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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 7, 2022

In late December, prior to the holiday, we published the January edition of the Cabot Turnaround Letter. Our first article, “Top Five Stocks for 2022,” we highlighted Credit Suisse (CS), Dril-Quip (DRQ), Lamb Weston Holdings (LW), Nokia (NOK) and TreeHouse Foods (THS).


In late December, prior to the holiday, we published the January edition of the Cabot Turnaround Letter. Our first article, “Top Five Stocks for 2022,” we highlighted Credit Suisse (CS), Dril-Quip (DRQ), Lamb Weston Holdings (LW), Nokia (NOK) and TreeHouse Foods (THS).

We also served up our 2022 Market Outlook, which first reviews the 2021 market performance by sector, geography and size, then covers bonds and commodities. We also provide our 2022 outlook, keeping firmly in mind Yogi Berra’s advice that “predictions are difficult, especially about the future.” Our third article delves into the bankruptcy and high yield bond markets, which we currently view as highly unappealing.

Our featured BUY is Brookfield Asset Management Reinsurance Partners Ltd (BAMR). This new company is a spin-off of the highly regarded Canadian investment manager Brookfield Asset Management. BAM Re is focusing on buying the assets and future contributions to pension plans, then reinvest these funds to generate long-term returns that exceed the build-up of the liabilities that they assume. BAM Re is undiscovered but well-capitalized, well-managed and well-positioned to succeed.

This week’s Friday Update includes our comments on earnings from Lamb Weston Holdings (LW) and Walgreens Boots Alliance (WBA). We had no price target or ratings changes this week.

Earnings updates
Lamb Weston Holdings (LW) – As the largest producer of frozen potato products (mainly French fries) in North America, Lamb-Weston’s revenues fell sharply when restaurants closed during the pandemic. We believe “Lamb” is a sturdy company, conservatively financed, with a strong market position among fast food restaurants (McDonald’s is a 10% customer, for example) and other food service venues. LW shares remain undervalued. Once the sales-reducing effects of the pandemic are in the past, we believe the market will more fully recognize the company’s value.

Lamb reported encouraging fiscal second-quarter results, and incrementally narrowed its full-year gross margin estimate (implying higher confidence as it addresses its near-term cost problems), driving a 7.5% increase in the shares on the day.

Sales of $1.0 billion rose 12% from a year ago and were in line with estimates. Adjusted earnings of $0.50/share fell 24% from a year ago but were 56% higher than the consensus estimate. Adjusted EBITDA of $181 million fell 15% from a year ago but was 22% above estimates.

The company said that strong demand and higher pricing equally contributed to the 12% sales increase. Gross margins fell compared to a year ago, but productivity improvements and product mix adjustments are now starting to help offset headwinds from higher commodity, labor and delivery costs. Management also characterized the potato supply issues as stemming from “an exceptionally poor harvest” this year – implying that a return to a normal harvest next year would bring relief for its commodity costs.

Overhead costs rose by $7 million, but consulting fees and new software implementation costs continue to fade away as these programs are winding down, so overhead costs may be flattening out. If so, any increase in gross profits would flow straight to the bottom line.

Lamb produced negative ($23) million of free cash flow, largely due to a large $145 million buildup of inventory. This inventory boost seems to be how Lamb is addressing its commodity and production problems. We see this as a one-time buildup, such that free cash flow will return to a healthy positive rate in future quarters. The company reiterated its capital spending and technology spending guidance. The balance sheet remains sturdy, with $622 million in cash that partly offsets $2.7 billion in debt. Lamb paid $34 million in dividends and repurchased $50 million in shares.

Walgreens Boots Alliance (WBA)– Once a retail pharmacy powerhouse, Walgreens faces hefty secular challenges from an overbuilt and mature store base, with customers who have plenty of alternatives to visiting its often poorly run and expensively priced stores. And pricing pressure from private and government payors is squeezing its prescription profit margin. Walgreens’ strategic plan seems unclear and unoriginal. Yet, the company has several appealing traits. Its shares are bargain-priced at 7.3x EBITDA, and even cheaper when Amerisource’s value is delineated. Walgreens has in solid financial condition, produces large and stable profits and cash flow, and replaced its CEO who brings a much-needed fresh perspective. We also like the appealing dividend yield.

