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Note: This is our final issue of Cabot Stock of the Week this year. Next week we get a little “vacation.”

But rest assured we’ll be keeping an eye on the market, where market trends remain very positive as we head toward the end of the year.



Today’s recommendation is a low-risk water company in a foreign country, so it may be the perfect diversification move if you’ve got a lot of U.S. growth stocks.



But to fit it into the portfolio, we’ve got to sell something, and the victim this week is Eli Lilly (LLY), which has brought us a decent profit in a fairly short time.



Full details in the issue.

Thank you for subscribing to the Cabot Turnaround Letter. We hope you enjoy reading the February 2023 issue.

While many initial public offerings (IPOs) have a quick price “pop” on their debut, most are speculative companies whose share performance is more accurately described as “pop and drop.” Our search for enduring post-IPO companies whose shares trade at attractive prices turned up four promising ideas.

We also take a look at our research process using an approaching opportunity in shares of Fidelity National Information Services (FIS).

Our feature recommendation this month is a European company that investors are avoiding due to its conglomerate structure and potentially large legal liabilities related to a disastrous acquisition several years ago. But shares of Bayer AG (BAYRY) trade at an excessive discount to the likely liabilities, while the core business is stable and resilient. Shareholders are beginning to press for major changes to unlock the company’s value.

Aerospace and oilfield service supply company KLX Inc. (KLXI) reported a strong fourth-quarter 2018 earnings beat this week (January year-end). Non-GAAP earnings per share (EPS) were $1.00 vs. the expected $0.88.

It doesn’t take a proprietary timing system to know the trend is down—we’ve been cautious and defensive since late February when the market and leaders first went over the falls, and we remain so today. That said, we’re also students of the market, and there’s no question we’re in the midst of an outright panic, with some truly extreme readings (north of 1,000 new lows on the NYSE on Friday and today; 95% of the S&P 1500 below their 50-day lines, etc.) that have a history of showing up near some sort of market low. That’s not a reason to turn bullish—again, the trends are clearly down—but it’s best to keep your head up and stay alert should some actual “good news” hit the wires. We’ll leave our Market Monitor at a level 3.

This week’s list is chock-full of defensive growth stocks—firms that have steadier growth stories that shouldn’t be affected by the tariff or economic headwinds. Our Top Pick is showing great relative strength and has a huge runway of growth ahead.

The S&P 500 paused its recovery over the past week, moving sideways over the past five days. Here is my take on the market.

It continues to be a very tough market, and with our exposure to small- and mid-cap growth stocks our portfolio continues to feel pressure. After some signs of stabilization last week the sellers are back in control this week and many names look destined to retest their March lows, or possibly dip a little lower.

Small-cap stocks continue to underperform their larger peers though, with the exception of this morning, the S&P 600 Small-Cap Index ETF (IJR) has been inching higher toward resistance at 110.

It’s possible that with expectations for the first rate cut being pushed out to June (currently, subject to change) that my expected small-cap rally has been similarly delayed. I have been surprised that this asset class hasn’t seen more momentum.

While the S&P 600 Small Cap ETF (IJR) hasn’t yet challenged its high for the year of 120.7, hit just prior to the market rout a few weeks ago, the index’s performance lately has still been impressive.

For most of this year the IJR bumped up against overhead resistance near 111. It finally blasted through in the second week of July. But that market turbulence from a few weeks ago seemed like it could put a lid on the index for a while.

That hasn’t been the case.

Small caps have come back swiftly, jumping back above that 111 level a week ago and acting very well this past week.

Earnings season is largely over, so there were no companies that reported earnings this past week. However, we do have at least one company reporting next week – Ammo, Inc. (POWW). And the next earnings season is frankly just around the corner, with Walgreens Boots Alliance (WBA) announcing they’ll release their next round of results the last week of the month.

Earnings season is over, so there were no companies that reported earnings this past week. However, we do have at one last company on a slightly different fiscal schedule reporting next week – Walgreens Boots Alliance (WBA), who will announce results on the 27^th.

Walgreens Boots Alliance (WBA) acknowledged disappointing quarterly results on Thursday, cutting its full-year financial guidance to a range of $2.80 a share to $2.95 a share, down from previous expectations of $3.20 a share to $3.35, and well off analyst estimates of $3.21. CEO Tim Wentworth discussed plans that could lead to the closure of thousands of its U.S. pharmacies as the company’s retail business continues to struggle. “We are at a point where the current pharmacy model is not sustainable, and the challenges in our operating environment require we approach the market differently,” Wentworth said, also noting that a quarter of the stores are not contributing to operating income. While there were positives – a well-performing international business and a growing U.S. healthcare segment for instance – future performance will heavily rely on the company’s shift toward greater efficiency.

The story of the week in the markets has been that central bankers are still leaning toward cutting rates by mid-year (odds still favor a cut in June). That’s helped stocks do pretty well, with outsized performance in energy, banks, insurers and homebuilders.

I’ve been monitoring the performance of small-cap sector ETFs versus those of the comparable large-cap offerings. It’s been interesting to see small-cap financials, materials and industrials performing far better.

Wells Fargo (WFC) kicked off the Cabot Turnaround Letter earnings season today, showing EPS of $1.26/share, which exceeded estimates by 17 cents. WFC also beat top-line revenue estimates by $710M, coming in at $20.86B. Despite the comfortable beats, WFC shares are essentially flat for the day.

The market continues to struggle with the rapid jump in interest rates (10-year at 4.63% after hitting 4.7% on Tuesday).

I think we’re still fluctuating somewhere between a code yellow and a code orange situation (was code green a few weeks ago!) so long as that yield doesn’t go over 4.7% and all hell doesn’t break loose in the Middle East.

Duluth Holdings Inc. (DLTH) reported its fiscal first-quarter 2024 results, with revenues of $116.68 million, missing estimates by 2.52% and down from $123.76 million a year ago. The company posted a net loss of $7.9 million and Adjusted EBITDA of $1.8 million. Despite sales challenges, CEO Sam Sato highlighted improved inventory management and successful customer engagement campaigns. The company ended the quarter with $6.8 million in cash and updated its fiscal 2024 outlook to net sales of $640 million and Adjusted EBITDA of $39 million.

The S&P 600 SmallCap Index hit a multi-week high on Tuesday before giving a little back yesterday.

There’s some interesting data that suggests small-cap stocks could be in for a run starting now.

According to data from Evercore ISI, small-cap stocks have done better than large caps 60% of the time in June, dating back to 1990. The odds are even better when small caps enter June underperforming, as they have for a while now.

The big macro development of the week is that the Fed is in no rush to rescue the market or the economy.

Speaking yesterday at the Economic Club of Chicago, Fed Chair Jerome Powell sounded a hawkish tune. While he acknowledged that the level of tariff increases announced on Liberation Day is much higher that what was expected, and will likely lead to higher inflation and slower growth (i.e. the dreaded stagflation), he said the Fed is well positioned to wait for greater clarity before considering any adjustments to policy.

Despite an onslaught of tariff headlines and rumors, the holiday-shortened week was mostly quiet outside of a nasty sell-off on Wednesday. By week’s end the S&P 500 had lost 1.5%, the Dow had fallen 2.7% and the Nasdaq had declined by 2.6%.

Despite an onslaught of tariff headlines and rumors, the holiday-shortened week was mostly quiet outside of a nasty sell-off on Wednesday. By week’s end the S&P 500 had lost 1.5%, the Dow had fallen 2.7% and the Nasdaq had declined by 2.6%.