May 27, 2022

This week’s Friday Update includes a summary of the recent Cabot Turnaround Letter, and comments on earnings at Macy’s (M). We also summarize the podcast and include The Catalyst Report.

We encourage you to look through The Catalyst Report. It includes a listing of all companies that have reported a catalyst in the past month, including 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.

On Wednesday, we published the June edition of the Cabot Turnaround Letter. While the stock market has surged since its pandemic low, shares of many companies have sold off sharply and now trade below their March 23, 2020 level. We touch on several different types of situations behind these sell-offs and highlight five attractive stocks that are backed by reasonably healthy companies yet trade at attractive valuations. We also mention one additional stock that has significant potential but not under the current value-destroying management.

We also delve into the investment management industry and highlight stocks of four companies that look appealing but are not generally on investors’ radar screens. Our featured recommendation this month is investment firm Janus Henderson Group (JHG). The company produces strong free cash flow, has a fortress balance sheet, offers an attractive 5.7% dividend yield and is under pressure from activist investor Trian Partners to improve its results.

The letter also includes our previously distributed change in our rating of Altria Group (MO) from Buy to Sell.

Earnings updates:
Macy’s (M) – With a capable new CEO since February 2018, Macy’s is aggressively overhauling its store base, cost structure and ecommerce strategy to adapt to the secular shift away from mall-based stores. Its sizeable debt is not crippling the company but remains an overhang. Macy’s was hit hard by the pandemic, setting back its turnaround from a financial perspective, but the company’s acceleration of its overhaul shows considerable promise.

Macy’s reported a strong fiscal first quarter, as adjusted earnings were $1.08/share, up sharply from $0.39 a year ago and about 30% above the consensus estimate. Sales rose 14% from a year ago and were in line with consensus estimates. Same-store sales rose 12%, a generally impressive number. All three segments (Macy’s, Bloomingdale’s and BlueMercury) saw sharp growth. The company reaffirmed their full-year sales guidance and raised their adjusted earnings per share guidance due to a slightly wider EBITDA margin guide and significant share buybacks.

On most metrics, Macy’s is performing well. Compared to a year ago, gross margin and EBITDA margin expanded, overhead costs as a percent of revenue declined and credit card revenues rose 20% – faster than overall Macy’s revenues as bad debt expenses remained subdued. Inventories rose 17% from a year ago (although turnover increased) as slowdowns in some categories led to accumulations, while improved supply chain conditions accelerated some deliveries. Management said they are confident that they can work down the excess inventory without much pricing impact.

The company’s profit improvement programs, including the Polaris strategy, is boosting results. On about 14% higher sales compared to the first quarter of 2019 (pre-pandemic), adjusted EBITDA is 45% higher.

The CFO has been busy – the company’s improved credit quality allowed for the release of collateral for some of its debt, such that now none of its long-term debt is secured by any collateral. Also, Macy’s issued new debt that allowed for a net repayment of $300 million in debt and now has no material debt maturity for five years. The company also repurchased $600 million of its shares, about 10% of its market cap (Macy’s share count is down 14% from a year ago), and paid $45 million in quarterly dividends. These transactions reflect the remarkable shift from only two years ago when the company was in near-dire financial condition.

In front of what many fear is a recession, investors have little patience for Macy’s. The shares jumped nearly 20% on the news, cutting the recent losses, yet the company needs to continue delivering, as it did this quarter, for many quarters.

Friday, May 27, 2022 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 8½ minutes and covers:

• Ratings and earnings:
  
  • Comments on Macy’s earnings.

• Comments on other recommended companies:
  
  • Credit Suisse (CS) – CEO under new shareholder pressure
  • Vodafone (VOD) – major new shareholder gives CEO more time
  • Kaman (KAMN) – announces $440 million acquisition

• Final Note
  
  • The Indianapolis 500 and Roger Penske.

The Catalyst Report
May was an active month for catalysts, led by 15 CEO changes, four spin-off announcements, 10 activist campaigns and several acquisitions including the massive $61 billion deal for VMWare by Broadcom. There even was a notable IPO, for Bausch & Lomb (BLCO), in an otherwise IPO desert amid the tech stock rout.

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

.

The following catalyst-driven stocks look interesting:

WisdomTree Investments (WETF) $860 million market cap – While its ETF-driven concept makes sense, WisdomTree has never had much success. Now, activist shareholders are calling for the CEO to resign. The company is fighting back, so this could be interesting, although at 12x EBITDA the shares aren’t much of a bargain.

Curaleaf Holdings (CURLF) $4.3 billion market cap – Its shares have collapsed, along with those of its cannabis peers, making the valuation of this fast-growth company inexpensive. The board recently removed the CEO, portending a possible change of strategy. The regulatory and optic risks may be high, but Curaleaf shares seem destined for recovery at some point – but when is nearly impossible to determine.

Bausch + Lomb, Inc (BLCO) $6.3 billion market cap – Now on its way to freedom (its parent retains a 90% stake for now) by way of its recent IPO, this iconic company may be worth a look.

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

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 bruce@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.