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Turnaround Letter
Out-of-Favor Stocks with Real Value

October 28, 2022

This note includes the Catalyst Report, a summary of the November edition of the Cabot Turnaround Letter, which was published on Wednesday and earnings updates on 12 recommended companies.

This note includes the Catalyst Report, a summary of the November edition of the Cabot Turnaround Letter, which was published on Wednesday and earnings updates on 12 recommended companies. Volkswagen (VWAGY) and Holcim (HCMLY) reported earlier today so we will include our analysis in next week’s note.

Due to problems with the podcast software, there will be no podcast today. However, we include in text format our comments otherwise provided on the podcast. Our preferred software did an upgrade, but unfortunately, this reduced its sound quality to the “dismal” level. We apologize to our podcast listeners and hope to have a replacement next week.

Next week, nine companies are scheduled to report, including Molson Coors (TAP), Goodyear Tire & Rubber (GT), Western Union (WU), Conduent (CNDT), Kaman (KAMN), Warner Bros Discovery (WBD), Gannett (GCI), ESAB (ESAB), Organon (OGN) and Ironwood Pharmaceuticals (IRWD).

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.

Catalysts produced by activist investor campaigns were higher in the first half of 2022 than the first half of 2021, with 321 campaigns compared to 261 a year ago. The most activity, by far, was in the Tech Media Telecom sector with 81 campaigns, or a quarter of the total. First-time activists launched 37% of all campaigns, a surprisingly high number, while the top five most prominent activists (Elliott Mgt, Icahn Associates, Pershing Square, Starboard Value and Third Point) launched only 23%, well below their average of around 30%.

In the November edition of the Cabot Turnaround Letter, we describe how investing, at its most basic level, is a mental game supplemented by a calculator. Much of the best investing relies heavily on the calculator part, while some investing relies heavily on contrarian instincts. We discuss five “calculator” stocks – companies with enduring value that trade at unusual discounts – including AMC Networks (AMCX), Comcast Corporation (CMCSA), Levi Strauss & Co. (LEVI), Six Flags Entertainment (SIX) and T. Rowe Price Group (TROW).

We also highlight three additional stocks that draw on our contrarian instincts. Scotts Miracle-Gro (SMG) has good assets but a bad balance sheet, AGNC Investment Corp (AGNC) is an “extreme yield” stock that looks worthy of a leap of faith, and Spirit Airlines (SAVE) may be worth a flier.

Our feature recommendation is Capital One Financial (COF). Short-term investors worry about the risks of elevated credit losses during a recession, but long-term investors see a well-managed and highly profitable bank with a strong capital base and hefty credit reserves that will prosper post-recession yet sells at an unusually large discount today.

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.

The bank posted a good quarter, although it missed the earnings estimate. Revenues and loans continue to grow at reasonable rates. Capital One saw incrementally higher credit losses and raised its credit reserves as we expected. We believe earnings estimates will likely tick down in coming quarters, but this is already baked into Capital One’s shares. The bank’s capital level remains robust even as it repurchased $300 million of its shares (yet likely halting repurchases in coming quarters) and provided a reasonable outlook. All-in, an as-expected quarter and outlook that is consistent with our thesis.

In the quarter, revenues of $8.8 billion rose 12% from a year ago and were about 2% above estimates. Earnings of $4.20/share fell 38% from a year ago and were 17% below the consensus estimate.

Separating credit conditions from operating results helps evaluate what is going on. Excluding credit, the bank’s underlying profits increased 6% from a year ago. We calculate this underlying profitability as total revenues less non-interest expenses – essentially, everything before taxes except credit costs.

Net interest income rose 9% as loans and other earning assets increased 6% while the net interest spread (the difference between the interest rate it earns and the interest rate it pays) expanded by 28 basis points (100 basis points = 1 percentage point). The bank is benefitting from rising interest rates although this benefit is approaching its peak.

Fee income increased 8%, roughly in line with earning assets.

Expenses increased 12% as the bank boosted its marketing costs and other spending, but these compared to weak spending in the fading days of the pandemic a year ago. Compared to the prior period (the second quarter), marketing expenses fell while operating expenses rose.

Capital One’s credit losses in the third quarter increased from a year ago, as we expected. Charge-offs of retail banking loans (a catch-all bucket excluding auto and credit cards) increased the most, but it appears that the bank was aggressive in writing off these loans, as delinquencies fell. Write-offs and delinquencies in auto loans and credit cards also rose. Commercial loan quality remains remarkably strong.

