June 6, 2025

In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including Alcoa (AA), Dollar Tree (DLTR), Intel (INTC), Kenvue (KVUE), Pan American Silver (PAAS), Paramount Global (PARA), UiPath (PATH) and SLB Ltd. (SLB).

Dollar Tree (DLTR) had a big week in the wake of earnings, hitting a new high for the year to date.

Pan American Silver (PAAS) is seeing the benefits of a 13-year high in silver prices, along with increasing industrial demand for the metal.

Comments on Portfolio Holdings

In what was a jolting headline for the steel and aluminum industries, the White House this week pledged to double tariffs on imported aluminum and steel to 50% starting June 4.

However, instead of having the widely expected bearish impact on the stock prices of domestic steel and aluminum producers, most stocks within the broader industrial metals sector were higher this week as of Thursday.

Alcoa (AA) in particular is viewed as bearing the brunt of the aluminum tariffs since it produces most of its aluminum for the U.S. market in Canada, which supplies 75% of the high-purity aluminum from smelters consumed in the U.S. annually.

In April, the company estimated its cost for the previous duty of 25% could reach $90 million for Q1. However, that total will presumably increase with the newly imposed higher tariff rate.

Responding to the new tariffs, analysts at BMO Capital Markets wrote, “The doubling of import tariffs, if maintained, is likely to create a panic in the market and trigger a restocking cycle that in our view has the potential to push prices [higher] in the near-term.”

While the higher prices could potentially benefit Alcoa and its industry peers, the higher tariffs would likely negatively impact profit margins. Moreover, any price spikes that occur in the wake of the tariffs could be temporary, “given macro uncertainty and seasonal demand trends,” according to BMO.

However, the market wasn’t bothered by the latest tariff news and has likely already factored in the negatives. In response to the tariff hikes, analysts expect Alcoa to explore deals with Canadian firms to mitigate the negative impacts in the coming months. (Indeed, the company’s CEO has already publicly mentioned seeking Canadian exemptions and potentially rerouting Canadian aluminum production to Europe to avoid U.S. tariffs.)

Moreover, Alcoa is likely to form strategic partnerships in a further effort to insulate itself from tariff impacts. All told, I think the company will be able to successfully navigate the trade war-related headwinds and execute on its strategic reacceleration plans.

AA maintains a Hold rating in the portfolio.

Dollar Tree (DLTR) reported Q1 earnings this week that beat estimates on both the top and bottom lines, while delivering upside across every key metric, sending the share price soaring.

Revenue of $4.6 billion increased 11% from a year ago, while earnings of $1.26 beat estimates by a nickel. On the earnings call, CEO Michael Creedon emphasized the impact of the firm’s expanded assortment strategy in driving incremental traffic, ticket and sales comps.

The company said its strong first-quarter performance “underscores the progress we’ve made against our strategic priorities and is a clear signal that our customers are responding positively to the changes we are making.”

Other highlights of the quarter included the opening of 148 new stores and the conversion of approximately 500 stores to the company’s 3.0 multi-price format.

And in a sign that Dollar Tree is beginning to attract even higher-income customers, it noted the company added 2.6 million new customers during the quarter, with “measurable sales improvement across all income levels,” especially among households with incomes over $100,000.

Dollar Tree also generated $379 million in net cash provided by operating activities from continuing operations and $130 million of free cash flow from continuing operations.

Looking ahead, the outfit reiterated its full-year comp and revenue outlook, with net sales expected at a midpoint of $19 billion and comparable same-store sales growth of 3% to 5%, with EPS expected to be unchanged from a year ago at around $5.50.

However, management warned that Q2 adjusted EPS from continuing operations could be down as much as 45% to 50% year-over-year on tariff-related impacts before reaccelerating in Q3 and Q4 “to get us back on track to reach our full-year target.”

Creedon added that over the balance of fiscal 2025, the company will be able to mitigate the earnings impact of the cost pressures it faces, including higher tariffs.

