February 21, 2025

In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including Agnico Eagle Mines (AEM), Alcoa (AA), American Airlines (AAL), Berkshire Hathaway (BRKB), Brookfield Wealth Solutions (BNT), GE Aerospace (GE), Pan American Silver (PAAS), Starbucks (SBUX) and Toast Inc. (TOST).

The Trump administration’s proposed revaluation of the U.S. Treasury’s gold reserves could serve as a “quantitative easing” for the economy and financial market.

Investors worry over its potential inflationary impact, but it could explain recent gold price strength.

Earnings continue to produce mixed results for our stocks, including most recently Agnico Eagle Mines (AEM), Pan American Silver (PAAS) and Toast Inc. (TOST).

Comments on Portfolio Holdings

Last Friday, Agnico Eagle Mines (AEM) released fourth-quarter earnings results that impressed on both the top and bottom lines. Revenue of $2.2 billion increased by an eye-popping 27% year over year, while earnings of $1.26 a share beat estimates by nine cents.

Management said 2024 was a record year for Agnico across several metrics, including annual gold production, earnings and free cash flow. Management further highlighted “robust” cost controls and strong operational performance, resulting in reduced leverage to gold prices.

The results were driven by an average realized gold price of $2,384 per ounce, with an all-in-sustaining cost (AISC, a key metric) of $1,316 an ounce, hundreds of dollars below industry peers—and significantly below the current price of gold.

On the capital returns front, the company allocated 40% of its free cash flow in Q4, returning almost $1 billion to shareholders in dividends and share buybacks while reducing net debt by $1.3 billion in the quarter. Exploration spending, meanwhile, hit record levels in a sign that Agnico is once again focused on long-term growth.

Looking ahead, Agnico plans to “achieve extraordinary production growth,” including the potential for both of its key mines, the Malartic and Detour Lake in Canada, to produce over one million ounces of gold annually. If realized, this would place the firm among the top six largest gold mines in the world.

For full-year 2025, analysts expect 15%-ish growth on both the top and bottom lines, which will likely prove conservative if upward pressure remains on the gold price as per my expectations. The stock maintains a Hold rating in the portfolio.

The new 25% tariff rates on steel and aluminum imports into the U.S. are due to take effect on March 12, based on executive orders signed by President Donald Trump last week. A U.S. official had earlier noted the new rates would take effect on March 4.

According to Mining.com, “The tariffs will apply widely to all U.S. imports of steel and aluminum, including from Canada and Mexico, among the country’s top foreign suppliers of the metals. The levies, which also include finished metal products, are meant to crack down on what administration officials said were efforts by countries like Russia and China to circumvent existing duties.”

Analysts at Goldman Sachs said Trump’s tariffs on aluminum imports will largely be passed on via higher domestic prices for the metal if no major trading partners are exempted. Trading partners including the European Union also plan to retaliate against American exports in response to the tariffs, with the head of the European Commission stating that “unjustified tariffs on the EU will not go unanswered—they will trigger firm and proportionate countermeasures.”

Although America’s steel imports account for 23% of domestic consumption, the ratio is much higher for aluminum, at 47%, according to the U.S. Geological Survey. The U.S. is also especially reliant on imports of primary aluminum from Canada, which supplies more than two million tons each year.

But because aluminum prices have already rallied 11% this year, there is now a renewed incentive for producers to smelt more scrap aluminum—including in the form of recycled beer cans. As highlighted in a recent Mining.com editorial, America is the world’s largest user of aluminum beverage cans with 107 billion sold in 2021, accounting for over a quarter of the global market. By contrast, the recycling rate was just 43% in 2023, down from a peak of 57% in 2014, according to the Container Recycling Institute.

The editorial went on to state that re-melting a beverage can is much more energy efficient than producing virgin metal since it typically requires only 5% of the power. And as industry consultant Jorge Vasquez recently stated, “Scrap is the new aluminum ore.”

Moreover, recycling is not only less costly, it’s also far less energy intensive than primary production and will help aluminum producers meet carbon reduction goals, according to experts.

For Alcoa (AA), this should translate into an expanded opportunity, as the company has the capacity to melt recycled aluminum as part of its aluminum production and sustainability efforts. The company also operates secondary aluminum smelting facilities, which process recycled aluminum scrap into new aluminum products, and it’s also increasing its focus on low-carbon aluminum by using more recycled materials and renewable energy in its operations. The stock retains a Hold rating in the portfolio.

