitions, which helped it broaden its product portfolio in key research areas and expand its geographical reach. Thus, for example, the 2010 buyout of Piramal Healthcare’s generic drugs unit made Abbott the largest pharmaceutical company in India by sales. ABT’s latest acquisition was that of Cephea Valve Technologies in 2021, which further expanded its cardiovascular device capabilities.
While acquisitions have played a critical role in Abbott’s expansion historically, the company’s recent strategy has leaned more towards organic growth through innovation, by expanding its existing product lines and increasing market penetration, rather than through large acquisitions. The company invests 6-7% of its annual revenue in R&D, reflecting its commitment to developing new products and improving existing technologies.
Today, with a market cap of almost $208 billion and annual revenues of ~$41 billion, Abbott is one of the largest and most influential players in the global medical technology and healthcare industry, operating in over 160 countries and territories globally. ABT ranks #108 on the Fortune 500 list and is one of a few companies that have remained on that list for 70 consecutive years .
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The World’s Most Diverse Healthcare Company
The company operates through four reporting segments: Medical Devices, responsible for over 42% of total revenue, Diagnostic Products (almost 25%), Nutritional Products (~20%), and Established Pharmaceutical Products (almost 13%). Medical Devices and Nutritional Products are currently the company’s fastest-growing segments, both in the U.S. and internationally.
Abbott is one of the most global healthcare companies in the world with over 60% of revenue generated in markets outside of the United States. Approximately one-third of its total revenue comes from emerging economies, i.e., fast-growing markets where healthcare spending is outpacing the growth of the economy.
Besides its geographical diversification, Abbott is the most diverse healthcare company in the world in terms of business lines. With its portfolio of nutrition products, diagnostics, medical devices, and branded generic pharmaceuticals, ABT’s businesses span the spectrum of healthcare, from prevention (via optimized nutrition) to detection (via diagnostic testing) to treatment (via medical devices and medications). No other healthcare company today offers such a comprehensive portfolio of solutions.
Moreover, Abbott is a key player in each of its four business fields, with its operational divisions successfully competing against larger, more specialized companies. Thus, ABT’s Medical Devices segment ranks 5th globally, behind Medtronic, Johnson & Johnson, Siemens Healthineers, and Philips Healthcare. In Diagnostics, it ranks 4th, with Roche Diagnostics, Siemens Healthineers, and Danaher Diagnostics leading the field. In Nutritional Products, ABT ranks 3rd, with Nestlé and Danone as the top players. Abbott ranks 4th globally in Branded Generics, after Sandoz (Novartis), Teva Pharmaceuticals, and Sun Pharma.
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Diversification Supports Revenue Growth
Wide geographical and portfolio diversification has significantly contributed to Abbott’s revenue stability. Thus, Abbott’s Diagnostics division experienced a temporary surge in revenue due to COVID-19 testing, but as demand has waned, growth in this segment has slowed. The company has refocused on other segments, such as medical devices and non-COVID-related diagnostic applications, to compensate for the loss of income. Still, Diagnostics has been a solid revenue growth source, with sales in the segment growing at a CAGR of ~9% in the past five years.
Abbott Laboratories’ Medical Devices business has registered the fastest revenue growth over the past five years, with a CAGR of ~12% in the past half-decade driven by successful product innovation. The company’s FreeStyle Libre continuous glucose monitoring system rapidly gained market share and became a leading product in the diabetes care market, fueling double-digit growth in this area. Abbott’s cardiovascular devices, including heart pumps and structural heart products, have also seen strong demand, particularly as elective procedures resumed after pandemic-related disruptions. Abbott has consistently innovated in the medical devices space, introducing next-generation products and expanding into minimally invasive procedures, which has driven robust revenue growth.
ABT’s Nutritional Products business has grown at a more moderate pace, largely driven by steady demand for its infant and adult nutrition products like Similac and Ensure. The segment has registered revenue growth at a CAGR of about 4% in the past five years. Over the same period, Abbott’s Established Pharmaceuticals (Branded Generics) segment revenue expanded at a CAGR of ~5%. Growth in this segment has been steady, primarily driven by demand in emerging markets.
