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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 27, 2023

This week, we comment on earnings from Dow (DOW), General Electric (GE), Nokia (NOK) and Xerox Holdings (XRX). Next week brings reports from Vodafone (VOD), Polaris Industries (PII), M/I Homes (MHO), Meta Platforms (META), Western Digital (WDC) and Janus Henderson Group (JHG).

We also include the Catalyst Report and a summary of the February 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 the February edition of the Cabot Turnaround Letter, we searched through the rubble for busted IPOs and found four that look worthwhile, including Core and Main (CNM), Hayward Holdings (HAYW), Petco Health & Wellness (WOOF) and Sun Country Airlines (SNCY).

We also offer a closer look at our research process. We used the approaching opportunity in shares of Fidelity National Information Services (FIS) to illustrate how we identify and qualify the multitude of stocks that attract our attention.

Our feature recommendation this month is the remarkably out-of-favor European conglomerate Bayer AG (BAYRY). The company’s crop protection, pharmaceutical and consumer health businesses are relatively strong, but investors are avoiding the shares due to uncertain liabilities from its glyphosate (Roundup) and PCB products and the company’s ineffective leadership and conglomerate structure. We believe that the discounted share price, combined with a growing tide of activist investors as well as encouraging progress on liability issues, offers considerable turnaround opportunity for patient investors.

Earnings updates:

Capital One Financial (COF) - Capital One is one of the nation’s largest banks, with over $440 billion in assets and 775 branches. Reflecting its roots, Capital One’s loan book is about 40% credit card loans, as it is the third largest issuer of Visa and Mastercard credit cards. The balance of its loans comprises auto loans (27%) and commercial loans (32%). The bank exited the single-family mortgage business in 2017. As investors worry that a recession would sharply increase the bank’s credit losses and have other negative effects on profits, its shares have slid nearly 50% and now trade at a price unchanged from five years ago. While a recession would weigh on Capital One’s near-term outlook, the bank’s robust capital position, large credit reserves and strong underlying profitability will allow it to endure to a prosperous post-recession future. For patient investors willing to look across the valley of a recession, Capital One shares look like a true contrarian bargain.

Capital One reported a respectable quarter that was better than feared. Revenues rose 11% and were in line with estimates. Adjusted earnings of $2.82/share fell 48% from a year ago and were 27% below estimates. The company’s outlook for 2023 was tempered and reasonable, with minimal improvements in revenues and expenses but likely continued elevated credit costs. COF shares jumped on Wednesday despite the sloppy report. The stock trades at 135% of tangible book value of $86.11 and 8x estimated 2023 per share earnings.

In the quarter, revenues improved as higher loan balances combined with rising interest rates to produce a 12% increase in net interest income. Fee income, which is only a quarter of the size of net interest income, rose 10%. Expenses increased 9% due to increases in both marketing and operating expenses. The bank has been boosting its marketing this year to increase its customer retention and growth as competition heats up. As such, Capital One’s pre-credit operating profits increased by 15% from a year ago.

While pre-credit profits were strong, the huge increase in credit costs dragged down all-in operating profits. Compared to the year-ago $400 million provision for credit losses, this quarter’s provision was $2.4 billion. About $1.4 billion of the provision was due to elevated charge-offs of current bad loans, with the remaining $1.0 billion due to increasing its reserves against future bad loans. We view these increases as a return to normal credit costs. However, the pace of the return is faster than we anticipated. We see credit costs continuing to rise but not high enough to produce anything worse than mild declines in earnings.

Capital One is girding for the elevated credit costs. Credit reserves, now at 4.24% of all loans, rose from 4.12% a year ago and 4.02% in the third quarter. We expect to see more reserve additions in 2023. The bank’s capital is sturdy at 12.5%, bolstered by decent earnings and an ongoing curtailment of share buybacks. Overall, the bank is managing its balance sheet properly and is likely to shepherd its capital until it is confident of when credit normalization peaks.

Dow (DOW) – As the world’s largest producer of ethylene and polyethylene, the most common plastics, as well as selected specialty products, Dow is a cyclical company whose shares have tumbled on fears of a recession. However, the company is well-managed, has a very strong balance sheet, generates sizeable profits and free cash flow, and pays a readily sustainable dividend. Dow is likely to remain profitable and healthy in economic conditions other than a deep and prolonged recession. At our Recommendation date, the shares traded at an overly discounted 4.8x EV/EBITDA on recession-minded 2023 earnings estimates and offered a dividend yield above 6%.