After taking a one-quarter profit in DLTR on Tuesday, the remaining three-quarters position is rated a Hold.

Intel (INTC) and Japanese tech conglomerate SoftBank (SFTBY) are set to form Saimemory, a new artificial intelligence-focused memory company, Nikkei Asia reported.

The new company hopes to develop stacked dynamic random access memory chips that will be used for AI and require roughly 50% of the energy that current high-bandwidth memory chips use, according to Nikkei Asia. The timeline to achieve this is in the next two years.

INTC remains a Buy in the portfolio.

Kenvue (KVUE) shares came under pressure this week after the company warned of challenges in selling seasonal products like allergy medicine and sunscreen. The comments from management, which were made at an investor conference on Tuesday, caused a notable dip in the stock price.

“We saw a longer winter, so winter pushed spring into later in Q2…and so far, it’s below last year,” CEO Thibaut Mongon said at the Deutsche Bank dbAccess Global Consumer Conference, adding that the company experienced a similar phenomenon with sales of sunscreen. “We are just at the beginning of the [summer] season. So, it’s too early to read the season [but] it will certainly impact Q2,” he said.

While Mongon previously acknowledged potential headwinds from “macro shifts and seasonal variability,” he had expressed confidence in Kenvue’s ability to navigate the challenging environment. However, many of these factors were already known to management and guidance wasn’t changed.

What’s more, analysts at Jefferies see opportunity in the recent share price decline, reiterating a Buy rating and calling the company a “self-help transformation story,” while noting that broad U.S. retail trends have recently returned to growth.

Additionally, the firm’s skin care business is reportedly showing early signs of recovery, driven by the Neutrogena product line. Jefferies further highlighted Kenvue’s re-investment push, with marketing, R&D and capital spending growing 11% in 2024.

KVUE maintains a Buy rating in the portfolio.

Silver prices just soared to their highest levels in 13 years, leading to across-the-board strength in the stocks of leading silver miners. Among them was Pan American Silver (PAAS), which just hit a new high on Thursday on the back of the precious metal’s strength.

Driving the silver price jump is a combination of factors, including technical momentum, improving fundamentals and a growing interest from participants looking for protection from persistent inflation pressures, tariffs and a potential re-acceleration of geopolitical turmoil.

Additionally, the recent strength in the gold-to-silver ratio (which just hit its highest level since 2019) has also benefited both the physical metal and the major silver miners. And as mentioned in a recent analytical piece at Investing.com, “Silver’s unique position as both a financial asset and an industrial material, particularly in clean-energy technologies like solar panels, contributes to its appeal.”

With PAAS now up 20% since our initial recommendation in February, I’m now recommending that we take a one-quarter profit at this time. After taking the partial profit, we’ll retain the remaining three-quarters position with a Hold rating.

Paramount Global (PARA) has nominated three new directors to its board as it awaits regulatory approval for its merger with Skydance Media.

The nominations include Mary Boies, counsel at Boies Schiller Flexner LLP, Charles Ryan, co-founder and general partner of Almaz Capital (a Silicon Valley venture capital firm) and Roanne Sragow Licht, former justice and adjunct professor at Boston University and Roger Williams University.

Paramount is also awaiting settlement over President Donald Trump’s lawsuit against CBS News, which alleges deceptive editing of an interview with Kamala Harris during the 2024 election.

According to Seeking Alpha, the three new board additions “could likely be an effort to strengthen board governance and prepare for challenges as the merger process continues to face delays and complications.” The nominees will stand for election during the company’s annual shareholder meeting on July 2.

In other company news, Paramount just declared a five-cent-per-share quarterly dividend, in line with the previous dividend, at a current yield of 1.7%. The dividend is payable July 1 for shareholders of record June 16.

PARA remains a Hold in the portfolio.

In what was hailed as a “milestone quarter,” automation software specialist UiPath (PATH) posted estimate-beating top- and bottom-line results for Q1 last week, including revenue of $357 million that increased 7% year-on-year, plus earnings of 11 cents a share that beat estimates by 7%.