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Translating Health to Corporate Wealth
Despite substantial R&D and portfolio expansion investments, Abbott remains in stellar financial health. It has not only maintained a low net debt-to-equity ratio but reduced it over the past few years. Its net debt-to-equity ratio amounts to just 19%, which is considered low. ABT’s debt is well-covered by operating cash flow, while interest is covered by EBIT many times over. This balance sheet strength adds to ABT’s resilience against unfavorable economic or market developments. The company’s high debt ratings – “AA-” at S&P and “AA3” at Moody’s – are a testament to this strength.
The company ranks among the top of its industry in terms of capital efficiency and profitability. Thus, its ROE, ROA, and ROIC – as well as its operating, net income, and FCF margins – come in the top 20% of its industry.
In the past five years, Abbott’s revenues grew at a CAGR of ~8%, while its earnings-per-share increased at a CAGR of ~13%. EPS growth has considerably outpaced revenue expansion thanks to improved profitability and operational leverage. Abbott is well-positioned to continue growing at a solid pace, with the major trends underlying its businesses. In addition to the growth of developing economies and the global middle class, which has vastly expanded its end markets, the aging of the global population provides a powerful tailwind for a long-term growth outlook. Analysts generally expect Abbott’s EPS to grow at ~9% annually over the long term, driven by its core growth drivers in medical devices and diagnostics, along with operational improvements.
While the company experienced an overall decline in revenue in 2023, this was due to the direct effect of the wind-down of its coronavirus diagnostic products sales. Excluding these products, ABT’s revenues grew by almost 12% from the previous year. The sharp decline in COVID-19 testing revenue will no longer be as significant a drag on earnings, as the company has successfully pivoted away from relying on pandemic-related sales.
This success has manifested itself through the results of Q2 and Q3 of this year, with total company earnings returning to solid growth. Abbott exceeded analyst EPS estimates in all quarters for which these estimates were available. In Q3 2024, ABT reported organic revenue growth of 8.2% year-on-year, led by double-digit growth rates in the Medical Devices division and U.S. sales. Following these strong quarterly results, the company maintained its full-year 2024 organic sales growth guidance, which it raised in the previous quarter. Moreover, Abbott increased its 2024 guidance for adjusted EPS for the third consecutive time this year.
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Total Return In Focus
Abbott’s stock returned about 22% in the past 12 months, as it suffered a large decline from mid-March to mid-July. Over that period, ABT was under pressure due to several factors, including relatively weak first-quarter results as the company was still dealing with the elimination of the COVID-testing windfall, and the general investor preference for high-growth stocks.
In addition, investors have been worried that the global spread of GLP-1 diabetes and weight-loss drugs would negatively affect ABT’s diabetes-care business. However, ABT’s continuous glucose monitors are in fact a perfect supplement for these drugs, especially when used for diabetes treatment. In fact, Abbott’s diabetes care devices have seen strong growth in the past several quarters, alleviating investor concerns. In addition, Abbott sees a significant opportunity for growth in its nutrition business line, as GLP-1 drugs reduce muscle mass, which the company’s products can help to decrease or avoid. In January, the company launched Protality, a new high-protein nutrition shake to support the growing number of people interested in pursuing weight loss while maintaining muscle mass. Abbott’s strong reputation in nutrition gives it a competitive edge in promoting Protality to health-conscious consumers in general, and GLP-1 users in particular.
Although Abbott’s stock has strongly rebounded in recent months in parallel with the significant improvement in its financial performance, it remains below its March level, and almost 18% below its all-time high reached in December 2021. As a result, it now carries an attractive valuation, which may not last long given the stock’s current upward trend. ABT trades broadly in line with the average for the Healthcare sector and near the bottom of the price range for comparable peers in the industry. Furthermore, based on projected cash flows, the company trades about 10% below its fair value.