Fiscal first-quarter results were encouraging, as Walgreens’ earnings were higher than the consensus estimate, and the company raised (incrementally) its full-year sales and earnings guidance. Walgreens shares fell about 3% on the day.

Sales of $33.9 billion rose 8% from a year ago and were about 3% above estimates. Adjusted earnings per share of $1.68 rose 53% from a year ago and were about 25% above the consensus estimate. Adjusted EBITDA rose 36% from a year ago (to a 6.7% margin) and was about 27% above estimates.

New full-year sales guidance is for 5-7% growth (was 4%) and low-single-digit earnings per share growth (was 0%). The earnings guidance includes a six percentage-point drag from higher compensation costs and incremental healthcare investments.

The company’s strategic transition continues with its new controlling stakes in Shields, VillageMD, Alliance Rx Walgreens Prime, and the German wholesale JV, as well as its rollout of more healthcare services, improvement in its core operations, and its targeted $3.3 billion in annual cost-cuts by 2024.

In the quarter, total sales were healthy, up 7.6% on a constant-currency basis, with roughly equal strength in the U.S. and international operations. Margins expanded as costs were restrained, leading to a 49% increase in adjusted operating profits.

In the U.S., which houses about 83% of total sales and most/all of the operating profit, same store sales rose about 8%. Walgreens’ role in providing Covid vaccines and testing helped drive sales. Total pharmacy sales rose about 1%, weighed down by weakness in the Alliance Rx Walgreens Prime segment, but comparable retail sales (everything except pharmacy) rose 11%. Gross margins and operating margins expanded, with adjusted operating margin reaching 5.5% compared to 3.9% a year ago. Adjusted operating profits rose 46%. Strong results in the U.S. are a key component of the Walgreens story, particularly as there is chatter about a divestiture of the Boots UK and perhaps other international operations.

International gross margins expanded but were nearly offset by higher overhead costs. Adjusted operating margins expended to 2.8% compared to 2.0% a year ago, but on the small numbers, operating profit nearly doubled.

Walgreens Health, which houses the emerging Shields, Village MD and other healthcare services initiatives, generated a small ($13) million loss.

Free cash flow of $645 million fell 15% from a year ago, mostly due to a $600 million negative change in working capital. We are expecting better results in future quarters, more from fundamental profit increases with less cash drain from working capital. The balance sheet remains solid, with only $9.7 billion in debt net of cash. Walgreens paid for its higher stakes in Shields and VillageMD during the quarter, leading to the uptick in net debt from the year end.

Friday, January 7, 2022 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.

Today’s podcast is about 9½ minutes and covers:

  • Brief updates on:
    • This month’s Cabot Turnaround Letter
      • Top Five Stocks for 2022
      • Market Review and Outlook
      • Bankruptcy and High Yield Bond Outlook

    • Feature recommendation: Brookfield Asset Management Reinsurance Partners Ltd (BAMR)
    • Lamb Weston Holdings (LW) – Reported encouraging earnings.
    • Walgreens Boots Alliance (WBA) – Reported encouraging earnings.

  • Updates on other recommended stocks:
    • Viatris (VTRS) – Increases its dividend by 9%.
    • TreeHouse Foods (THS) – Activist Jana Partners nominates two to board.
    • Kaman (KAMN) – Reorganizes its operating segments.
    • Western Union (WU) – We look through a minor downgrade by BofA analyst.
    • Strong opening week performance by our recommended stocks – fleeting or enduring?

  • Final note:
    • Rose Bowl includes a clinic in turnarounds on the football field.

Catalyst Report
December was a reasonably busy month for catalysts, with several new CEO announcements as well as good deal and spin-off activity. The coming year will likely bring a continued strong flow of catalysts.