As we expected, the bank increased its credit reserves to 4.02% of loans from 3.88% in the prior quarter. The already-strong capital base increased to 12.2% from 12.1% last quarter but slipped from 13.8% a year ago due to share buybacks.

Dril-Quip (DRQ) – A major supplier of subsea equipment, Dril-Quip is struggling with the downturn in offshore oil and natural gas drilling. It generates positive free cash flow and has a sizeable cash balance yet no debt, all of which should allow it to endure until industry conditions improve.

The company reported an uninspiring quarter, with limited revenue progress but it appears that revenues have at worst stabilized. Drilling activity is ticking up, helping the company’s prospects, and Dril-Quip is ramping its capital outlays in anticipation of this pending recovery. Margins and expenses remain under control, as the new leadership is working to improve the company’s overall productivity and efficiency – important positives for a company that arguably has been undermanaged for years. The new leadership is selling off extraneous assets, with the proceeds plus cash from the company’s cash-heavy balance sheet eventually being redirected toward acquisitions to build out the company’s capabilities.

Overall, we are fine with keeping our position in Dril-Quip as the shares remain washed out, yet a recovery (even if slow) seems underway.

We clearly like the efficiency improvements. We have mixed views on the use of capital to build out the company. Yes, building out a more diversified company could improve its value, but unless the company has some special skills the build-out would merely make it larger rather than more valuable. Much depends on the price Dril-Quip would pay for its acquisitions, and then its ability to boost the earnings of the acquisitions. We would like to see the company use more of its idle cash hoard to buy back its shares as they trade near all-time lows.

In the quarter, revenues rose 6% from a year ago but fell 4% below estimates. Revenues fell 6% compared to the prior sequential quarter. Adjusted earnings of $0.05/share improved from a $(.35) loss a year ago and were better than estimates for a $(0.01) loss. Adjusted EBITDA of $7.0 million rose 78% but was 22% below estimates. The strong U.S. dollar is weighing on revenues but it’s not clear how: translation of weak local currencies into strong dollars hurts revenues, but it is not clear to what extent Dril-Quip’s contracts are priced directly in dollars or use a dollar reference, given that oil prices are priced in dollars (natural gas prices can be more local-currency priced). Also, we estimate that most of Dril-Quip’s competition is U.S.-based which would tamp down currency effects.

Subsea activity is improving, led by Brazil and Saudi Arabia, with early indicators pointing toward further gains next year. Downhole activity remains weak. Backlog is incrementally ticking up yet not meaningfully improving yet. However, even incremental improvements suggest stability at worst, a positive for the company’s ability to outlast the downturn.

Profitability improved incrementally from a year ago but was incrementally weaker than the prior sequential quarter. Gross margin percentage and operating expenses as a percentage of revenues told the same story.

General Electric (GE) – Led by impressive new CEO Lawrence Culp, GE finally appears to be righting its previously severely damaged business. The company is embarking on a three-way split-up to improve its value to shareholders.

GE delivered a mixed quarter. Revenues rose 3% but by 7% adjusted for currency changes and acquisitions/divestiture) and were about 2% above estimates. With the spin-offs starting in January, GE shares will increasingly trade on a sum-of-the-parts basis, making full-company analysis less worthwhile. We will dig into the merits of keeping/selling GE and its spin-offs in the coming weeks.

Adjusted earnings from continuing operations of $0.35/share fell 34% from a year ago and were 29% below the consensus estimate. However, the company took some reserves in its Renewable Energy segment – excluding these, earnings would have been $0.75/share, up 42% from a year ago and handily above estimates. As the consensus didn’t explicitly include or exclude these reserves, there isn’t a direct comparison. With the three-way split-up on deck, we anticipate generous additional reserves to set up the new companies for healthier earnings. GE Healthcare will hold an investor conference on December 8, followed by its spin-off in January.

Full-year revenue guidance was maintained while operating margins were guided to expand by 125 to 150 basis points. Earnings per share were guided for $2.40 to $2.80, in line with current estimates.

GE Aerospace produced strong results, as revenues grew 24% and profits increased by 52% to $1.3 billion. Orders rose only 6%. Overall, the outlook here is mildly encouraging. GE Healthcare continues to struggle, with a 6% increase in revenues but essentially flat profit. Within the new GE Vernova, both segments (Renewable Energy and Power) had weak revenues and profits, with the combined profits sliding to a $793 million loss from a $53 million profit a year ago.