Annual recurring revenue (ARR, a key metric) of $1.7 billion increased 12% and reflected the “improved execution and the meaningful ROI” of UiPath’s automation platform. A highlight of the quarter was the successful launch of the First Enterprise-Grade Platform for Agentic Automation, the firm’s next-generation, groundbreaking platform designed to unify AI agents, robots and people on a single intelligent system.

Another key development in Q1 was the rollout of UiPath’s Agent Builder (in preview), which witnessed “accelerating adoption with customers creating thousands of autonomous agents and generating over 250,000 agent runs today.”

The company further launched UiPath Test Cloud, a new approach to software testing that uses advanced AI to amplify tester productivity across the entire testing lifecycle for exceptional efficiency and cost savings, which UiPath sees making meaningful contributions to future revenue growth.

And significantly, management referenced a “multiyear, multimillion-dollar expansion” with a Fortune 15 health company and significant partnerships, including a new AI partnership with Google Cloud and expanded collaboration with Microsoft.

The company ended the quarter with $1.6 billion in cash and no debt, with the share buyback authorization proceeding as planned. Remaining performance obligations (RPOs) increased to $1.2 billion.

In the wake of the sanguine earnings report, a number of Wall Street firms increased their share price targets for PATH, although the consensus outlook remained mostly neutral as analysts remained reticent beyond the short-term outlook (which I think bodes well for the turnaround from a contrarian standpoint).

PATH maintains a Buy rating in the portfolio.

SLB Ltd. (SLB) announced last week that that ADNOC Drilling has agreed to acquire a 70% stake in its land drilling rigs business in Kuwait and Oman for as much as $112 million, creating a joint venture the companies plan to double over the coming year.

According to a Reuters report, ADNOC Drilling will pay $91 million for the stake, plus another $21 million payout to SLB related to business performance.

The deal includes eight operational onshore rigs—six in Oman and two in Kuwait—under contract with the respective national oil companies of both countries and marks ADNOC’s first drilling operations outside the UAE (apart from a single rig in Jordan).

On a market-related note, analyst Tom McClellan points out in a recent missive that the backwardation in the crude oil market of the last four-plus years has now receded to almost zero. (Backwardation refers to the condition where the near-month price for any type of futures contract is higher than the prices for contracts maturing further into the future. As McClellan observed, “It is a condition which reveals near term supply stress, such that traders are willing to pay up to make sure that they have near term supplies.”)

He further noted that backwardation falling close to a zero value compared to far contract pricing has been enough to mark a meaningful price low for crude oil in the past. This is currently happening, and it suggests an upward bias for oil prices in the near term which, in turn, should benefit SLB’s stock price.

SLB maintains a Buy rating in the portfolio.

RATINGS CHANGES: Dollar Tree (DLTR) was downgraded from Buy to Hold this week after we took a one-quarter profit in the stock. HOLD

Pan American Silver (PAAS) was downgraded from Buy to Hold this week after we took a one-quarter profit in the stock. HOLD

NEW POSITIONS: We added Solventum (SOLV) to the portfolio last week with an upside target of 85 a share. BUY

Friday, June 6, 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 12 minutes and covers:

• Investor sentiment has been bearish for the last 18 consecutive weeks. Why this is potentially good news, near term, from a contrarian perspective.
• Gold mining stock strength suggests some market-related imbalances must be addressed at some point in the coming months.
• Transportation industry turnarounds are starting to heat up.
• Final note
  
  • Alcoa (AA) is expected to be able to successfully navigate the impacts of Trump’s new 50% aluminum tariff.

Market Outlook

There’s a Wall Street contrarian adage that you may have heard before: “It’s so bad out there it’s good!” I think that’s an apt description of where the market is right now.

