May 23, 2025

In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including Centuri Holdings (CTRI), GE Aerospace (GE), Intel (INTC), Pan American Silver (PAAS) and Paramount Global (PARA).

Intel (INTC) is reportedly mulling a sales of its network and edge businesses as part of an ongoing focus on streamlining the company.

Pan American Silver (PAAS) stands to benefit from recent gold-to-silver ratio readings.

Comments on Portfolio Holdings

On Tuesday, Centuri Holdings (CTRI) announced the commencement of an underwritten secondary public offering of nine million shares of its common stock by Southwest Gas Holdings as the selling stockholder. Additionally, Southwest expects to grant the underwriters (which include J.P. Morgan, UBS and Wells Fargo, which served as the joint lead book-running managers) a 30-day option to purchase up to an additional 1.3 million shares of Centuri’s common stock.

While this transaction increases the stock’s liquidity, it obviously had at least a temporary impact on the share price this week, with the stock dropping 8% intraday on Wednesday before recovering at the close. (The stock is down just over 4% from Tuesday’s close as of this writing.)

The coming weeks will ultimately determine whether the increased liquidity will serve to attract institutional interest in the stock, or whether it will increase near-term volatility.

On that score, a potential positive development for Centuri was announced this week. Activist investor Carl Icahn’s Icahn Partners and Icahn Partners Master Fund LP signaled its confidence in Centuri’s long-term prospects by announcing its intent to purchase an aggregate of $50 million in shares of Centuri’s common stock from Southwest Gas in a concurrent private placement at a price per share equal to the offering price per share—a deal that could serve to further stabilize liquidity.

It should be noted that Centuri itself isn’t selling any shares of common stock in the proposed offering or the concurrent private placement, nor will it receive any proceeds from the sale of the shares being offered by Southwest Gas.

CTRI remains a Hold in the portfolio.

Air travel demand in 2024 and 2025 to date has completely recovered from the Covid-era decline and is still growing. Meanwhile, total worldwide defense spending is expected to reach a record $2.6 trillion this year (56 countries are now at war—up from 27 three years ago). So, it’s not surprising that the defense and aerospace sector is currently one of this year’s strongest performers.

And in view of this year’s ramped up air travel/military spending measures, the share price strength of GE Aerospace (GE) should also come as no surprise. Most of the news surrounding the company has been favorable lately, including last Friday’s White House announcement that it has a $14.5 billion agreement with GE Aerospace, Etihad Airways and Boeing (BA). (The deal is part of a larger package of deals worth more than $200 billion between the U.S. and the United Arab Emirates.)

Indeed, GE hit new highs earlier this week on the back of widespread investor optimism for the sector, based on factors like the accelerated defense spending trend, strong Q1 earnings across the sector and recent technological earnings.

Meanwhile on Thursday, the U.S. Ambassador to NATO, Matthew Whitaker, urged alliance members to “outline a clear path toward dedicating 5% of their economic output to defense, with a strong emphasis on traditional military capabilities” ahead of next month’s NATO summit, according to Seeking Alpha.

Currently, the U.S. allocates around 3% of its GDP to defense—more than any other country. But with U.S. military spending projected to decline to 2.4% by 2035, the push is on by interested parties to increase those spending levels.

Speaking to Bloomberg Television, Whitaker emphasized the need for a “more ambitious and specific roadmap than the 2% GDP pledge adopted at NATO’s 2014 Wales summit.” Specifically, he called for the majority of future spending to go toward what he called “hard defense,” or combat-ready forces, equipment and infrastructure. Should NATO members heed Whitaker’s call, it could create significant opportunities for GE Aerospace, including higher demand for advanced military aircraft, engines and related technologies the firm provides.

According to U.S. military news provider Stripes.com, GE Aerospace could see “new contracts for fighter jet engines, drone propulsion systems and other defense-related aerospace technologies.” And if member nations invest more in infrastructure and cybersecurity alongside traditional military hardware, the firm could also increase its role in supplying integrated defense products and services.