Free cash flow fell 13% from a year ago. GE said it expected full-year free cash flow to be about $4.5 billion.

Janus Henderson Group (JHG) – Janus Henderson Group is a global investment management company focusing on publicly-traded equities and bonds. The 2017 merger of Denver-based Janus Capital Group and London-based Henderson Group was to produce faster growth and a more valuable firm, but it has proven unsuccessful on most counts. The recent market sell-off has further weighed on its shares. However, the company’s low valuation and chronic problems led activist Trian Partners to become the firm’s largest shareholder with a 19% stake. Trian is actively driving change by replacing the CEO, taking two board seats and pressing for an overhaul. Janus is highly profitable, has a fortress balance sheet and pays a generous dividend.

Revenues and profits fell sharply, reflecting the declining prices in the capital markets. Most of the company’s expenses are fixed (expenses fell only 8%), so most of the revenue decline flowed straight to weaker operating profits. However, cash flow remains well above the dividend payout. Janus’ balance sheet remains very strong with $900 million in net cash.

The chronic and strategic issue plaguing the company is its net redemptions, in essence, clients pulling money from its strategies due to weak performance or allocations to other assets like private equity. Without competitive products, Janus will not garner a high valuation multiple nor will it have a sustainable strategic position. Compared to a year ago, net redemptions trimmed its assets by 9%. Investment performance over the past several quarters is mixed.

The prior leadership made some progress in this regard but not nearly enough. We see performance as a cultural problem. One cultural component is that fund managers may be “playing to play” implying that they protect their high-income jobs at the cost of striving for truly impressive and repeatable performance, rather than “playing to win.” Another cultural problem is that the Colorado/United States culture does not meld well with the London/U.K. culture. We hope that the new CEO can lead a turnaround in Janus’ culture or sell the company in whole or in parts.

Janus intends to expand into new product categories including private credit and insurance. If they hire full teams from other shops, this would be an incremental positive although this is an expensive route. If they start from scratch, they risk being a latecomer in a full and competitive race.

Assets under management fell 34% from a year ago. Assets declined for three reasons: market declines (reduced assets by 17%), net redemptions (-9%) and the shut-down of its quantitative products last year (-10%).

One positive from the update: The new CEO is initiating a $40 million efficiency-boosting program, which would represent about 8% of annual profits. We anticipate that nearly all of this will be reinvested in growth or other initiatives. While we would like to see at least a third of this flow to profits, any improvement in expense allocations is a positive in the likely-inefficient Janus organization.

Adjusted earnings of $0.61/share fell 47% from a year ago but were about 27% above the overly pessimistic consensus estimate. Adjusted operating earnings fell 51% from a year ago. Revenues fell 25% from a year ago but were about 4% above the consensus estimate.

We remain engaged with the Janus story, as the share valuation remains low, the new CEO is making sizeable changes early, and activist Trian Partners continues to maintain its ownership stake and is likely pressing privately for changes.

Kraft Heinz Company (KHC) – Following a disastrous cost-cutting strategy that left the company with diminishing relevance to consumers, Kraft Heinz is rebuilding its brands and products, led by new CEO Miguel Patricio (July 2019).

The company reported a decent quarter. While revenues rose 3%, they rose 12% when currency and acquisition effects were removed, and included a surprisingly strong 15% increase in prices. Volumes were weak, partly due to consumers returning to restaurants and products not on Kraft’s menu as the pandemic effects are mostly gone. The company maintained its full-year organic revenue guidance and fractionally edged up its full-year EBITDA guidance. Looking into next year, while the company didn’t provide specific guidance, its presentation highlighted several trends and company initiatives that offer encouragement that Kraft’s growth prospects remain positive.

Adjusted earnings of $0.63/share fell 3% from a year ago but were about 13% above estimates. Adjusted EBITDA of $1.4 billion fell about 5% but was about 6% above estimates. Revenues rose 3% (12% excluding currency and acquisitions/divestitures) and were about 3% above estimates.

