April 17, 2025

Note: Due to the Good Friday market holiday, Cabot Turnaround Letter’s Friday update is being sent a day early. Next week’s update will be published as normally scheduled, on Friday, April 25.

In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including Agnico Eagle Mines (AEM), Alcoa (AA), Kenvue (KVUE), Pan American Silver (PAAS), Sirius XM Holdings (SIRI) and Toast (TOST).

Precious metals miners Agnico Eagle Mines (AEM) and Pan American Silver (PAAS) continue to lead the portfolio after making yet another series of new highs this week.

Strong earnings, with a mixed outlook, were just reported by Alcoa (AA).

Comments on Portfolio Holdings

It was a fairly quiet week for most stocks, with the exception being the noteworthy strength in the precious metals sector, which favored our holdings in Agnico Eagle Mines (AEM) and Pan American Silver (PAAS), both of which shot up to new highs on safety-related demand.

On that score, analysts at BMO Capital Markets initiated coverage on Agnico Eagle Mines (AEM) this week, assigning the stock an Outperform rating and setting a share price target of 131. The firm based its optimism for Agnico on the company’s ability to generate “significant free cash flow (FCF) due to reliable and high-margin production in secure jurisdictions.” (Agnico generated strong FCF of $2.14 billion over the past 12 months, with an excellent gross profit margin of 63%.)

BMO further underscored Agnico’s strong production profile and project pipeline, as well as its future high internal rate of return (IRR) opportunities, including the Malartic mine, the San Nicolas project and the Hope Bay property—all of which BMO expects will improve Agnico’s growth prospects.

“We believe an investment in Agnico gives reliable and high margin ounces in safe jurisdictions, driving significant free cash flow,” BMO said in a research note. “This is a gold mining equity that we think works.”

In another major upgrade, analysts at Citi raised Agnico’s share price target to 140 while maintaining a Buy rating, based on stable first-quarter expectations and higher gold prices. When Agnico reports Q1 results next Thursday, Citi forecasts an EBITDA of $1 billion and a per-share earnings of $1.40 (up 84% year-on-year if realized), along with significant free cash flow yield.

AEM maintains a Hold rating in our portfolio.

Alcoa (AA) announced its first-quarter financial results when the market closed on Wednesday. The strong overall results included a significant sequential improvement in profitability despite facing new tariff challenges.

The aluminum producer posted revenue of $3.4 billion, a 30% improvement from a year ago, but it missed estimates by 3%. However, earnings of $2.15 a share beat estimates by a whopping 81 cents and were significantly ahead of the year-ago per-share loss. Adjusted EBITDA excluding special items was $855 million, a sequential increase of 26%, primarily due to higher aluminum prices.

Alcoa’s realized primary aluminum price increased by $207 to $3,213 per metric ton, while the realized alumina price decreased by $61 to $575 per metric ton. This pricing dynamic, along with lower intersegment profit elimination, drove the conspicuous earnings improvement.

Management cited a strong aluminum market for the mostly sanguine Q1 results, allowing the firm to deliver on its strategic goals despite economic uncertainty. Looking ahead, the firm said it expects 2025 total aluminum segment production and shipments to remain unchanged from its prior projection, ranging between 2.3 and 2.5 million metric tons, and between 2.6 and 2.8 million metric tons, respectively.

Additionally, Alcoa expects an operational tax benefit of approximately $50 million to $60 million for Q2, primarily stemming from the utilization of Alumina Limited’s net operating loss (NOL) carryforwards, which Alcoa acquired in 2024. The expected operational tax benefit for Q2 reflects Alcoa’s strategic tax planning and utilization of available tax credits and NOLs, contributing positively to the company’s financial position.

In terms of the balance sheet, the firm maintained a strong cash position and finished Q1 with $1.2 billion in cash, up 9% from Q4. The outfit further generated positive cash from operations of $75 million despite a significant working capital build. Management is targeting a cash balance of $1.5 billion moving forward, along with a significant reduction in net debt. Also, within the second quarter, alumina segment adjusted EBITDA is expected to maintain the strong level of performance delivered in this year’s first quarter.

Optimism aside, the company said the implementation of a 25% tariff on Canadian aluminum imports to the U.S. in March 2025 represents a “significant challenge” for Alcoa going forward. It estimates this will have an estimated $90 million annual negative impact on its business, as approximately 70% of its aluminum produced in Canada is destined for U.S. customers. (Canada is the most strategic supplier of primary aluminum to the U.S.)

