August 2, 2024

In today’s note, we discuss the recent earnings reports from Agnico-Eagle (AEM) and Janus Henderson Group (JHG). Our note also includes the monthly Catalyst Report and a summary of the August edition of the Cabot Turnaround Letter, which was published on Wednesday.

We encourage you to look through the Catalyst Report. This report is a listing of all of the companies that have reported a catalyst in the past month. These catalysts include new CEOs, activist activity, spin-offs and other possible game-changers. We source many of our feature recommendations from this list. You will find it nowhere else on Wall Street.

In this month’s edition of the Cabot Turnaround Letter, outgoing chief analyst Matt Warder focuses on playing one of the biggest turnaround catalysts of 2024, namely a rollover in the inflation cycle. This should dramatically boost gold and mining stock prices going forward—a trend that will only accelerate in the widely anticipated falling interest rate environment.

Our Buy recommendation this month, B2Gold (BTG), is a Canadian gold mining company that has grown from a small exploration outfit to one of the world’s largest gold producers since its inception. The company’s journey is marked by strategic acquisitions, successful exploration, and efficient operations that have positioned it as a major player in the gold mining industry.

Comments on Earnings

Agnico-Eagle (AEM) released Q2 results on Wednesday, with revenue of just over $2 billion increasing 21% from a year ago, while per-share earnings of $1.07 beat estimates by 18%. Analysts seem convinced the sanguine results were good enough to attract new investment funds, which should keep the forward momentum intact for the stock.

More pertinently, a falling interest rate environment bodes extremely well for gold prices, which are the main driver here. Either way, this stock firmly maintains a “Hold” rating in the portfolio, with Agnico shares hitting a fresh new high on Thursday.

Gannett (GCI) saw its Q2 revenue miss estimates and decline 5% this week, while EPS of nine cents beat estimates by 11 cents in what was a mixed quarter. The mixed results were followed by a stock price reaction that saw some initially heavy selling on Thursday but which stabilized by the close with a loss of around 8%, well above the lows for the day.

Encouragingly, Gannett reported year-over-year growth in Adjusted EBITDA and further improvement to same-store revenue trends, and it paid down $24 million in debt during the quarter. We still have a positive total return for Gannett, and for now, we’ll maintain our “Buy” rating.

Goodyear Tire & Rubber (GT) reported Q2 revenue that declined 6% and fell short of expectations despite an earnings beat. Management warned of “weaker underlying trends in the industry” for the second half of the year, augmented by lower tire volume and higher costs.

The stock dropped 16% to a new 52-week low, and while it’s testing a long-term benchmark level in the chart, I think it’s time we cut Goodyear from the portfolio. Accordingly, I’m moving it to a “Sell” as of August 2.

Janus Henderson Group (JHG), a global investment management company focused on publicly traded equities and bonds, released quarterly results on Thursday, with sales that increased 6% and earnings of 85 cents a share beating estimates by 18%. The earnings reaction was favorable with the stock hitting a new high. We’ll maintain our “Buy” rating on JHG.

U.S. Steel (X) financial results were released post-market on Thursday, which saw revenue decline 18% but beat estimates, while earnings of 84 cents a share just barely beat the consensus. The company also just declared a dividend of five cents a share (a 0.5% yield).

As of this writing early Friday, we’ll have to wait and see how the market reacts to the earnings before I can offer any further commentary, which will be forthcoming next week.

Western Digital (WDC) was hit by an earnings-inducted reaction on Thursday, falling 10% but closing at the middle of the day’s trading range on exceptionally heavy trading activity. The selling pressure was prompted by a mixed reaction among analysts despite the fact that Western grew its revenue by 40% from a year ago while easily beating both top- and bottom-line estimates.

Although some analysts think the recovery cycle in the storage and flash industry is in the late innings, others pointed to the likelihood that the early innings of the artificial intelligence boom will come to Western Digital’s rescue in the coming quarters. The company also continues to deliver high margins in the HDD business and remains sold out until the end of the year.

Going forward, revenue growth in the neighborhood of 50% is expected in each of the next two quarters. We think the earnings reaction was overdone and that a positive readjustment phase is likely forthcoming for Western Digital in the coming weeks. We’ll maintain a “Hold” rating.

Western Union (WU) on Tuesday released its second-quarter report which featured a revenue beat, even though sales declined 9% year-on-year, while earnings of 44 cents a share were in line with estimates.

The highlight of the report was a 21% increase in consumer services revenue and a 4% rise in consumer money transfer transactions, but the stock didn’t react well to the report, falling 8% the next day. Revenues are expected to remain stable over the next couple of years, however, and low-single-digit earnings growth is anticipated, so we’ll keep the stock on a leash for now.

RATING CHANGE: Shares of GT fell 16% in the wake of this week’s earnings and are down 30% in the year to date. As such, we are moving this one to SELL.