Dow reported a reasonable quarter given the weakened global economy and what may have been over-ordering and hoarding by industrial customers when supplies were short a year ago. Revenues of $12 billion fell 17% from a year ago and were about 2% below estimates. Adjusted operating earnings of $0.46/share fell 79% and were about 19% below estimates. The outlook was mildly encouraging.

Overall, Dow remains well-managed, well-capitalized and well-positioned for an eventual economic recovery while having reasonably defensive traits barring a sharp decline in energy prices and pricing spreads which we see as unlikely.

In the quarter, the revenue decline comprised a 5% price decline, 8% volume decline and 4% currency drag due to the strong dollar. Economic weakness and destocking by customers drove the weaker volumes. Dow has exposure to a broad range of intermediate/end markets, so the declines were not particularly surprising. Operating profits fell sharply due to the fixed cost nature of Dow’s operations and the weaker pricing which is generally a straight hit to profits. During the quarter, the company continued to control what it can: costs, production volumes and production mix. For 2023, Dow said these efforts would lead to $1 billion in savings.

Fourth-quarter free cash flow was $1.5 billion. This flow was sharply higher than earnings, so it appears to have been boosted by a strong contribution from working capital as lower production and demand allowed Dow to cut its inventory and receivables. Just over a third of the free cash flow was returned to shareholders in dividends and share repurchases.

The balance sheet remains sturdy, with $10 billion of net debt. Dow’s pension underfunding was headed toward zero but it still has a shortfall of $2.5 billion.

General Electric (GE) – Led by impressive new CEO Lawrence Culp, GE finally appears to be righting its previously severely damaged businesses. Key priorities include much better execution and an emphasis on cash flow and debt reduction. Following the spin-off of 80% of GE Healthcare (GEHC) in January 2023, General Electric now comprises GE Aerospace (commercial and military jet engines) and GE Vernova, which includes the Renewables segment (on-shore and offshore wind power) and the Power segment (gas turbines, coal, nuclear). GE Aerospace and GE Vernova will separate in 2024.

GE reported a mixed fourth quarter. GE Aerospace results were strong, while within GE Vernova, GE Power had good results while GE Renewables continued to be sloppy. Total revenues of $25.4 billion rose 15% but were about 1% below estimates. Adjusted earnings of $1.24/share increased 51% from a year ago and were 7% above estimates. Guidance was encouraging but is difficult to rely on due to the volatility in GE’s product markets. Overall, we are still supportive of the GE story.

GE Aerospace is performing well, particularly as the commercial jet cycle rebounds after the pandemic and as military jet demand is increasing. Organic revenues and new orders both rose a robust 26%. Segment profits rose 16% but the margin eroded modestly, much due to higher volumes of engine shipments. The jet engine business is a razor/razor blade business: lower-margin engine sales essentially ensure years of high-margin, follow-on services. Free cash flow for the year was a healthy $4.9 billion.

GE Vernova’s two segments are headed in different directions. GE Power is prospering. Organic revenues rose 12% and orders rose 26%. Segment profits more than doubled, which brings the profit margin to an acceptable 14.3% compared to a sub-par 7.2% a year ago. GE Renewable Energy is ailing. Organic revenues fell 13%, although this partly was due to a surge a year ago. This business is a chronic money-loser: the quarterly loss of $(435) million and the full-year loss of $(2.3 billion) accelerated from a year ago. This segment produced a negative (16.8%) margin for the year.

The company’s 2023 outlook, excluding GE Healthcare, calls for 8-9% organic revenue growth which is an acceleration from the 6% pace in 2022. Adjusted earnings were guided to $1.60-$2.00/share (we expect the consensus estimate will migrate to the $1.80 midpoint), up sharply from $0.77/share for 2022. Free cash flow was guided to $3.4-$4.2 billion ($3.8 billion midpoint). Based on the guidance, GE Aerospace will continue to prosper while GE Vernova will continue to struggle. GE will provide more details at its March 9 Investor Conference.