According to news reports, NATO leaders are in fact expected to approve an updated spending target at the upcoming summit. One such proposal involves allocating 3.5% of GDP to direct military spending (by 2032), with another 1.5% going toward related areas like defense research and strategic infrastructure.

GE remains a Hold in the portfolio.

According to a Reuters report, Intel (INTC) is considering selling its network and edge businesses as part of an ongoing focus on shedding business segments which its new CEO does not view as financially critical. (The company, however, has declined to comment on this story as of Thursday, calling it a “rumor,” according to multiple sources.)

According to the report, “Discussions on the potential sale of the group, once known as NEX in Intel’s financial results, are part of CEO Lip-Bu Tan’s strategy to focus its thousands of employees on areas in which it has historically done well—personal computers, or PC and data center chips.”

Tan, meanwhile, told executives at a celebration of the company’s 40th year on Monday, “That’s something we’re going to expand and build on,” adding that Intel had a share of around 68% of the PC chip market and 55% of that for data centers.

The Reuters report further said that Intel has considered when and how to divest the NEX group, while seeking out third parties with potential interest in a deal—including interviewing investment bankers to select an adviser for the potential sale. However, Intel hasn’t started a formal deal process for the unit, nor has it solicited bidders, per the report.

The NEX unit, which makes chips for telecom equipment, networking infrastructure and edge computing applications, will no longer support Intel’s core strategy, Reuters said. (Incidentally, the NEX unit generated full-year 2024 revenue of $5.8 billion, a 1% year-on-year increase.)

Additionally, the report said Intel’s networking business might also be divested since competition from firms like Broadcom (AVGO) is becoming intense. The proposed moves are part of Intel’s strategic initiative, which includes reorganizing the business.

INTC remains a Buy in the portfolio.

In a potentially bullish development for our holding in Pan American Silver (PAAS), the gold-to-silver ratio has reached the benchmark 100 level in just the last few weeks. This marks the highest level it has hit since early 2019.

The gold/silver ratio is a measure of how many ounces of silver are equivalent to one ounce of gold. It’s calculated by dividing the price of gold by the price of silver, and it fluctuates due to a variety of factors, including market sentiment, industrial demand for silver and economic uncertainty.

The last time the gold/silver ratio reached such an extreme level, the price of silver rallied over 30% in just a period of a few months, while Pan American Silver shares more than doubled. Of course, the latest ratio readings are no guarantee that history will repeat. But readings of this extreme magnitude are hard to ignore and could (and likely have already) attract concentrated institutional buying interest among the actively traded silver mining stocks.

PAAS remains a Hold in the portfolio.

Nielsen’s “Gauge” report for April—a monthly snapshot of total broadcast, cable and streaming consumption via TV—showed that streaming continued to dominate in overall TV viewing, while cable and broadcast dwindled in the U.S.

By percentages, the latest report revealed that time spent streaming accounted for 44% of total TV viewing in April, while cable accounted for 25% and broadcast’s share was 21% of total TV viewing.

Nielsen said TV viewing via streaming increased 15% year-on-year in April, while broadcast declined 7% and cable fell 16%.

At face value, this may seem like a disturbing development for Paramount Global (PARA). However, the broadcaster is adapting to the shift toward streaming by doubling down on its direct-to-consumer strategy, mainly through Paramount+ and Pluto TV (a free, ad-supported streaming service).

In a signal development underscoring the strategy’s success, Paramount+ reached 79 million subscribers in this year’s first quarter, an 11% improvement from a year ago. And while the streaming segment still operates at a loss, the company has significantly decreased its losses, pointing to progress toward profitability.

Moreover, to remain competitive, Paramount is leveraging its strong portfolio content while also exploring strategic partnerships (including a recent collaboration with Netflix), which many analysts believe could enhance Paramount’s streaming presence. Paramount’s Filmed Entertainment segment also returned to profitability in Q1, which provides the firm with additional revenue to support its streaming goals.