Following the positive Q3 earnings surprise and the underlying details reflecting the strength of its business model, analysts from most leading Wall Street firms – including Mizuho, Piper Sandler, Raymond James, Jefferies, Morgan Stanley, Citi, and others – raised their price targets for the stock. According to RBC Capital Markets, Abbott is expected to sustain business momentum into 2025, thanks to its “solid growth profile.”
In addition to the potential for stock-price appreciation, Abbott Laboratories is a dividend-paying company. It has been paying dividends for the past 100 years, one of the longest track records of uninterrupted payouts to shareholders. ABT’s dividend yield of 1.9% is higher than that of all of its competitors except Medtronic. The payouts have grown at a CAGR of over 12% over the past five years and are expected to continue growing for years to come. This outlook is supported by ABT’s long dividend track record and modest payout ratio, as well as its stellar financial health and robust profitability.
Furthermore, Abbott regularly performs buybacks as part of its ongoing strategy to return capital to shareholders and enhance EPS through share reductions. In 2023, Abbott Laboratories repurchased $2.5 billion worth of shares. Adding to that, in the first three quarters of 2024 ABT repurchased approximately $2.05 billion worth of common stock. Within its Q3 2024 earnings release, the company announced a new share repurchase program of up to $7 billion with no expiration date.
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Investing Takeaway
Abbott Laboratories is a global healthcare leader with a stellar balance sheet and a robust business model. Holding top-tier positions in all of its end markets and continuing to innovate and expand its portfolio, the company is well-positioned to benefit from the growing global demand for advanced healthcare solutions. While not promising explosive growth, ABT is likely to offer steady, defensive returns with lower volatility for years to come. Trading at attractive valuations, Abbott presents a compelling case for investors seeking stable, innovation-driven growth. As such, we view it as a valuable addition to the Smart Investor Portfolio.
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New Sell: Target Corp. (TGT)
Target is a retail corporation that operates a chain of discount department stores and hypermarkets in all 50 states and the District of Columbia. TGT is the sixth-largest retailer in the U.S. by annual sales value.
Target’s shares have been under pressure since reaching a local peak in March this year. Several factors have contributed to underperformance, including inflationary pressures and heightened price competition, which negatively impacted traffic and sales. Shrinkage (loss from theft and fraud) also affected profitability. Additionally, discretionary spending trends have been mixed, which has affected Target’s ability to generate consistent growth. Although the company is working on improving profitability by reducing markdowns and cutting costs, these challenges have continued to impact its stock performance throughout 2024.
Recently, East Coast port strikes, although short-lived, added to negative sentiment towards the stock. Meanwhile, the disruptions brought on by Hurricane Milton in Florida continue to harm investor sentiment. Although a strong September retail sales print injected some optimism into consumer-related areas of the market, the overhang of depressed consumer sentiment remains a threat.
Target remains one of the best stocks to own in the retail space, featuring higher margins and better profitability metrics than most of its comparable peers, and performing more upward earnings revisions than any of its competitors. It is attractively valued, considering its robust fundamentals and dominant market position.
However, the short-term outlook for the retail sector in general and Target in particular remains cautious, impacted by economic uncertainty, inflation, and changes in consumer behavior. Retailers are adjusting to strained shopping budgets, with consumers increasingly seeking discounts and promotions, especially as discretionary spending tightens. The holiday season is expected to be a crucial time for recovery, with retailers starting promotional events earlier than usual to capture demand.
For Target specifically, despite efforts to boost sales through initiatives like Target Circle Week, the company is facing ongoing challenges, which, although sector-specific, continue to weigh on its margins, harming investor sentiment. We believe that longer term, Target will overcome these headwinds thanks to its proactive approach, which includes significant investments in its store experience and digital capabilities. However, given the current vulnerability of the industry’s shares to economic uncertainty, we view it as prudent to sell the stock .
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Despite stock market turbulence in the past few days, our exclusive club still counts 16 members: GE, AVGO, ANET, EME, ORCL, TSM, TPL, SMCI, CHKP, PH, HWM, APH, GD, ITT, AMAT, and PNR.
The next in line to join the lucrative club is still PYPL with a 27.56% gain since purchase. Will it finally close the gap, or will another stock outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