Potentially serving as a counterbalance to this, however, Alcoa also noted that with current alumina prices around $329 per metric ton and bauxite costs higher than normal, over 80% of Chinese refineries are currently unprofitable, which could lead to production curtailments and provide price support for aluminum prices going forward.

AA maintains a Hold rating in the portfolio.

Kenvue (KVUE) has just announced a five-year collaborative agreement with Microsoft (MSFT) with the stated aim of establishing “a strong foundation for transforming digital operations through advanced Artificial Intelligence technologies.”

These technologies include machine-enabled collaboration, predictive analytics, smart agents, digital twins and generative AI, with Kenvue planning to scale its use of Microsoft Azure to capitalize on its wide range of services.

Additionally, Kenvue aims to set new standards for innovation across commercial, operations and technology practices to improve customer experiences, increase productivity and sustain growth.

KVUE remains a Buy in the portfolio.

Earlier this week, BMO Capital Markets initiated coverage of Pan American Silver (PAAS) with a Market Perform rating. BMO analysts highlighted the company’s industry-leading management, along with multiple opportunities for value creation within its gold and silver mining project portfolio.

In particular, BMO sees Pan American having the potential to benefit if it successfully resumes production at its Guatemala-based Escobal mine, which is one of the world’s largest silver mines. While no timeline has been provided in terms of the mine’s return to production, a restart is regarded as a “significant potential catalyst for the company,” according to BMO, with a possible startup later this year or in early 2026.

Finally, BMO emphasized Pan American’s potential to enhance shareholder value through strategic improvements to current operations, partnership transactions and the possible sale of additional assets (it recently completed the divestment of its La Arena mining asset in Peru), all of which are being actively considered by the firm’s management.

As an update on our position in PAAS, after its recent 17% rally since initiating a Buy on the stock in early February, I recommend that we book a one-quarter profit today. I’m also assigning a Hold rating for the remainder of our trading position.

In company news, Sirius XM Holdings (SIRI) declared a quarterly dividend of 27 cents a share this week, which is in line with the previous dividend. The dividend, with a forward yield of 5.4%, is payable on May 28 to shareholders of record May 9.

SIRI maintains a Buy rating in our portfolio.

Restaurant payment systems provider Toast (TOST) announced on Monday that it has partnered with Dine Brands Global (DIN) to implement its technology across Applebee’s restaurants across the U.S. The deployment includes Toast point-of-sale terminals, Toast Go handheld devices, Kitchen Display Systems, and the Restaurant Management Suite Enterprise.

Toast said the initiative aims to enhance operational flexibility, improve labor efficiency and elevate the guest experience at Applebee’s, which is one of the nation’s largest casual dining chains by revenue.

The partnership with Applebee’s is seen marking a significant milestone for Toast as it grows its footprint in large-scale food service operations. By integrating its full suite of technology into Applebee’s locations, analysts believe Toast has reinforced its position as a leader in enterprise-level solutions for the casual dining sector.

TOST maintains a Buy rating in the portfolio.

RATINGS CHANGES: I recommend selling a one-quarter position in Pan American Silver (PAAS) after its recent 17% rally. The remainder of the shares are now rated Hold.

NEW POSITIONS: None this week.

Thursday, April 17, 2025 Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 18 minutes and covers:

• Stocks were mostly quiet this week as investors digest recent gains, but market internals remain weak as the bottoming process continues.
• Consumer staples providers like Dollar Tree (DLTR) and Dollar General (DG) look promising.
• Updates on several portfolio holdings, including the latest developments for restaurant technology provider Toast (TOST).
• Final note
  
  • I recommend taking a partial profit in Pan American Silver (PAAS) today.

Market Outlook

In contrast to the excitement of last week, the last few days have witnessed a mostly quiet market backdrop as investors seemed less interested in snapping up bargains, with some evidence of short-term profit taking at mid-week.

And after shrinking for the last few days, new 52-week lows on the NYSE began expanding again and, by Wednesday, were back up to above 40 in a sign that internal weakness is still a problem.

That said, it’s clear the market is trying to find a bottom, and I think we’ll probably have a confirmed low by early May, if not sooner. It’s normal for the major indexes to test their lows before launching an extended rally, and that can take the form of a double bottom, a higher low or—in rarer cases—a lower low. I’m not sure which of the three permutations we’ll see once the bottoming process concludes, but I do see a stronger environment heading into May.

To reiterate a point I made back in March, the renowned market statistician Jason Goepfert of Sentiment Trader pointed out that the S&P 500 recently had two straight days with 90% advancing stocks after hitting a six-month low. Whenever this has happened going back to 1933, the S&P has been higher 12 months later in almost every instance, with 100% accuracy in forecasting the market being higher two months later and 95% accuracy in being higher three months later.