On the surface, things look bad and appear, by some measures, to be getting worse. On Thursday, for instance, the lead headline in the Financial Times was, “Big investors shift away from U.S. markets,” which was followed by the sub-heading, “Donald Trump’s trade war and rapidly mounting government debt have shaken confidence in American assets”—a sentiment that needs no explication.

Then there was the recent news that the U.S. experienced its largest monthly decline on record in goods imports for the month of April. This was based on data released by the U.S. Census Bureau that showed domestic imports decreased by $68 billion to $276 billion, down 20%, as businesses rushed to import goods ahead of the White House’s new tariffs that month.

Additionally, major U.S. ports, such as Los Angeles and Long Beach in California, reported substantial declines in import cargo—the most since 2009—with year-over-year drops of 35% and 20%, respectively, due to canceled voyages and reduced demand.

Moreover, earlier this week, JPMorgan Chase CEO Jamie Dimon, the man widely lauded as “America’s most powerful banker,” warned attendees at an economic forum that the U.S. military should be stockpiling guns, bullets and other weapons ahead of what he sees as a potential war in the South China Sea region.

Turning his attention to the subject of America’s economic power, Dimon further lamented what he sees as the waning status of the U.S. dollar when he said, “I always get asked this question: Are we going to be the reserve currency? No. You know, if we are not the preeminent military and the preeminent economy in 40 years, we will not be the reserve currency. That’s a fact. Just read history.”

So, as you can see, the sentiment out there is rather bleak right now.

Continuing with this theme—and underscoring the prevailing negative bias toward equities—Thursday’s release of the latest AAII investor sentiment poll found that for the 18^th straight week, the percentage of bearish investors outnumbered the bulls. And while the margin of bears-to-bulls is narrowing, it’s telling that even after a nearly two-month sustained rally in the Nasdaq and other major indexes, retail investors remain reticent and apparently aren’t yet ready to fully commit to equities.

It goes without saying that, from a contrarian’s perspective, the above evidence can be taken as good news for stocks. For whenever prevailing sentiment is this categorically bearish (which is to say, not very often), stocks have historically outperformed the negative consensus. And I expect that will continue to be the case in the coming weeks.

Although I have been bullish since April, one of the things that (somewhat) worried me in recent weeks was the seeming lack of participation of turnaround-oriented stocks. Normally, turnarounds are among the very first types of stocks to rally after a major decline in the S&P 500, often leading the way for the rest of the market. But many beaten-down, out-of-favor names with otherwise great fundamentals and spring-loaded technicals were exceedingly slow coming out of the gate in the post-correction April/May period.

But that dynamic appears to be changing right now, as more value- and turnaround-type stocks are not only beginning to strengthen, but many of them are looking as promising as I’ve seen them look all year. And while I have no way of knowing how long this strength will carry out, I have reason to believe the month of June will see a continuation of last month’s strength.

To that end, the historical pattern noted by market statistician Jason Goepfert back in March provides some context. He noted then that after the S&P recorded a second straight day with 90% advancing stocks after hitting a six-month low two months ago, “Whenever this has happened going back to 1933, the S&P has been higher 12 months later with only two exceptions—1940 and 2014 (in both cases the S&P was still down by only 0.5% and 3%, respectively).”

As I wrote in the newsletter at that time, “Tellingly for the short-term, that pattern also has a 100% accuracy for the market being higher two months later, with an average S&P gain of 6%, and has a 94% accuracy for being higher three months later, with an average gain of 7%. 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.”

The bullish outlook for May was obviously correct; now it remains to be seen if the prognosis for June is accurate. Based on the internal evidence I’m seeing right now, viz., bullish new highs-to-lows, bullish copper prices, high short interest ratios (which could fuel additional rallies) and cryptocurrency and financial sector relative strength, I believe the positive pattern will continue.

But lest you think I’m becoming too complacent in my optimism, I’ll offer the following by way of caveat: Although I like what I’m seeing across many sectors and industries right now, the current backdrop somewhat reminds me of the six-to-12 months before the 2008 credit crisis was in full swing.