The overall company still has a hefty debt burden following the spin-off. We worry only modestly about this debt, as long as GE continues to generate strong free cash flow and stays focused on working its debt lower. Total GE debt excluding GE Healthcare but including GE preferred stock is $28 billion, or about 5.3x EBITDA. This is partly offset by $16 billion in cash, such that the net debt is about 2.4x. GE also provided metrics used by credit rating agencies – this approach shows 4.0x leverage – but we consider this metric less relevant as we disagree with its treatment of pension and lease liabilities.

GE still has a long way to go to convince investors that it has fully righted its ship, including its earnings profile, cash production capabilities and balance sheet.

Nokia (NOK) – Initially recommended in 2015, Nokia has struggled for years to regain its competitiveness. New CEO Pekka Lundmark (March 2020) is finally getting the company back into the game.

Nokia reported a strong quarter and provided encouraging guidance for 2023. Demand was robust, particularly in India where telecom companies are aggressively rolling out 5G mobile service. Nokia Technologies, which houses Nokia’s patents that are licensed to others, saw an 85% jump in revenues and a doubling of profits, assuaging concerns that arose in the third quarter. The company generated a modest amount of free cash flow but guided to as much as a doubling in 2023. For 2023, revenue was guided to an increase of 2-8%, with incremental operating margin expansion of perhaps 25 basis points leading to around a 6% increase in operating profits. Slow growth in revenues, profits and free cash flow at these guided levels would be enough to boost the share price considerably.

Nokia raised its dividend by €0.01 per year, or about 9%, to €0.12, to be paid quarterly. The company is also continuing its €300 million buyback program to be completed this calendar year.

In the quarter, revenues of €7.4 billion rose by 11% and beat the consensus estimate by about 5% (all on a constant currency basis). Adjusted earnings of €0.16/share rose 23% from a year ago and were 23% above estimates that called for flat earnings.

Gross and operating margins expanded, helped in part by additional very high-margin patent revenue, partly offset by higher overhead and research costs. The company is executing well as illustrated by its 15.5% operating profit margin.

The balance sheet remains robust, with net cash (in excess of debt) increasing an incremental €112 million. We are unimpressed with Nokia’s free cash flow. For the year, this key metric was only €800 million, or about 27% of operating profits. Over €1.8 billion was absorbed by working capital – understandable only partly because they are building inventory in advance of stronger sales. And, working capital would have been worse had the company not resorted to the appalling practice of selling receivables at a discount (the company has plenty of cash to cover the carry). The company guided 2023 free cash flow to an improved 20-50% conversion, but this is still too low. Nokia said that 2024 free cash flow would be “significantly stronger” and guided toward a long-term conversion target of 55% to 85%. For now, we will resign ourselves to waiting patiently.

Xerox Holdings (XRX) – While the near-term outlook remains clouded, as office workers remain in partial work-from-home mode, we believe the company’s revenue and cash flow will recover. Investors underestimate Xerox’s value due to its zero-growth prospects, but the company’s hefty free cash flow has considerable value. The balance sheet is strong, new and capable leadership is working to drive shareholder value higher, and its generous dividend looks reliable.

Xerox reported improved results, reflecting the increase in workers headed back to the office. Revenues rose 14% ex-currency and were 2% above estimates, driven by a 49% increase in equipment sales and decent growth in services (+2%) and supplies (+14%). Expenses remained under control and the adjusted operating margin (9.2%) improved to the highest level by far in the past eight quarters. Adjusted net income of $0.89/share increased from $0.55 a year ago and was nearly double the estimates.

Guidance for 2023 calls for flat to down revenues and an incremental improvement in adjusted operating margin (to “at least 4.7%,” compared to 3.9% in 2022). Free cash flow was guided to “at least $500 million.” Despite our view that the guidance was uninspiring, it was better than the consensus. Xerox’s fundamentals are recovering yet the shares discount a dismal future. The dividend remains well-covered and produces a 5.7% yield.

The effect of workers returning to the office is clear although much-delayed from our initial expectations, and this continues to drive our interest in the Xerox story. Equipment sales are surging, and eventually, this will lead to more post-sale revenues for maintenance and supplies.

We’re surprised at the weak revenue and profit guidance. With more workers returning, we would expect more sales. But Xerox’s management said they are worried about an economic slowdown. However, they may have been more motivated by setting low expectations after a difficult few years. Also, better component supply conditions have allowed Xerox to work down its backlog (it fell 43% from the third quarter), which removes a temporary pent-up demand tailwind.