Thus, if the statistical pattern repeats once again this time, we can expect to see stocks in the aggregate higher in May and (likely) June, then higher on a year-over-year basis in December. My colleague here at Cabot, Jacob Mintz of Cabot Options Trader fame, observed this week that with the way hedge funds and institutional investors are currently positioned, and if there is a worthwhile catalyst at some point in the next few weeks, we could potentially see a “rip-your-face-off rally.” I tend to agree with that assessment, and if it happens, my best guess is that the May-June period would provide the ideal window for it.

However, it should also be pointed out that a stronger May-June period would also seemingly contradict the old adage, “Sell in May and go away.” My answer to this objection is that there are reasons for believing this year’s spring season will buck this trend—not the least of which is that the market has already had a significant period of underperformance and is coming off a sold-out technical condition.

Moreover, sectors that are less economically sensitive, like consumer staples and health care stocks, tend to outperform the general market beginning in May. And perhaps not surprisingly, this is where much of the relative strength has been seen of late.

Within the consumer staples provision, where I’m seeing the most strength right now is in stocks that should perform well in a weaker (or uncertain) economic environment, specifically, Dollar General (DG) and Dollar Tree (DLTR), which I highlighted here a couple of weeks ago.

Of the two, Dollar Tree is where I see the most potential as a turnaround. The firm operates more than 15,500 discount stores across the U.S. and Canada, with more than 90% of the items on the shelves costing $1.25. In the present inflationary environment, the store’s price points are attractive for cost-conscious shoppers.

A major catalyst for the store’s ongoing turnaround efforts is that it just removed the proverbial albatross around its neck by shedding the Family Dollar brand it acquired in 2015, a deal that several analysts have described as a “disastrous marriage.” By selling Family Dollar to Brigade Capital Management and Macellum Capital Management for around $1 billion, Dollar Tree can now focus on its core brand while avoiding the overhang caused by the ill-timed merger.

Dollar Tree has also recently had a management shakeup, with a new CEO, Michael Creedon (formerly of Advance Auto Parts, Tyco and ADT Security), taking the helm in December and a new CFO, Stewart Glendinning (previously of Tyson Foods), resuming duties in March. Creedon’s turnaround strategy involves refocusing on the core Dollar Tree brand, expanding its multi-price assortment, implementing store upgrades and exploring new store openings, including conversions of former 99 Cents Only locations.

Last week, analysts at Citi Research raised their rating on Dollar Tree from Neutral to Buy, calling the discount retailer a “dark horse winner in a new tariff world.” More specifically, the Citi analysts observed, “While Dollar Tree was previously trying to manage China tariffs within its current pricing architecture, this higher tariff regime gives them further cover to expand price points from $1.25 to $1.50-$1.70,” allowing for margin expansion.

Analysts see the company’s earnings trend bottoming out by the middle of the current fiscal year and turning around in the second half as the strategic initiatives presumably begin to gain traction.

Speaking of tariffs, Dollar General is another discount retailer that’s well positioned to thrive in the current tariff regime. The company operates 20,000 stores across North America and is one of the largest discount retailers in the U.S., with more than 80% of its sales coming from essential household items (including food) that can be considered relatively recession-proof.

And as the store sources most of its goods domestically and its sales mix is tilted towards non-discretionary consumer staples, the tariffs are disproportionately impacting the firm’s competitors that rely heavily on imports. This should consequently allow Dollar General to expand its market share and improve its competitive positioning going forward at the expense of its competition. On that score, Wall Street sees several years of 10% to 15% bottom-line growth ahead for the firm.

Beyond the consumer staples, the macro environment also favors the traditional safe haven of gold miners, a growing number of which are in the relative strength camp, including Agnico-Eagle Mines (AEM) and Barrick Gold (GOLD). Our exposure to the gold and silver miners has been a useful hedge against the recent market turbulence, and I believe this industry group will end up having a strong overall year ahead as safety demand looks to persist into the foreseeable future given the combined headwinds of inflation, tariff uncertainty and geopolitical risk.

Finally, I would reiterate that the recent market sell-off was entirely the result of a news-induced panic, which should make a recovery, once it gains traction, fairly swiftly. As previously noted, news-driven panics are historically quick to recover their losses since it’s easy for the market to diagnose the problem, while policy makers should have no trouble addressing the underlying issues involved.

Please know that while I don’t yet personally own shares of all Cabot Turnaround Letter recommended stocks, this will materially change in the coming weeks as I become fully integrated as your new chief analyst.

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at cdroke@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

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