Specifically, I recall a market commentary from the late Don Hays around the middle of 2007, who wrote, “I like what I’m seeing in the overall market…but all those gold stocks!” This was a reference to the relentless strength exhibited in the gold miners at that time, which, as it turned out, served as a harbinger of the problems to come within the context of an otherwise strong equity market.

Historically, persistent strength in gold and mining stocks while the broad market is rising and the dollar is weakening is not a sustainable dynamic. Sooner or later, something has to give (either in the way of stock market or gold price strength).

And while the current relationship might end up favoring stocks over gold in the coming year, as long as gold continues to strengthen, it’s warning us that there is a negative undercurrent—possibly inflation or some other problem(s)—that must be addressed at some point.

Stocks of Interest

Continuing the theme of the market recovery potentially extending into the summer, one area that has stood out to me of late is the transportation industry. I’m seeing a greater number of transport names, including railway, trucking, shipping and parcel delivery stocks, display increasing strength with near-term rally potential—and with more than a few of them falling into the turnaround category.

One such name is Norwegian Cruise Line Holdings (NCLH), which has been a major laggard among the otherwise lively cruise ship stocks. Like its industry peers, Norwegian began falling out of favor with investors in the years immediately prior to the pandemic, as shown by the gradual decline in its stock price from late 2015 to early 2020, followed by an outright collapse during the pandemic year and several more years of bottoming activity.

The decline was attributed to negative customer experiences and concerns regarding the cruise line’s service quality, as well as ship condition concerns and unexpected costs—all of which contributed to declining popularity among some travelers in the years leading up to 2020.

But in spite of obvious macro headwinds, Norwegian is showing signs of recovery. As it wrapped up 2024, the company boasted its strongest ever booked position, including excellent net yields and what it described as “sustained demand” heading into 2025.

Meanwhile, in its recently released Q1 results, Norwegian said the business continues to operate profitably, while its “disciplined pipeline” of introducing new ships is proceeding apace, all the while management is executing on the turnaround strategy.

That strategy, which was revealed last year in its latest iteration, the “Charting the Course” initiative, is aimed at improving operational performance and improving the guest experience. Key to achieving this is the plan to grow its fleet with 12 ships on order through 2036 across its three brands—including seven for Norwegian Cruise Line, three for Oceania Cruises, and two for Regent Seven Seas Cruises—which amounts to a major fleet expansion and a key factor in the company’s return to growth.

Also imperative for Norwegian in its turnaround ambitions is a continued focus on cost discipline and balance sheet improvement. On that score, the firm is already showing progress across key metrics, including adjusted net cruise costs (excluding fuel), improved fuel hedging and net leverage (which dropped to 5.3x in 2024, with plans to reduce it further to 5x by the end of this year).

Analysts see top- and bottom-line growth of 6% and 12%, respectively, for 2025, followed by several more years of gradually accelerating improvement across both metrics.

Another laggard in the overall transport industry that I think has turnaround potential is United Parcel Service (UPS), one of America’s largest package shippers and a long-time leader in the express and courier service market.

Currently trading around multi-year lows, the stock is coming off a nearly three-and-a-half-year decline brought on by several factors, including macroeconomic headwinds, softening demand, increased competition and strategic shifts within the company.

To address these problems, UPS has embarked on an ambitious turnaround plan aimed at aggressively restructuring and improving costs (including $3.5 billion in 2025), shifting its focus to higher-margin healthcare logistics and small business customers and maintaining its already formidable capital returns (including a current dividend yield around 7%).

In the latest quarter, the company reported strength in its domestic business and said profitability trends are “very strong,” as shown by free cash flow (FCF) per share of $6.30 and an FCF yield of 6.6%.

Institutional analysts see the company’s strategic efforts paying off longer term. And while the bottom line is expected to decline 9% for full-year 2025, Wall Street sees a return to growth next year, followed by two more years of mid-teens percentage growth.

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

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