In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including Alcoa (AA), Atlassian (TEAM), Fidelity National Services (FIS), Paramount Global (PARA) and Starbucks (SBUX).
The famous January Barometer projects a strong overall performance for the broad market this year, despite the lack of a Santa Claus rally.
However, statistics suggest February could be the weakest month of the year for stocks, with Q3 also likely to underperform.
Energy and agriculture stocks are positioned for strength in 2025, with potential turnarounds in firms that have exposure to natural gas and renewables.
Comments on Portfolio Holdings
Although shares of Alcoa (AA) have been under some pressure lately, the stock got some good news this week after Bloomberg reported the European Union is preparing to propose a phased ban on imports of Russian aluminum as part of a broad package of sanctions ahead of the third anniversary of Russia’s invasion of Ukraine.
Benchmark aluminum futures on the London Metals Exchange (LME) rose 1% in response to the news, with analysts predicting the sanctions will increase LME prices even further if they are enacted.
According to analysts at ING, EU import volumes have declined in the last two years, with European buyers self-sanctioning since the Russia/Ukraine conflict began and importing just over 320,000 tons of unwrought Russian aluminum in the first 11 months of 2024, which accounts for around 6% of its total primary aluminum imports. AA retains a Hold rating in the portfolio.
Atlassian (TEAM) reported its fiscal Q2 (ended in December) earnings after the market closed on Thursday, which featured decisive beats on both the top and bottom lines. Total revenue of $1.3 billion jumped 22% from a year ago, boosted by a 30% increase in subscription sales, while earnings of 96 cents beat estimates by 20 cents.
Another highlight of the quarter was the firm’s surpassing of the $5 billion in annual run rate revenue, thanks largely to its strategic investments in AI and enterprise expansion, as well as growing customer adoption of Atlassian’s system of work platform.
More than one million monthly active users are now using the firm’s Atlassian Intelligence features, leading to AI interactions increasing more than 25 times year-over-year. Meanwhile, premium and enterprise editions saw adoption growth of over 40% year-over-year, supported by those features.
Looking ahead, management reiterated its long-term target of $10 billion in annual revenue to be obtainable by or before 2030, supported by strong enterprise trends and the increasing adoption of premium cloud offerings. It further guided for growth in cloud revenue from data center migrations, which are expected to contribute mid-to-high single digits to annual revenue growth over the next three years. The stock maintains a Hold rating in the portfolio.
Payment technology provider Fidelity National Services (FIS) declared a 40-cent per share quarterly dividend increase, amounting to an 11% bump, on Thursday. The yield is currently 1.8%, and the dividend is payable to shareholders of record March 11. The next earnings report is due out Tuesday, February 11 before the market opens. The shares remain a Hold rating in the portfolio.
A group of investors calling themselves Project Rise is offering $19 a share for Paramount Global’s (PARA) Class B shares, according to a Variety magazine report last Friday, which cited a letter being sent to Paramount’s board. The offer represents a 27% premium to the $15 a share in the prior Skydance deal.
The Project Rise bid for the A shares remains the same as the Skydance deal, and the consortium’s $13.5 billion offer includes $5 billion for restructuring of the debt, according to Variety. Both Skydance and Paramount Global declined to comment to Variety. The stock retains a Buy rating in the portfolio.
More good news for Starbucks (SBUX), which is providing additional evidence of its successful turnaround strategy execution under CEO Brian Niccol. The stock broke out to new 52-week highs this week in the wake of its fiscal Q1 (ended December) report, which showed that while revenue was flat on a year-on-year basis, earnings of 69 cents a share beat estimates by 3%, while the company reported 377 net new store openings in Q1. Additionally, the company said its Starbucks Rewards loyalty program 90-day active members in the U.S. totaled 35 million, up 1% year-over-year and up 2% sequentially.
According to Niccol, while Starbucks is only one quarter into its turnaround strategy, “We’re moving quickly to act on the ‘Back to Starbucks’ [strategic] efforts and we’ve seen a positive response,” adding that, “we believe this is the fundamental change in strategy needed to solve our underlying issues, restore confidence in our brand and return the business to sustainable, long-term growth.”
