Thank you for subscribing to the Cabot Turnaround Letter. We hope you enjoy reading the September 2022 issue.



One of our more productive methods for finding attractive turnaround stocks is to see what other like-minded investors are holding. We culled the list of hundreds of positions held by our evolving list of 50 or so preferred managers, as reported in the quarterly 13F filings, and discuss three of the most promising.



We also combed through the roster of stocks trading at low prices – another great source for turnaround stock ideas – and review four that have particular appeal.



Our feature recommendation this month is Warner Brothers Discovery (WBD). While most investors view this company as a “play” on streaming, we view it as an undervalued turnaround of the poorly managed WarnerMedia assets that it recently acquired from AT&T.

We note our recent ratings change of Lamb Weston Holdings (LW) from Buy to Sell.

This week we are adding leading energy player Devon Energy (DVN). Please note, we will VERY likely collect the $1.55 quarterly dividend in the coming weeks, though I won’t include that in the profit and loss equations as it’s not a certainty.

No student of the market is going to look at the action of the past week and shrug it off; that said, looking at the evidence, we can’t say the rally has gone kaput, at least not yet: By our measures, the intermediate-term trend is still pointed up, and a lot of high relative strength stocks (like those found in Top Ten) are pulling back very normally at this point, We’re not going to whistle past any graveyard: We’ll move our Market Monitor back down to a level 5, and if things worsen from here, we’ll quickly bring that down another notch or two--but we’re still holding our resilient names until something changes.



This week’s list reflects the renewed strength we’ve seen in commodity and “old world” names, even as the market has retreated. Our Top Pick is a name we missed a couple weeks back but think this pullback marks a decent entry point.

Stocks continued to retreat last week, prompting us to sell two more stocks today and downgrade another. But the pullback looks pretty normal on the heels of the 17% run-up from mid-June to mid-August and in light of Fed Chair Jerome Powell’s hawkish comments last Friday. And one sector, in particular, has been immune to the recent selling: renewable energy. So today, I’d like to introduce Brendan Coffey, Chief Analyst of our fledgling Sector Xpress Greentech Advisor newsletter and a first-time Stock of the Week contributor. Brendan will tell you about what has been his best-performing clean energy stock of late.

Details inside.

It has been a fairly quiet week for the market so I’m going to keep it short this week. Most of the potential market-moving news was backloaded coming into the week with the Fed meeting at the annual Jackson Hole summit. Jerome Powell, as always, has the potential to move the markets significantly, which is why this post-expiration week has been a slow one for trading.

We currently have three positions on and all of them are in profitable territory. If all goes well over the coming days, there is a good a chance that I will lock in profits in all three trades and immediately initiate several more positions. I continue to tread lightly, as there is no use trying to force trades at the moment.

We are officially in the doldrums between earnings seasons. But an opportunity or two can still be found each week. And while the offseason earnings trades oftentimes lack all of the necessities for an actual trade, it’s still worth looking at potential trades as we patiently wait for another earnings season, if only for educational purposes.

I’m going to keep it short this week as it has been a fairly quiet week for the Income Trader service. We added some calls on PFE, but other than that, we are well positioned into the September 23, 2022 expiration cycle. I plan on adding a minimum of two additional short-term positions next week and as I spoke about on our call last week I intend on taking some of the premium we’ve collected and create a black swan trade just in case we see a swift drawdown as we move into the latter part of 2022. It never hurts to have a little insurance just in case and it would only cost us a few percentage points. I’ll be discussing the details of the trade in the next issue.

Most people in the market (and in life) think of a lot of things as black and white, good or bad, bull or bear … and, frankly, for the market anyway, that’s often a good approach. We’re trend followers, after all, and we’ve designed our indicators to mostly be green or red, telling us whether stocks are headed up or down. It’s often best to play things in a decisive manner.

Although uncertainty in the market is growing, there are still strong income stocks out there. But we must be careful to find the right ones. A good stock needs to be resilient in a continuing recession, yet able to thrive amidst high inflation, or both, or neither. In this issue, I highlight such a rare bird.


The portfolio is also eliminating a cyclical position and adding a more defensive one. At the same time, we are seizing upon recent strong performance in another stock and selling a call to lock in a high income in this uncertain market.

Today we are adding a recent earnings season winner, though because of the weakness in the market the last two trading days, we are playing it somewhat defensively.

With short-covering activity no longer a factor, gold remains in a tenuous position on a short-term basis. A strengthening 10-year bond yield and a robust dollar are further headwinds for the metal.

Lithium, meanwhile, is back in a commanding lead among the key industrial metals—thanks in part to the newly passed Inflation Reduction Act law.



In the trading portfolio, no new positions are recommended for now as the broad metals market is unsettled.

Stocks finally had a bad week on the heels of a two-month, off-the-bottom rally that hadn’t relented since mid-June. One bad week doesn’t mean we’re destined to return to the kind of selling we saw in the first half of 2022. But the retreat was sharp enough to sell three of our weakest performers and add some safety in the form of another dividend stock. But the newest addition to the portfolio, courtesy of Tom Hutchinson, isn’t some stodgy utility company. It’s a fast-growing technology company whose stock is starting to regain traction with investors.

Details inside.

Today’s note includes earnings updates, ratings changes and the podcast.