Xerox’s lease financing segment, with the awful name of “FITTLE,” continues to advance its strategy of financing Xerox and non-Xerox third-party leases. We like the financing partnership with HPS Investment Partners, a well-capitalized and well-managed investment firm with $95 billion in assets, but we wonder if HPS is getting the better end of the agreement. In the quarter, new lease originations rose 40%. We think eventually this segment will be sold or spun off.

Debt excluding FITTLE debt remains below the cash balance, and the maturity profile shows a relatively low and steady series of annual maturities over the next five years. The company continues to produce weak free cash flow, but much of this appears due to weak operating results and drains from working capital. We would like to see more color on the operating cash flows fully separated from the FITTLE cash flows – beyond the single data point in the slide deck.

Friday, January 27, 2023, 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 14½ minutes and covers:

  • Earnings
    • Dow (DOW), General Electric (GE), Nokia (NOK) and Xerox Holdings (XRX).
  • Comments on other recommended companies:
    • Western Digital (WDC) and Toshiba (TOSYY) – More chatter about a Western Ditigal-Kioxia merger
    • Walgreens Boots Alliance (WBA) – may sell its pharmacy automation ops for as much as $2 billion.
    • Newell Brands (NWL) – Announced an operational restructuring.
    • Goodyear Tire & Rubber (GT) – More investigations over a faulty tire model.
    • Kaman (KAMN) – ending production of the K-Max helicopter

The Catalyst Report

January saw 45 catalysts, with a good mix of new CEOs, acquisitions and activist activity. Bayer AG, one of our recommended stocks, is included in this month’s report.

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.

You can access our Catalyst Report here.

The following catalyst-driven stocks look interesting:

7 & i Holdings

Seven & I Holdings Co, Ltd. (SVNDY) $41.4 billion market cap – This Japanese company is a retail store conglomerate that owns the 7-Eleven business. The company is undervalued and poorly managed, leading activist investor Value Act Capital to build a 4.4% stake to exert pressure for a corporate break-up.



Toyota Motors (TM) $237 billion market cap – Shares of this company are at the same level as in 2007, over 15 years ago. Akio Toyoda, the company’s well-regarded CEO and grandson of the founder, is stepping down (to become chairman). He has been an advocate of a gradual migration to electric vehicles rather than an aggressive change-over but acknowledged that a younger generation needs to take the reins. Perhaps incoming CEO Koji Sato, 53, can re-ignite Toyota’s fortunes.

Market CapRecommendationSymbolRec. IssuePrice at Rec.1/26/23Current YieldRating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.18 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.59 - Buy (20)
Small capDril-QuipDRQMay 202128.28 30.02 - Buy (44)
Small capZimVieZIMVApr 202223.00 8.87 - Buy (32)
Mid capMattelMATMay 201528.43 20.30 - Buy (38)
Mid capConduentCNDTFeb 201714.96 4.83 - Buy (9)
Mid capAdient plcADNTOct 201839.77 42.15 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 17.175.8%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.31 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 11.644.1%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 30.323.7%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 47.54 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 23.893.3%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 14.266.6%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 37.461.5%Buy (93)
Mid capBrookfield Asset MgtBAMSpin-offna 32.05 - Unrated
Mid capPolarisPIIFeb 2022105.78 106.46 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 11.52 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 58.32 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 25.656.1%Buy (67)
Mid capESAB CorpESABJul 202245.64 56.58 - Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 27.15 - Buy (35)
Large capGeneral ElectricGEJul 2007304.96 81.140.4%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.811.9%Buy (12)
Large capMacy’sMJul 201633.61 23.472.7%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 17.386.0%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 11.533.8%Buy (16)
Large capNewell BrandsNWLJun 201824.78 15.825.8%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.468.9%Buy (32)
Large capMolson CoorsTAPJul 201954.96 52.772.9%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 310.95 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 45.812.6%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 43.76 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 13.88 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 36.505.2%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 17.414.4%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 15.00 - Buy (20)
Large capDowDOWOct 202243.90 58.124.8%Buy (60)
Large capCapital One FinancialCOFNov 202296.25 116.072.1%Buy (150)
Large capMeta PlatformsMETA Jan 2023118.04 147.30 - Buy (180)
Large capBayer AGBAYRYFeb 202315.41 15.353.5%Buy (180)

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at or to our friendly customer support team at 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.

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.