Analysts weren’t unanimous in their appraisal of Starbucks’ Q1 earnings, but a number of major investment banks were optimistic about the company’s prospects for the year ahead, including TD Cowen, which maintained its Buy rating for the stock, as well as analysts and Bank of America and Morgan Stanley, with most analysts agreeing that the firm’s recent coffee price increases aren’t likely to adversely impact earnings going forward.
The company also announced plans to optimize its menu offerings, resulting in a 30% reduction in total beverage and food items. Starbucks also plans to deploy digital menu boards at its domestic stores and launch a pilot program across 700 of its outlets that examines staffing levels to optimize its baristas’ ability to serve “the world’s finest coffee with a moment of connection.”
As a result of these innovations, Niccol sees the potential to double Starbucks’ store count in the U.S. while optimizing the current store base and renovating some existing locations.
Meanwhile, regarding its ongoing labor issue, the Workers United union representing Starbucks has agreed to bring in an outside mediator to advance ongoing contract negotiations. According to Seeking Alpha, “The coffee chain operator and Workers United noted in a joint statement that they have made progress over the last nine months of bargaining, and are committed to continuing to work together with a mediator’s assistance to navigate complex issues and reach fair contracts.” The stock retains a Buy rating in the portfolio.
RATING CHANGES: None this week.
NEW POSITIONS: Vestis Corp. (VSTS) was initiated as a Buy with a 22 upside target this week.
Friday, January 31, 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 20 minutes and covers:
- Despite higher highs in the Nasdaq in the last few months, a recent spike in new 52-week lows is concerning.
- NYSE stocks are better positioned, however, with particular strength in the industrial sector.
- Quarterly earnings and the latest company-related headlines continue to be mostly supportive for our holdings.
- Final note
- We initiated a Buy rating in North American uniform provider Vestis Corp. (VSTS) in the latest issue of the Turnaround Letter.
Market Outlook
January is nearly in the books and, assuming Friday witnesses no adverse market action, it looks like the S&P 500 will post a net gain for the month. As of January 30, the S&P is up 3% for the month while the Nasdaq 100 is up 2%. The Dow Jones Industrial Average was the big winner, however, with a monthly gain of 6%.
And while the bulls failed to call “on Broad and Wall” during the traditional Santa Claus Rally window in late December/early January, the overall positive tilt for the month suggests the bears may have been sent packing for a while despite their earlier successes. That’s because positive Januarys in the market are historically followed by overall bullish years nearly 90% of the time over the last 45 years, with an average S&P 500 gain of 17%.
That said, and also based on long-term statistics, it’s commonly assumed by investors that post-election years tend to be bearish for stocks. But as Jeffrey Hirsch of Stock Trader’s Almanac has observed, post-election years have notably improved since World War II, and especially since 1985. Over the last 40 years, the Dow’s average gain for post-election years has been a remarkably strong 17%, with eight up years and only two down, making it the best average gain of the four-year presidential cycle over this period and outperforming the pre-election year’s 15% average.
That’s the good news, but the bad news is that while February is in the middle of the so-called “Best Six Months” of the year for stocks, its long-term track record since 1950 isn’t very impressive. In fact, February is ranked sixth in terms of average market performance, with the exception of small-cap stocks, which tend to benefit from the spillover “January Effect.”
As Hirsch points out, the Russell 2000 small-cap index has posted an average 1% gain for February since 1979, while the other major indexes have struggled. Hirsch describes February’s post-election performance for the S&P and Nasdaq as downright “wretched,” and the month ranks a meager tenth for the Dow in post-election years with an average loss of almost 1%. This is particularly true when the incumbent party loses the election, as happened most recently.
However, he adds by way of disclaimer that the last three post-election years of 2013, 2017 and 2021 were up for the major indexes, so perhaps there will once again be an exception to the long-term rule this February. Nevertheless, if we assign greater weight to the long-term evidence, then Hirsch’s research suggests February could end up being the weakest month of the entire year for equities, with August and September also showing notable weakness.
For what it’s worth, he sees the market being up between 8% and 12% for the full year, with pullbacks in Q1 and Q3, with the broad market being bumpier in 2025 than it has been in the last two years. (As an aside, I certainly agree with his assessment on the volatility score.)
Now as far February goes, if indeed the month ahead is fated to be bearish, I would argue the weakness is more likely than not to manifest itself within the tech sector. And the reason for that is because there has been an abnormal show of internal weakness from a key breadth metric for the Nasdaq, namely the new 52-week lows. Between November and January, while many segments of the tech sector rallied to new highs, a growing number of Nasdaq stocks made new lows, which isn’t a normal relationship.