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:


Fresenius Medical Care AG (FMS) $18.6 billion market cap – German-based Fresenius is the world’s largest provider of services and products to patients with kidney diseases. The shares have fallen sharply from their early-2018 high and now are unchanged over the past decade. Last month, Fresenius overhauled its management team and operating model to help right the ship. Noted value investors Dodge & Cox, Pzena Investment Management and Harris Associates are sizeable shareholders.


Hill International (HIL) $118 million market cap – This small-cap company is the 5th largest project and construction management firm in the United States, with involvement in some of the most significant global developments, including the new World Trade Center in New York and Panama Canal Expansion project. While the company has struggled in recent years, as has the stock price, noted activists Engine Capital and Ancora have a combined 15.2% stake and will likely press for changes or a sale.


AT&T (T) $187 billion market cap – Long-suffering AT&T has struggled under its misguided diversification strategy that drained it of perhaps over $50 billion of shareholder value. Under new leadership, the company is shedding most of its non-telecom assets in an effort to refocus. Investors are skeptical of the management team and the highly complex plan, but the shares trade at a highly discounted value.

Market CapRecommendationSymbolRec.
Price at
Small capGannett CompanyGCIAug 20179.225.070.0%Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.6815.000.0%Buy (20)
Small capDril-QuipDRQMay 202128.2822.370.0%Buy (44)
Mid capMattelMATMay 201528.4322.350.0%Buy (38)
Mid capConduentCNDTFeb 201714.966.160.0%Buy (9)
Mid capAdient plcADNTOct 201839.7749.700.0%Buy (55)
Mid capLamb Weston HoldingsLWMay 202061.3667.821.4%Buy (85)
Mid capXerox HoldingsXRXDec 202021.9123.644.2%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.0211.650.0%Buy (19)
Mid capViatrisVTRSFeb 202117.4314.503.3%Buy (26)
Mid capVistra CorporationVSTJun 202116.6822.322.7%Buy (25)
Mid capOrganon & Co.OGNJul 202130.1931.513.6%Buy (46)
Mid capMarathon OilMROSep 202112.0118.031.3%Buy (18)
Mid capTreeHouse FoodsTHSOct 202139.4342.580.0%Buy (60)
Mid capKaman CorporationKAMNNov 202137.4144.311.8%Buy (57)
Mid capThe Western Union Co.WUDec 202116.4018.345.1%Buy (57)
Mid capBrookfield ReBAMRJan 202261.3259.820.0%Buy (93)
Large capGeneral ElectricGEJul 2007304.9699.950.3%Buy (160)
Large capRoyal Dutch Shell plcRDS.BJan 201569.9546.794.1%Buy (53)
Large capNokia CorporationNOKMar 20158.026.120.0%Buy (12)
Large capMacy’sMJul 201633.6126.742.2%HOLD
Large capCredit Suisse Group AGCSJun 201714.4810.192.6%Buy (24)
Large capToshiba CorporationTOSYYNov 201714.4920.953.1%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.9210.404.2%Buy (16)
Large capNewell BrandsNWLJun 201824.7823.084.0%Buy (39)
Large capVodafone Group plcVODDec 201821.2415.556.6%Buy (32)
Large capKraft HeinzKHCJun 201928.6836.834.3%Buy (45)
Large capMolson CoorsTAPJul 201954.9649.782.7%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18313.220.0%HOLD
Large capWells Fargo & CompanyWFCJun 202027.2253.631.5%Buy (55)
Large capBaker Hughes CompanyBKRSep 202014.5325.952.8%Buy (26)
Large capWestern Digital CorporationWDCOct 202038.4764.740.0%Buy (78)
Large capAltria GroupMOMar 202143.8049.217.3%Buy (66)
Large capElanco Animal HealthELANApr 202127.8527.080.0%Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.5352.443.6%Buy (70)

Market cap is as-of the Initial Recommendation date.
Current status indicates the rating and Price Target in ( ).
Prices are closing prices as-of date indicated, except for those indicated by a "*", which are price as-of SELL recommendation date.

Please feel free to share your ideas and suggestions for the podcast with an email to either me at or to our friendly customer support team at Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.

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.