And as one analyst recently observed, “Despite the decline in traditional TV, Paramount’s TV Media segment remains a financial backbone, [allowing] the company to continue investing in streaming while maintaining a foothold in broadcast and cable.”

Ultimately, Paramount’s future growth hinges on its success in scaling its streaming business, capitalizing on its prodigious library content to attract and retain subscribers, while reducing costs. Paramount+ has shown steady growth internationally, while Pluto TV enhances the firm’s reach.

On that score, recent partnerships with several major corporations (including Walmart) have allowed it to reduce churn and gain more subscribers, while aggressive cost reduction efforts are already underway and gaining traction. All told, I remain confident in Paramount’s ability to successfully execute on its strategic initiatives.

PARA remains a Hold in the portfolio.

RATINGS CHANGES: None

NEW POSITIONS: None

Friday, May 23, 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 15 minutes and covers:

• A brief review of the broad market’s current condition (still mostly strong).
• Continued rising Treasury yields could pose a near-term threat to equities, however.
• Healthcare stocks are the current leaders in the latest quarter’s earnings.
• Final note
  
  • GE Aerospace (GE) should benefit from record worldwide aerospace and defense spending trends.

Market Outlook

Just when you thought it was safe to fully embrace a bullish posture, the market just reminded us the bears are still growling out there.

The S&P 500 Index is down just 2% from its latest high, but it’s what’s happening under the market’s immediate surface that is somewhat troubling. For starters, new 52-week lows on the NYSE expanded above the “line-in-the-sand” 40 level this week.

New lows continued to expand on Thursday, hitting 60, while the new highs have shrunk and the high/low differential turned negative. This by itself isn’t a major concern just yet, although if it continues for a few more days, it will become a legitimate worry for the near-term outlook.

Accounting for the latest show of internal weakness is the recent uptick in longer-term Treasury yields. The CBOE Treasury Yield Index (TNX) has risen 10% so far this month, and it’s not far from the 4.8% peak from January—a level that served as a catalyst for the broad market decline earlier this year. A continuation of the rising TNX trend would therefore be a major concern for the equity bulls.

However, the weight of current evidence—both fundamentally and technically—still favors a bullish outlook. To begin with, the Q1 2025 blended year-over-year earnings growth rate for the S&P 500 stood at 14% as of last week, marking the seventh consecutive quarter of yearly earnings growth for the index. And as pointed out by FactSet, if this rate holds, it will mark the second consecutive quarter of double-digit earnings growth.

Source: First Trust Portfolios

Incidentally, the three S&P sectors with the highest Q1 earnings growth rates were: healthcare (up 43%), communication services (up 29%) and info tech (up 18%), with all three sectors also leading the market in terms of earnings beats (including 91% of healthcare sector companies beating estimates).

This is a significant development for the healthcare space, as it underscores the positive fundamental backdrop for an otherwise out-of-favor sector. As mentioned in last week’s newsletter update, there are technical reasons for believing that healthcare stocks—particularly in the biotech space—will soon begin a long period of outperformance that could last until the end of this year (and about which I’ll have more to say in the next issue).

From a technical perspective, it’s encouraging that the crypto asset market continues to confirm the strong presence of risk-oriented demand. This of course typically carries a bullish near-term implication for the stock market, with bitcoin strength usually leading the S&P 500 at critical turning points. It’s worth noting that as of Thursday, the Grayscale Bitcoin Trust ETF (GBTC)—one of my favorite leading indicators—has hit a record high, which I see as a positive for stocks.

Finally, the financially hyper-sensitive bank and broker/dealer stocks are still strong, while the CBOE Volatility Index (VIX) is currently under the pivotal 25 level, denoting a reasonable market environment (i.e. one that historically favors buying over selling stocks).

Thus, the bulls still enjoy a net advantage over the bears in my estimation—and in spite of investors’ worries over the latest U.S. credit rating downgrade. Accordingly, our portfolio holdings remain unchanged this week with no new actions recommended.

Portfolio

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