Ideally in an overall bullish environment, new lows should be shrinking while stock prices are making new highs. But instead, what we saw in the fourth quarter was increasing new lows, led by semiconductor and therapeutic stocks.
As one of my favorite market technicians, Tom McCllellan, noted in a recent blog posting: “We saw a similar ramp higher in Nasdaq New Lows back in late 2021, just before the bear market of 2022. This does not mean that we have to get the exact same outcome this time. But it does serve as a warning that things are not acting normally, at least for these data.”
With that in mind, whatever new purchases we might end up making in the coming month will likely be relegated to areas outside of the tech sector—at least until the internal data improve. For now, our focus will primarily be in the stronger-performing NYSE stocks.
The Catalyst Report
In this edition of the Catalyst Report we’ll be focusing mainly on stocks that didn’t quite make the cut for the latest monthly issue of the Turnaround Letter, but which I still consider to be worthy longer-term turnaround candidates. The dominant theme here is the energy sector, with a secondary focus on agriculture.
At the top of the list is CVR Energy (CVI), a Texas-based diversified energy company mainly engaged in the renewable fuels and petroleum refining and marketing business, as well as in the nitrogen fertilizer manufacturing business through its interest in CVR Partners, LP. It’s basically a dual play in two industries that I expect will outperform in 2025, energy and agriculture.
On the ag front, CVR Energy produces nitrogen fertilizers like ammonia and urea ammonium nitrate (also known as UAN solutions), through its subsidiary. This is where I think much of the future strength is likely to come from since grain and oilseed prices are forecast to increase this year based on tighter supplies and potential weather-related challenges. Additionally, analysts see higher demand for ethanol production, which is further expected to contribute to higher demand for fertilizers.
And while CVR isn’t heavily involved in the ethanol production industry, it’s actively exploring the renewable fuels sector through renewable diesel production rather than ethanol. In recent years, the company has converted some of its traditional oil refining assets to produce biodiesel at its Wynnewood refinery in Oklahoma, where the focus is on making renewable diesel from feedstocks like vegetable oils and animal fats, hence the additional connection to agriculture.
The company’s largest shareholder of record is the well-known activist investor Carl Icahn, who owns 66% of the common stock, and in late 2024, he initiated a tender offer to acquire up to an additional 18 million shares which, if fully subscribed, would have increased his ownership to 84%. The offer expired on January 8 with only around 900,000 shares tendered and accepted, which was significantly below the original offer.
However, recent reports further suggest that Icahn has increased his stock holdings in CVR, potentially bringing ownership to well above 70%. This is a key consideration given that Icahn’s heavy presence in other companies with turnaround potential has often resulted in favorable long-term results for investors in those companies.
Analysts aren’t expecting much in the way of sales and earnings for full-year 2024 when CVR releases its Q4 results on February 20. But the consensus estimates that earnings will bottom out and turn the corner in 2025, with a per-share loss for last year projected to jump to an EPS of 12 cents for this year, with earnings significantly accelerating in 2026 and 2027. The stock remains high on my watchlist as we head further into the new year.
Another stock high on my watchlist is Vital Energy (VTLE), an independent energy company that explores and develops oil and natural gas properties in the Permian Basin of West Texas. The company’s share price is down nearly 100% from its price three years ago while per-share earnings have also been trending lower over that time period. But recent developments within the company suggest a successful turnaround is likely.
In September, the company closed its acquisition of Point Energy’s assets in its latest ventures on the M&A front. Strategically, however, Vital Energy has shifted its focus from M&A to organic growth, cost management and debt reduction. This includes a capital expenditure plan of up to $850 million aimed at increasing oil production by approximately 10% from the fourth quarter of 2023 exit rates.
Analysts, moreover, see the potential for Vital to reduce its leverage to around 1.4x by the end of 2025, with further potential for the firm to generate over $500 million in free cash flow by the end of this year.
Additionally, management is shifting away from the Permian Basin and more toward the Delaware Basin of West Texas and southern New Mexico, a highly lucrative oil and gas sub-basin of the Permian. The company’s properties in the Delaware are regarded as having the potential to be highly profitable and therefore a key catalyst to the company’s turnaround prospects. It’s another stock I believe is a worthy addition to the catalyst report, with the possibility it will be added to the portfolio later on.