The profit margin as measured by EBITDA slipped to 21.7% from 23.4% a year ago as commodity, logistics and manufacturing costs increased by more than it benefits from higher prices and efficiency improvements. Kraft said that the timing differences between its price increases and its cost increases should narrow over the next few quarters. We estimate that, adjusting for the effects of acquisitions/divestitures over the past year, last year’s third-quarter margin would have been about 22.0%, so the current third-quarter comparison shows almost no decline. However, divesting high-margin businesses won’t build margins long term.

Free cash flow was weaker due to inventory builds (volumes combined with higher embedded costs/unit) but the net debt balance improved incrementally. All of its debt is fixed-rate, and the pension plan is over-funded.

Mattel (MAT) – At our initial recommendation in 2015, Mattel was struggling with its failure to adjust to the realities of how young children spent their playtime. This failure had produced years of revenue decay. In addition, its cost structure became bloated, and its debt levels increased. However, led by its new CEO, Mattel now appears to be finding its way.

Mattel reported a reasonable quarter. The gross margin increased to a sturdy 48.3%, suggesting decent control over its manufacturing, outsourcing and pricing. Operating profits, when scrubbed for small and reasonable adjustments, were essentially flat – not great but not bad considering the drag from the strong dollar. Marketing expenses ticked up in the quarter, which is reasonable in advance of a very unclear holiday season, while overhead expenses actually declined (even if by only $1 million). Adjusted EBITDA, or cash operating profits, rose 2% in the quarter and are up 18% from a year ago as the company continues to advance its turnaround strategy.

Adjusted earnings of $0.82/share fell 2% from a year ago but were about 11% above the dourer consensus estimate. Revenues were flat (up 3% after removing the drag from the strong U.S. dollar) but slightly below estimates.

The balance sheet carries less net debt than a year ago while earnings are higher, supporting its expectations for receiving an investment-grade credit rating. We believe most investors are already assuming this boost will happen. Inventories rose 27% from a year ago, which suggests that either Mattel is highly confident in its holiday outlook or that it will get stuck with a glut that needs to be discounted to move. Perhaps this explains some of the increase in marketing spending. Interestingly, the company said in its presentation that the improved balance sheet will “become a growth lever.” This translates into Mattel making acquisitions. We’re all for this as long as the company strikes a good (albeit challenging) balance between sensible targets and sensible prices.

Overall, the company is in much better shape than perhaps any time in the past decade. And, its outlook is encouraging: its point-of-sale trends are at least stable and it is making strides to cash in on its brands through new media opportunities.

M/I Homes (MHO) M/I Homes is one of the country’s largest homebuilders, with 175 communities under development across 15 states. Its shares have tumbled sharply from their 52-week high and now trade at their pre-pandemic price as investors worry about a possible recession, the effects of rising mortgage interest rates and higher labor and raw materials costs. While we appreciate the headwinds facing M/I Homes and its industry, we see a diversified, highly profitable, financially solid and well-managed company whose shares trade at a sizeable discount to their liquidation value.

The company reported a strong quarter. Earnings of $4.67/share rose 43% from the adjusted year-ago results and were 26% above the consensus estimate. Revenues rose 12% and were in line with estimates. Homes delivered (volume, essentially) fell 1% but prices rose 13%.

The company is clearly benefitting from the robust demand for new homes, but of course, that robust demand is slipping. The “best of times” is now in the rearview mirror for at least a while, perhaps until the economy sees more robust growth and homebuyers can adjust to the permanently higher mortgage interest rate level helped by some easing in those rates.

Yet, M/I remains in strong financial condition, with very reasonable debt that doesn’t come due for another six years. The shares are undervalued even on a true liquidation value of $57.40/share, in which the only assets that count are cash, marketable securities and the home inventory. Theoretically, if the company was converted into cash tomorrow, this is what shareholders would get, net, after all obligations are paid. This number compares to a traditional liquidation value which counts all assets other than goodwill, or $68.75/share.

In the quarter, revenues and profits both reached record highs. The 26.8% gross margin, which measures profits at the property lot level (the key metric for a homebuilder), rose from 24.5% a year ago.

Pointing to slowing demand, new orders fell 31% from a year ago while the cancellation rate of 17% was double the 8% rate a year ago. A year from now, after the current backlog is worked down as demand slows, M/I will likely generate lower revenues and profits, but still remain highly profitable and undervalued by even more as its book value per share continues to increase.