The market took another hit this morning, but like yesterday, the major indexes have found support as the day has progressed—just after 3 pm EST, the Dow was down 70 points while the Nasdaq was off 66 points. Part of the reason for the recent selling is supposedly due to inflation fears and higher interest rates—indeed, the 10-year note reached north of 1.30%, which is low historically, but up 30 basis points (0.3%) since late January and 50 basis points (0.5%) from the start of December.

As mentioned last week, today’s Weekly Update will be an abbreviated version owing to the short work week and because of family commitments as our kids are out of school and I am solo parenting, making free writing time hard to come by. That said, to help you keep track of the latest guidance on all positions I’ve maintained our normal formatting and included short notes on all positions.

Earnings have been sensational. Reported earnings for S&P 500 companies have grown an average of 2% in the fourth quarter, compared to an expected -11%.

With the stock market regularly surging to record highs, it may seem like an unusual time to focus on valuation. After all, many stocks are remarkably expensive on traditional measures, and even somewhat lofty on non-traditional measures. But valuation still matters, especially if the market loses its current luster (assuming that is even possible)!

The market continues to perform incredibly well with the S&P 500 at an all-time high. And there continues to be signs of froth. The latest data point that I’ve found is the average SPAC is trading at a 26.4% premium to its cash value.

While the rest of the year looks very good for the market, a pullback is likely, if not inevitable, in the weeks and months ahead.

Today’s note includes earnings updates, ratings changes and the podcast.

Suffice to say we are in a bull market. Areas of it are most definitely frothy. But stepping back and thinking about where we are in a bigger cycle I continue to feel as though we are entering a more sustained economic recovery and (hopefully) sustained market run-up broadly similar to what happened coming out of other major shocks, like the dot-com bubble and Great Financial Crisis.

While the market continues to move forward, The “Buffett Indicator,” which takes the broadest Wilshire 5000 Index and divides it by the annual U.S. GDP, is now at a record high. In doing the math, the Buffett Indicator stands at about 194%. This figure is well above the 159% seen just before the dot-com bubble.

This market looks like it never wants to stop going higher. The S&P 500 just made yet another in a long series of new all-time highs.

Last week, we outlined four ingredients of a market bubble that were usefully outlined in a recently published book1”and briefly described how it clearly appears that our stock market is in a bubble. These ingredients include easy trading of assets, cheap and easy money, rising speculative fervor and an appealing narrative.

Avalara (AVLR) reported results after the close yesterday that handily beat expectations on virtually all metrics. Q4 revenue was up 35% to $144.8 million (beating by $11.4 million) while adjusted EPS of $0.09 beat by $0.15. Billings of $167 million were up 38%. Adjusted gross margin increased from 71% to 74% and free cash flow increased from $14.2 million to $28.6 million.

The top five holdings of this utility ETF are: NextEra Energy Inc (NEE, 18.28% of assets); Duke Energy Corp (DUK, 7.98%), Southern Co (SO, 7.18%), Dominion Energy Inc (D, 6.86%), and Exelon Corp (EXC, 4.68%). The ETF has a current dividend yield of 3.17%, paid quarterly.

As I’ve explained previously, I’ve become increasingly concerned that the blistering advance of the marijuana sector had progressed so far so fast that it was getting increasingly ripe for a correction. But as long as the stocks were advancing, I was happy to stay fully invested.

Lyft (LYFT) reported Q4 2020 earnings after the close yesterday and the results were better than expected even though the numbers look just terrible (thanks pandemic!). Revenue fell 44% to $570 million (but beat expectations by $9 million) while adjusted EPS was -$0.58, $0.05 less than the year ago quarter. We knew getting into this stock that the numbers would be bad and that we were looking to buy into a recovery before it gained too much momentum. That thesis appears to be playing out.

This infrastructure company is expected to report earnings per share of $0.41 on revenues of $457.6 million, for its fourth quarter.

Nuance (NUAN) reported Q1 fiscal 2021 results yesterday that beat expectations on the top and bottom lines. That said, the numbers don’t look that great due to a large, non-strategic coding government contract that did not renew (management previously disclosed on the Q4 fiscal 2020 conference call) and the ongoing transition to a subscription model.

This home builder just reported a great quarter—beating on the top and bottom lines. The shares have a current annual dividend yield of 2.48%, paid quarterly.

Cerence (CRNC) reported this morning that Q1 revenue was up 22.6% to $95 million (beating by $7.1 million) while adjusted EPS of $0.59 was up 103% (beating by $0.08). There are a lot of initiatives at Cerence and management had a lot to say, but I’ll just mention a few things that jumped out at me.

In the past 30 days, 21 analysts have increased their EPS projections for this data storage company. The shares have a current dividend yield of 3.97%, paid quarterly.

As earnings season gets into gear we have a few updates on positions that have reported this week. Stepping back and looking holistically at our portfolio, which currently has 34 positions, we’re going to view earnings season as an opportunity to prune our portfolio a little. Essentially, we want to use the current market’s strength to our advantage to lock in some profits, exit stories that aren’t super-inspiring at the moment, and focus on the highest potential names.

This steelmaker’s shares were just upgraded to ‘Overweight’ at JP Morgan.

To follow up on today’s issue and new recommendation of Fisker, Inc.

Our Cabot Top Ten Trader’s market timing system consists of two parts—one based on the action of three select, growth-oriented market indexes, and the other based on the action of the fast-moving stocks Cabot Top Ten features.