Is Warren Buffett’s Berkshire Hathaway (BRKB) souring on the stock market? That’s the takeaway that a number of bearish analysts attached to Berkshire’s decision to completely close out two of its S&P ETF holdings, including the SPDR S&P 500 ETF (SPY) and the Vanguard S&P 500 ETF (VOO). It should be noted that Buffett has previously called low-cost S&P 500 ETFs “the best investment most people can make.”

Berkshire also completely divested its stake in Ulta Beauty (ULTA) and trimmed its stakes in Bank of America (BAC), Citigroup (C) and Capital One Financial (COF).

In terms of Berkshire’s decision to exit the market-tracking S&P funds, it must also be noted that those holdings represented less than 1% of the firm’s total portfolio. Therefore, it can’t necessarily be assumed that Buffett has turned bearish on the broad market outlook.

By the same token, neither can it be blithely ignored as an irrelevant decision. To me, it provides another reason for being more judicious in selecting stocks than would normally be the case in a bull market. Above all, a wait-and-see approach is definitely in order.

In terms of the stocks Berkshire increased its holdings in, Sirius XM (SIRI), Domino’s Pizza (DPZ) and Occidental Petroleum (OXY) were among them. The stock retains a Hold rating in the portfolio.

Brookfield Wealth Solutions (BNT) has declared a 9-cent-a-share quarterly dividend, a 13% increase from the prior dividend with a yield of 0.6%. It’s payable to shareholders of record as of March 14 on March 31. The stock is rated Hold in the portfolio.

GE Aerospace (GE) last Friday declared a 36-cent-per-share quarterly dividend at a 0.7% yield. The dividend increased 29% from the prior dividend of 28 cents, and it’s payable on April 25 for shareholders of record as of March 10.

Earlier this week, GE was initiated as a Buy in research coverage by capital markets firm Redburn Atlantic. The analysts said the company’s jet engine business was positioned “to increase profits on growing demand for air travel worldwide,” adding that GE is “the engine maker with the largest and most profitable installed base, offering investors sustained earnings growth and good cash conversion well into the 2030s, with limited volatility and downside risks.”

GE maintains a Hold rating in the portfolio.

Pan American Silver (PAAS) reported its fourth-quarter earnings on Wednesday, which featured revenue of $815 million that increased 22% year-on-year and EPS of 35 cents that was in line with estimates. The shares rallied 6% in response to the mostly sanguine results.

The company reported record cash flow from operating activities on both a quarterly and a yearly basis, as well as record free cash flow of $196 million and $445 million for Q4 and 2024, respectively.

I’ll have more to say about Pan American’s earnings and future outlook after I’ve had a chance to examine the earnings call. The stock remains a Buy in the portfolio.

Starbucks (SBUX) has announced that it plans to increase its Middle East storefront exposure. CEO Brian Niccol told Bloomberg this week that the firm plans 500 new store openings over the next five years with the potential to create 5,000 jobs.

Bloomberg noted that Starbucks currently has more than 1,300 stores in the region, where it operates through a licensing agreement with Kuwaiti family conglomerate Alshaya Group.

What’s more, the report said Starbucks plans to expand into China, with plans to open a “few thousand” more stores. The company is also considering options that could include selling a stake in the firm, Bloomberg reported.

Starbucks shares have risen 24% this year through this week. The stock retains a Buy rating in the portfolio.

Restaurant payment systems firm Toast Inc. (TOST) reported fourth-quarter revenue of $1.3 billion that beat estimates and increased 29% from a year ago, but adjusted earnings per share fell short at five cents against the consensus estimate of 17 cents. The underwhelming profitability metric was the reason for the market’s negative reaction, as shares were down 4% on Thursday in the report’s wake.

However, the strong top-line growth was the main attraction here, and it was driven by continued adoption of the company’s integrated platform—and in spite of increasing competition and economic headwinds.

In the earnings call, Toast’s management emphasized the addition of 28,000 net locations in 2024, pushing the total to 134,000 total locations where its products are used. The top brass described 2024 as a “transformational year” for the business and emphasized the company’s first full year of GAAP profitability and a 34% growth in recurring gross profit streams.

Toast’s enterprise segment posted its best year ever in 2024, featuring key wins with Hilton Hotels, Marriott and Ascent brands, along with 500 Perkins and Huddle House locations. International markets boasted a 50% increase in new locations.

For 2025, Toast expects to achieve around 25% growth in recurring gross profit streams and sees adjusted EBITDA of $520 million at the midpoint, reflecting a 30% margin.

The company also plans to prioritize scaling market share in its U.S. restaurant segment, expand new markets overseas, increase platform adoption through AI and expand profit margins. The stock remains a Buy in the portfolio.