Newell Brands (NWL) – The company has struggled, literally for decades, with weak strategic direction and expense control, epitomized by its over-reaching $16 billion acquisition of Jarden in 2016. Pressured by activist investors last year, and now led by a capable new CEO, Newell appears to be finally fixing its problems, yet the shares remain significantly undervalued relative to their post-turnaround potential.

Newell reported a sloppy quarter as it struggles to move merchandise to retailers whose shelves are already overloaded.

Core sales fell 11% but were in line with estimates. Core sales are a highly scrubbed metric and are similar to same-store sales, excluding currency changes. Sales fell due to a decline in orders from major retailers, which are generally cutting their excess inventories after over-ordering earlier this year. Inventories are accumulating at Newell, so it is working to reduce these to a healthier level, but the adjustment process will likely take a few quarters.

Adjusted profits of $0.53/share fell 2% from a year ago but were 13% above estimates.

Newell’s profit margins slipped modestly in the quarter. On a normalized basis, which removes charges and merger costs, the gross margin fell from 30.6% a year ago to 29.4%, reflecting higher supplies, transportation and other costs and perhaps some discounting to help move the merchandise from Newell’s shelves to retailers’ shelves. Operating costs fell 20%, but this was not nearly enough to offset the lower gross profits, so normalized operating profits fell 28%.

The balance sheet is reasonably healthy. During the quarter, the company replaced near-term expiring debt with longer-maturity debt, but the interest rates are a bit steep at over 6.25%. Cash flow has been crimped – running at a sizeable deficit compared to a sizeable surplus a year ago – almost entirely due to a bulge in working capital. Newell could use a year of hefty profits to trim its leverage and reverse its working capital drain.

Polaris (PII) – Shares of this high-quality and market-leading manufacturer of powersports equipment like off-road vehicles, snowmobiles, motorcycles and boats, have fallen out of favor with investors. Major concerns include the risk of a post-stimulus falloff in demand as well as supply chain disruptions that are weighing on profit margins. We believe the company’s long-term prospects remain intact. Polaris produces strong profits and free cash flow, has a solid balance sheet, and a strong, shareholder-friendly management team.

Polaris reported a decent quarter. Adjusted earnings of $3.25/share rose 64% from a year ago and were 17% above the consensus estimate. Revenues increased 32% and were about 6% above estimates. Adjusted EBITDA of $320 million rose 48% and was about 5% above estimates. Better volumes, higher pricing and more valuable product mix lifted profit margins.

As the supply chain tightness eases and the company improves its operations, it is increasingly able to work down its immense backlog of pre-sold orders as well as replenish the depleted dealer inventories. These drivers provided a healthy tailwind to Polaris’ revenues in the quarter and for the rest of the year. The company guided for a 15-16% increase in full-year sales (slight uptick in guidance) and an 11-14% increase in adjusted per-share earnings (unchanged). However, the benefits from the backlog and dealer inventory refilling will likely fade away next year.

End-market demand remains stable but won’t likely return to strong growth until the overall economy returns to strong growth. So, it is likely that revenues for next year will be flattish, but we view that as perfectly fine given the shares’ low valuation and the company’s healthy profitability, strong balance sheet and growing free cash flow.

Shell (SHEL) Shell has been on the recommended list for a long time (January 2015), so we are circumspect about its continued presence there. The company is well managed, but its upside (and downside) is tied to unpredictable energy prices.

Shell posted a good quarter with adjusted earnings per share of $1.30 increasing 145% from a year ago and coming in 4% above the consensus estimate.

Although profits and free cash flow were weaker compared to the prior quarter (second quarter) they were sharply higher than a year ago and were close to record highs. The ongoing high profits and strong cash flow, plus management’s confidence in Shell’s future and perhaps in a nod to shareholders frustrated by the company’s heavy spending on alternative fuels, is allowing the company to boost its dividend by 15% and announce a new $4 billion (2% of market cap) share buyback to be completed by year’s end.

Western Digital (WDC) – Western’s new and highly capable CEO, David Goeckeler, who previously ran Cisco’s Networking & Security segment, is making aggressive changes to improve the company’s competitiveness in disk drives and other storage devices, as well as bolster its financial strength. The company generates free cash flow and holds plenty of cash to buy time for the turnaround and to help pay down its elevated debt.