Friday, August 2, 2024, 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 16 minutes and covers:

• Discussion of the major turnaround categories
• Comments on Catalyst Report stocks
• Comments on earnings
• Elsewhere in the markets
  
  • Macro: focus on retail stocks in view of a falling interest rate environment.
• Final note
  
  • Expect longer-term strength in real estate stocks, with utilities also strong.

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.

The Catalyst Report

There has been lots of investor activism in some promising potential turnaround stocks, including major stakes by Elliott Management and Bill Ackman. Restaurant Brands (QSR), Match Group (MTCH) and Starbucks (SBUX) are among the big-name targets here.

On the management front, high-profile new CEOs for dental implant specialist Envista Holdings (NVST) and apparel retailer Gap Inc. (GPS) are expected to galvanize the turnarounds in the respective companies.

Elsewhere, CVS Health (CVS) is in the early innings of a potentially strong turnaround, while Edwards Lifesciences (EW) has turnaround potential after its massive recent sell-off.

The Catalyst Report is a proprietary monthly report that is unique on Wall Street. It is an extensive listing of companies that have experienced a recent strategic event, such as new leadership, a spin-off transaction, interest from an activist investor, emergence from bankruptcy, and others. An effective catalyst can jump-start a struggling company toward a more prosperous future.

This list is intended to be comprehensive. While not all catalysts are meaningful, some can bring much-needed positive changes to out-of-favor companies.

One highly effective way to use this tool is to pair the names with weak stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. The spreadsheet indicates these companies with an asterisk (*), some of which are highlighted below. Market caps reflect current market prices.

The following catalyst-driven stocks look interesting:

CVS Health (CVS), $79 billion market cap—CVS is currently in the early stages of its turnaround, marked recently by some of the highest capitulation trading volume seen in years. The firm’s turnaround strategy involves driving reliable, diversified and accelerating earnings growth, while also delivering superior care and value to its customers. The company’s first-quarter results missed expectations on both the top and bottom lines, but revenues appear to be stabilizing, especially in certain segments.

Moreover, CVS stands to benefit from the struggles of other nearby competitors. When it reports second-quarter earnings next Wednesday, analysts expect revenue to increase a conservative 3% on both a sequential basis and year-over-year basis, but encouragingly, Wall Street sees gradual revenue growth in the next several quarters to follow.

Edwards Lifesciences (EW), $37.6 billion market cap—The medical device maker recently agreed to sell its Critical Care product group to Becton, Dickinson and Company for $4.2 billion in cash (expected to close later this year).

Management said the firm has made “significant progress” since then as it increases its focus on the structural heart market, potentially becoming a pure player in this high-growth market.

Envista Holdings (NVST), $2.9 billion market cap—The dental implants and orthodontics technology specialist recently announced a new CEO in Paul Keel, which is expected to galvanize a turnaround for the California-based company. More recently, Envista announced a new CFO, Eric Hammes, formerly of Rockwell Automation to further bolster its turnaround strategy.

Gap (GPS), $8.5 billion market cap—Gap is another of our retail group candidates high on the watchlist. The stock is in the middle stage of its turnaround, making it a prime candidate for inclusion in our portfolio.

It has lately benefited from upgrades from some major Wall Street banks, as well as from the successful turnaround strategy of CEO Richard Dickson, formerly of Mattel (MAT), who has introduced trendier styles across the brands while ramping up marketing efforts to attract fastidious shoppers, and the strategy is paying off. Dickson also remains focused on improving cost savings and margins going forward, as well as the stability of revenues.

Match Group (MTCH), $8.82 billion market cap—Activist investor Starboard Value recently took an equity stake in Match Group, the company that owns the popular dating apps Tinder and Hinge. Starboard is pushing for a business turnaround or a potential sale. Starboard is the third to push for changes at Match after Elliott Investment and Anson Funds. (Talks with Elliott led to two additions to Match’s board.) A major Wall Street bank noted that Starboard’s appearance should “spur optimism regarding potential change.”

Restaurant Brands (QSR), $31.5 billion market cap—Activist investor Bill Ackman recently built a sizable stake in the company. The Burger King parent has a stable source of cash flow, redistributing it to shareholders in the form of dividends and share buybacks. Expectations are for earnings growth of 4% for 2024 followed by several years of low-teens percentage growth.

Starbucks (SBUX), $83 billion market cap—America’s favorite coffee chain experienced a vigorous turnaround under interim CEO Howard Schultz, but the stock has struggled in the past year under the new management, essentially returning to its original level when Schultz first took over.

However, there are preliminary signs that another major rebound opportunity lies ahead for Starbucks. Starbucks falls under the Company-Specific Issues category, with the turnaround opportunity likely to emanate from activist intervention. On that front, well-known activist investor Elliott Management has just bought a sizable stake in the company, which bodes well for an eventual turnaround.

We’re not quite ready to place Starbucks in the portfolio, but it merits close watching and will likely soon merit inclusion.

Portfolio

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