RATINGS CHANGES: None this week.

NEW POSITIONS: None this week.

Friday, February 21, 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 18 minutes and covers:

• Discussion of the Trump administration’s proposal to make gold an increased focus of the U.S. monetary system.
• How beer cans could help circumvent shortfalls related to Trump’s tariffs while boosting the growth outlook for Alcoa (AA).
• Earnings beats and misses among portfolio holdings.
• Final note:
  
  • Berkshire Hathaway’s decision to cut S&P 500 ETF holdings, while not necessarily a bear signal, is another reason to maintain a judicious stock selection approach.

Market Outlook

Shortly after entering the White House in January, Donald Trump proclaimed that America will soon be entering what he styled as a new “Golden Age.” Critics and partisans alike interpreted the phrase as having a mostly metaphorical or sociopolitical meaning. But it’s becoming apparent that his statement may well have a literal reference to the shiny yellow metal itself and its application to U.S. monetary policy.

Trump’s new Treasury Secretary, Scott Bessent, recently announced plans to monetize the U.S. Treasury’s 262 million troy ounces of gold, which are carried on the books at $42.22 an ounce. Revaluing this gold at current market prices of around $2,900 an ounce could potentially add up to as much as $800 billion to the Treasury’s balance sheet via a repurchase agreement. It could also reduce the need for additional bond issuance while also lowering Treasury yields and having a stimulating effect on the economy.

A recent Financial Times editorial posited that rising speculation behind such a gold revaluation could be the main reason for gold’s latest price surge. Moreover, if carried out, this scheme could offer, in the words of ZeroHedge, a new kind of quantitative easing (QE) that would carry considerable financial and economic benefits for the U.S.

Paving the way for this, as ZeroHedge also pointed out, is the fact that the BRICs nations like China have not only been reducing their holdings of U.S. Treasuries while de-dollarizing, but the BRICs nations have already positioned gold as the cornerstone of their financial strategy. The United Arab Emirates (UAE) has emerged as Asia’s gold hub in the bloc’s new economic corridors of India-Middle East-Europe and China-Mongolia-Russia.

Notably, the United Arab Emirates (UAE) surpassed the United Kingdom in 2023 to become the world’s second-largest gold trade center. In the wake of these developments, a growing number of economists believe Western nations, led by the U.S., must act quickly to shore up their own monetary standard, and they believe gold’s time-tested and proven reliability as a store of value could accomplish this goal.

Bessent’s recognition of gold’s role in the international monetary system comes at a time when central banks are increasingly turning to gold in order to diversify their monetary strategies. And with global gold demand continuously hitting new quarterly and full-year highs—including most recently a 6% year-on-year increase to a record level in Q4—the timing arguably couldn’t be better.

Along those lines, Trump economic advisor Judy Shelton recently advocated for a 50-year Treasury instrument that could be converted into gold upon maturity. She argued that such an instrument would address perceived shortcomings in the current monetary system while possibly restoring its stability by linking the dollar to a tangible asset like gold.

Writing last week in the Financial Times, policy analyst Bob McCauley opined, “The prospect of the Treasury’s using gold profits to reduce its bond issuance would give comfort to some investors, while President Donald Trump might want to use the proceeds to start his new American sovereign wealth fund.”

As of now, the Trump administration has announced no formal plans to actively pursue this plan, and it’s not clear if the Treasury Secretary can unilaterally re-mark gold. But the idea is clearly being considered, and should it actually be implemented, it’s worth briefly considering how it might impact financial markets and the economy.

For investors, Treasury bond maturities would likely lengthen while the Fed’s holding of Treasuries would decrease by up to a half a trillion dollars (by McCauley’s projection), in turn leaving more money in the hands of investors.

Moreover, if the U.S. sells gold and thereby injects cash directly into the economy, it could significantly increase the money supply. And while some analysts believe this would lead to a further jump in the inflation rate, demand for goods and services would also presumably increase, thereby providing more of a salutary lifting effect for the economy while benefiting the nation’s finances.

Some observers believe a gold revaluation might be viewed as a desperation measure that could destabilize the economy. But I think a more likely outcome would be enhanced confidence in the dollar and an increase in the currency’s strength due to a gold backing, in turn reducing long-term inflation.

For now, gold revaluation remains shrouded in the realm of mist and maybe. But should it become reality, I expect the measure to produce a mostly positive outcome for investors and the economy on the whole.

Please know that while I don’t yet personally own shares of all Cabot Turnaround Letter recommended stocks, this will materially change in the coming weeks as I become fully integrated as your new chief analyst.

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at cdroke@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.

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