Western reported a marginally profitable quarter as the storage industry shifts from strong demand/tight supply to softer demand/easing supply. This shift crimps both volumes and pricing, which mostly wiped out Western’s profits. The company guided for a break-even fiscal second quarter. We anticipate the downturn will last a year, after which the industry will return to an upcycle which should restore Western’s prosperity and share price. In the meantime, the company has the leadership, cost structure and balance sheet to endure.

Revenues fell 26% from a year ago but were 3% above the consensus estimate. Adjusted earnings of $0.20/share fell 92% from a year ago and were about half the consensus estimate. Most of the decline was driven by the weaker gross margin due to weaker pricing and fixed cost absorption. Operating expenses fell incrementally which did little to soften the effects of weaker gross profits.

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 reasonably reliable.

Xerox reported a disappointing quarter and free cash flow guidance, but these weren’t nearly as bad as initially perceived. Traders aggressively sold down the shares, which fell by as much as 26% at one point but have since recovered enough of that decline to now trade in line with the price of about two weeks ago.

Adjusted earnings of $0.19/share fell 34% from a year ago and were less than half the consensus estimate. Sales were essentially flat but rose 5% when removing the effect of the strong U.S. dollar. Margins slipped on higher costs and supply chain issues.

Guidance for “at least $125 million” in full-year free cash flow compared miserably to the former “at least $400 million” guidance. As the Xerox story is a cash flow story, investors were alarmed. But, some of the decline is due to the slow recovery in demand and the supply chain compared to management’s prior expectations (meaning more inventory build-up) and to a significant step-up in financing originations at its financing segment. A recovery is bound to happen, but it won’t be as fast as investors anticipated.

Xerox has a lot going on. The work-from-home shift has perhaps permanently and certainly cyclically reduced demand for its machines and related products. Inflation and currency changes are disrupting its profitability. It is on its third CEO in about five years following the sad passing of John Visentin in June. Steve Bandrowczak, the new chief, has reasonable potential and experience but is untested as a turnaround CEO of a public company.

The company split its reporting into two segments, “Print and Other” and “Financing.” We think this is a prelude to a divestiture of the financing group, which would be an important catalyst for Xerox shares.

The Print group showed decent results. Revenues were flat but profits rose 14%. After several quarters with weak sales and profits, it appears that Print is bottoming out and turning up. An encouraging indicator for future print machine demand is that services, paper and other supply sales jumped 11% as usage is recovering. Sales of its entry-range machines rose 13%. Also, the gross margin on equipment ticked up by nearly 3 percentage points. Midrange demand rose 7%. Services/Paper/Supplies gross margin slipped by 2 percentage points as costs rose, but we see this as recovering as the company implements its price increases.

Financing group revenues fell 12%, while segment profits slipped to near zero. Non-captive financings surged 33%, as Xerox is working to replace the slide in the volume of its own products being financed. As it builds the segment (called FITTLE) into a diversified financial services entity, it makes it more likely to be spun off or divested.

Overall, we are staying with Xerox even if the near-term slide in the stock and the delayed recovery make waiting exceptionally frustrating.

Friday, October 28, 2022, Subscribers-Only Podcast: NO podcast this week. Included below are our comments that otherwise would have been in the podcast.

Warner Bros Discovery will take about $4.3 billion in charges over the next two years or so related to its acquisition of the Time Warner assets from AT&T. The huge size reflects both the level of problems with the assets and the determination of the CEO to aggressively turn around the assets. We see all of this as a positive and would be more concerned if these charges and aggressive steps weren’t taken. Warner Bros Discovery reports full results on November 3.

A few weeks ago, Toshiba awarded preferred bidder status for its potential buyout to the JIP Group. That group is now rumored to miss the deadline to secure financing for a deal. Their initial bid was below ¥6,000 yen per share, equivalent to about $20.28/TOSYY ADR. The Toshiba saga will likely continue to drag on for months or quarters and will end when the check clears the bank. If the shares get close to what we think the company will sell for, we will probably cash out at that point.

We remain intrigued by Credit Suisse. Recall that we sold these shares in the summer at $5.11/share, taking a loss but avoiding the subsequent 25% decline in the shares. The new leadership at Credit Suisse, installed days after our exit, has begun a full-on process to essentially dismantle the bank – as we long thought necessary. We’re not ready to jump back in, but this stock is worth a fresh look.

As complete vindication of the merits of competition and value investing, we see that shares of former market darling Meta Platforms, previously known as Facebook, have underperformed the S&P 500 since their IPO. Once worth north of $1 trillion, Meta is now worth only about $350 billion.

