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Turnaround Letter
Out-of-Favor Stocks with Real Value

July 21, 2023

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We comment on earnings from Capital One (COF), First Horizon (FHN) and Nokia (NOK). Next week, the deluge starts, with ten companies reporting.

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. A major difference from other banks is its focus on credit card lending, which comprises 40% of total loans. It is the third largest issuer of Visa and Mastercard credit cards. Auto loans (27%) and commercial loans (32%) comprise the balance. Its shares are depressed from worries about a possible recession and, like all banks, its ability to retain deposits at costs that don’t erode its net interest margin. However, the bank is well-managed, has robust capital and credit reserves and strong underlying profitability. For patient investors, Capital One shares look like a true contrarian bargain.

Capital One reported reasonable results that show strong underlying fundamentals are being weighed down/distorted by credit costs. Pre-provision operating earnings – a measure of operating profits before credit costs – rose 16% from a year ago and 7% from the prior quarter, indicating that underlying profits continue to move ahead. However, operating profits after credit costs fell 33% from a year ago, as the provision for credit losses more than doubled. Operating profits after credit costs rose 49% compared to the first quarter, as the second-quarter provision was 11% lower than in the first quarter.

Overall, the business remains solid, but we anticipate that the shares will stay restrained until the credit cycle either peaks or until Capital One becomes excessively reserved for credit losses. The shares trade at 128% of tangible book value of $90.07 and 9.6x depressed 2023 earnings.

In the quarter, revenues rose 9% from a year ago and were about 1% below estimates. Earnings of $3.52/share fell 29% from a year ago but were 9% above estimates. The net interest margin remained relatively steady compared to a year ago and the prior quarter, with deposits rising 12% from a year ago and up 1% compared to the prior quarter. Capital One looks relatively safe from a deposit run, especially as 79% of deposits are insured.

Credit charge-offs and delinquency rates continue to increase but are well covered by reserves. Capital One added a sizeable $556 million to its reserves in an effort to stay well ahead of charge-offs. The bank’s CET1 capital ratio of 12.7% is sturdy and higher than a year ago, even as the bank has repurchased $300 million of its shares this year.

First Horizon Corp (FHN) – Based in Memphis, Tennessee, First Horizon is a relatively straightforward mid-sized regional bank that emphasizes personal and small/medium-sized business banking across the southeastern United States. Our initial thesis anticipated the bank’s sale to TD Bank, but with that deal’s collapse, the thesis converts to a grind-out recovery from rising interest rates and rising credit worries for this generally prosaic yet well-capitalized and well-managed bank.

First Horizon reported a modestly encouraging quarter. Revenues and profits included the $130 million break-up fee the bank received from TD Bank, and some merger expenses, so we focus on results adjusted for these one-time items. It’s not clear whether consensus estimates included these, so we won’t pay any attention to the consensus estimates.

Adjusted revenues rose 8% and earnings increased 15% from a year ago, the return on tangible capital was a strong 14.6%, and loan quality, credit reserves and capital levels remain healthy. The bank’s profit outlook is flattish given rising deposit costs and some additional reserve-building ahead. First Horizon shares trade at about 110% of tangible book value of $11.50.

Net interest income rose 17%, as higher interest rates boosted the yields on its loans and securities more than it increased the costs of its deposits and other funding. The net interest margin of 3.38% is respectably strong. Compared to the first quarter, however, net interest income fell 8% as funding costs rose faster than asset yields. First Horizon raised interest rates on its deposits to 1.73%, up from 1.11% in the prior quarter and 0.10% a year ago. Deposit balances fell, however, by 15% from a year ago, as customers found better yields elsewhere. Perhaps more important – deposits increased 7% from the prior quarter as the bank launched an aggressive deposit-gathering campaign. About 68% of deposits are insured or collateralized –acceptable in our view.

Adjusted non-interest income fell 15% while adjusted expenses fell 6%.