And finally, while I normally don’t like to focus on utilities, one that recently caught my eye is worthy of inclusion in this report. It’s Northwest Natural Holding (NWN), a provider of natural gas distribution services to residential, commercial and industrial customers primarily in Oregon and Southwest Washington, and it’s regarded as the largest independent natural gas utility in that region. Its diversified business segments also include water and renewable natural gas.
What makes the stock particularly attractive is the stability of its dividend, as it offers a 4.8% dividend yield, with 25 years of consecutive dividend raises and a strong balance sheet. However, the stock is down almost 50% on a five-year basis and is down 30% from its peak price three years ago, with per-share earnings decreasing by 3% annually, in part due to the rising interest rates and a slowing customer growth rate in recent years.
However, Northwest has seen a notable customer growth surge in the past year, with 17,000 gas and water utility connections added in the first nine months of 2024 compared to the comparable year-ago period and achieving a growth rate of 2%.
The firm said its gas utilities segment is on track to earn a “strong return” on its invested capital in the coming quarters, while its water and wastewater utilities segments have witnessed a “robust growth trajectory with both organic and acquisition opportunities.”
Moreover, management sees the potential for long-term earnings per share growth rate of 4% to 6% and believes the longer-term EPS downward trend is in the process of reversing. And while I’m not quite ready to add NWN to the portfolio, I like what I see here and think it’s worth a speculative nibble at the current price level.
You can access our Catalyst Report here.
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.
Portfolio
Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | Current Price * | Current Yield | Total Return | Rating and Price Target |
Small cap | Teladoc Health | TDOC | Dec 2024 | $10 | $ 10.40 | 0.0% | 4.0% | Buy (16) |
Small cap | Fortrea Holdings | FTRE | Jan 2025 | $18.65 | $ 16.75 | 0.0% | -10.0% | Buy (25) |
Small cap | Vestis Corp. | VSTS | Feb 2024 | $16.00 | $ 15.85 | 1.0% | -1.0% | Buy (22) |
Mid cap | Brookfield Reinsurance | BNT | Jan 2022 | $61.30 | $ 62.00 | 0.0% | 1.0% | Hold |
Mid cap | Janus Henderson Group | JHG | Jun 2022 | $27.20 | $ 43.70 | 3.6% | 61.0% | Hold |
Mid cap | Centuri Holdings | CTRI | Oct 2024 | $18.70 | $ 22.70 | 0.0% | 21.0% | Hold |
Mid cap | American Airlines | AAL | Nov 2024 | $13.60 | $ 16.90 | 0.0% | 24.0% | Hold |
Mid cap | Paramount Global | PARA | Dec 2024 | $10.45 | $ 11.00 | 1.8% | 5.0% | Buy (14) |
Mid cap | UiPath | PATH | Jan 2025 | $13.80 | $ 14.60 | 0.0% | 6.0% | Buy (18) |
Large cap | General Electric | GE | Jul 2007 | $195.00 | $ 205.60 | 0.5% | 5.0% | Hold |
Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | $183.00 | $ 472.35 | 0.0% | 158.0% | Hold |
Large cap | Agnico Eagle Mines | AEM | Nov 2023 | $49.80 | $ 94.50 | 1.7% | 90.0% | Hold |
Large cap | Fidelity Natl Info Services | FIS | Dec 2023 | $55.50 | $ 82.10 | 1.8% | 48.0% | Hold |
Large cap | Alcoa Corp. | AA | Oct 2024 | $39.25 | $ 35.50 | 1.1% | -10.0% | Hold |
Large cap | Atlassian Corp. | TEAM | Oct 2024 | $188.50 | $ 267.00 | 0.0% | 42.0% | Hold |
Large cap | Starbucks Corp. | SBUX | Nov 2024 | $99.25 | $ 109.00 | 2.2% | 10.0% | Buy (118) |
Large cap | SLB Ltd. | SLB | Nov 2024 | $44.05 | $ 41.00 | 2.8% | -7.0% | Buy (55) |
Large cap | Toast Inc. | TOST | Dec 2024 | $43.00 | $ 40.30 | 0.0% | -6.0% | Buy (70) |
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