What do these stocks have in common: Meta, Amazon, Netflix, Intel, Paypal, Zoom, Uber, Lyft, Micron, Shopify, Docusign, Okta, Zoom Video, Square/Block, Peloton, Wayfair? They all trade below their March 2020 pre-pandemic prices. Liquidity-soaked parties of all kinds can be a lot of fun, but the hangovers are killers.

Final Note: Does the stock market have you feeling down? It could be worse. Mark Zuckerberg, at one point the third richest person in the world, has lost over $100 billion in the past year or so. That’s billion with a “b.” Sure, his 350 million shares are still worth about $34 billion, but imagine the angst of going from #3 to something like #30, according to the Bloomberg Billionaires Index of the top 500 billionaires, which is calculated daily.

As subscribers may know, we’re baseball fans, particularly when it comes time for the World Series. Game 1 is tonight, featuring the perennial powerhouse Houston Astros, this time facing the Philadelphia Phillies. They barely made the playoffs – firmly holding a lock on third place in the National League Central Division, 14 games behind – and if the new 12-team format wasn’t in place the Phillies would be watching the World Series from their living room couches. How unlikely is it that the Phillies are here? Comparing this to public companies … it would be like perennial loser IBM making a hostile bid for Amazon, even with Amazon’s sloppy results lately.

The Phillies have rightfully earned their World Series spot, taking down three impressive teams: the St. Louis Cardinals, the Atlanta Braves and the San Diego Padres who for their part dismantled the otherwise dominant Los Angeles Dodgers.

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

The Catalyst Report

October saw a step-up in catalysts, helped by strong deal activity.

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:


Brinker International (EAT) $1.4 billion market cap – Shares of this owner of casual dining brands like Chili’s Grill and Bar remain near their lows, but a new CEO, who previously was the COO at KFC during its turnaround, is now at the helm. Still-healthy consumer consumption trends will likely provide a tailwind. The shares trade at a low 6.9x EBITDA.


Cameco Corporation (CCJ) $10.0 billion market cap – Cameco, a major producer of uranium for nuclear power plants, is teaming up with Brookfield Renewable Partners to buy Westinghouse Electric. The innovative deal makes sense given Westinghouse’s close involvement with nearly half of the world’s nuclear power fleet and could be a powerful catalyst for Cameco’s shares.

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.

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

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Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 1.49Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 8.50Buy (20)
Small capDril-QuipDRQMay 202128.28 25.78Buy (44)
Small capZimVieZIMVApr 202223.00 7.70Buy (32)
Mid capMattelMATMay 201528.43 18.62Buy (38)
Mid capConduentCNDTFeb 201714.96 3.93Buy (9)
Mid capAdient plcADNTOct 201839.77 35.10Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 14.676.8%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 10.91Buy (19)
Mid capViatrisVTRSFeb 202117.43 9.874.9%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 25.954.3%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 49.23Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 33.322.4%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 13.866.8%Buy (25)
Mid capBrookfield ReBAMRJan 202261.32 39.781.4%Buy (93)
Mid capPolarisPIIFeb 2022105.78 100.59Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 12.23Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 41.80Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 22.606.9%Buy (67)
Mid capESAB CorpESABJul 202245.64 36.91Buy (68)
Large capGeneral ElectricGEJul 2007304.96 76.000.4%Buy (160)
Large capShell plcSHELJan 201569.95 56.013.6%Buy (60)
Large capNokia CorporationNOKMar 20158.02 4.362.1%Buy (12)
Large capMacy’sMJul 201633.61 20.933.0%Buy (20)
Large capToshiba CorporationTOSYYNov 201714.49 17.483.7%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 8.685.1%Buy (16)
Large capNewell BrandsNWLJun 201824.78 15.675.9%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.518.9%Buy (32)
Large capKraft HeinzKHCJun 201928.68 38.024.2%Buy (45)
Large capMolson CoorsTAPJul 201954.96 49.873.0%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 289.88HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 45.652.6%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 34.34Buy (78)
Large capElanco Animal HealthELANApr 202127.85 13.06Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 35.675.4%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 17.004.5%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 12.49Buy (20)
Large capDowDOWOct 202243.90 47.625.9%Buy (60)
Large capCapital One FinancialCOFNov 202296.25 102.132.3%Buy (60)

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.