Credit costs remain subdued. Charge-offs were tiny at 0.16% of loans, and non-performing loans were relatively stable at 0.66%, even as the bank lifted its reserves to 1.20% of loans. We would like to see reserves boosted a bit further, to perhaps 1.50% of loans over the next few quarters. First Horizon’s CRE book looks reasonably diversified with small exposure to offices.

Capital is sturdy at 11.1% CET1, up from 9.8% a year ago. Including marks to adjust the loan and securities books to their market values, CET1 capital is 9.3%, on the low end of acceptable. We would like to see the bank lift this “marked book” capital ratio to 11% over time.

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 weaker profits as sales in higher-margin North America fell 42%. The region is struggling with slower spending and elevated inventories. Sales in India surged 3x and have lifted the country from Nokia’s smallest market to one of its largest as that country’s 5G build-out rolls on. New royalty revenues in Nokia Technologies and overall cost discipline partly offset the weaker earnings elsewhere.

The outlook for full-year 2023, pre-announced earlier, is uninspiring as it calls for flat revenue growth and perhaps unchanged operating profits. But in a competitive telecom equipment market where 5G growth will be slower and smaller than initially expected, flat is fine as Nokia is operating at a reasonably healthy level. Nokia has a €3.7 billion net cash balance and should generate somewhere around €850 million in free cash flow this year, some of which it will return to shareholders through dividends and buybacks.

In the quarter, revenues ex-currency were unchanged and were in line with estimates. Adjusted earnings of $0.07/share fell 30% from a year ago and were a cent shy of estimates.

Friday, July 21, 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 7½ minutes and covers:

Comments on recommended companies

  • Frontier Group Holdings (ULCC) – pilot pay may not be too big of a problem.
  • Nokia (NOK) – may see slower spending by Verizon and AT&T if the lead-wrapped cable environmental clean-up costs are large.
  • Retailers’ fortunes maybe aren’t so dour. Recent government data shows that consumers are still spending at retailers, no doubt including Macy’s (M), Kohl’s (KSS) and Duluth Holdings (DLTH).
  • Macy’s (M) – launching private label brand “On 34th.”


  • Mattel (MAT) – Barbie movie is released today.
Market CapRecommendationSymbolRec. IssuePrice at Rec.7/21/23Current YieldRating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.66 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.48 - Buy (20)
Small capDril-QuipDRQMay 202128.28 25.45 - Buy (44)
Small capL.B. FosterFSTRJul 202313.60 14.00 - Buy (44)
Mid capMattelMATMay 201528.43 21.27 - Buy (38)
Mid capAdient plcADNTOct 201839.77 42.05 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 15.526.4%Buy (33)
Mid capViatrisVTRSFeb 202117.43 10.474.6%Buy (26)
Mid capTreeHouse FoodsTHSOct 202139.43 52.25 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 24.783.2%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 12.267.7%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 35.341.6%Buy (93)
Mid capPolarisPIIFeb 2022105.78 134.30 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 15.96 - Buy (24.50)
Mid capJanus Henderson GroupJHGJun 202227.17 29.605.3%Buy (67)
Mid capESAB CorpESABJul 202245.64 68.641.4%Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 23.58 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 25.627.8%Buy (50)
Mid capFirst Horizon CorpFHNApr 202316.76 12.824.7%Buy (24)
Mid capFrontier Group HoldingsULCCApr 20239.49 9.95 - Buy (15)
Large capGeneral ElectricGEJul 2007304.96 111.240.3%Buy (160)
Large capNokia CorporationNOKMar 20158.02 3.932.3%Buy (12)
Large capMacy’sMJul 201633.61 16.334.1%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 16.446.3%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 13.713.2%Buy (16)
Large capNewell BrandsNWLJun 201824.78 9.952.8%Buy (39)
Large capVodafone Group plcVODDec 201821.24 9.5310.7%Buy (32)
Large capBerkshire HathawayBRK.BApr 2020183.18 346.61 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 47.133.0%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 38.28 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 11.57 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 30.246.3%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 16.615.5%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 13.11 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 114.992.1%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 14.473.7%Buy (24)
Large capTyson FoodsTSNJun 202352.01 52.503.7%Buy (78)

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.