February 28, 2025

In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including Alcoa (AA), Centuri Holdings (CTRI), Janus Henderson Group (JHG), Paramount Global (PARA), Starbucks (SBUX) and Teladoc Health (TDOC).

This month’s catalyst report features a mixed bag of attractive turnaround candidates in several industries, including software, healthcare, luxury retail and chemicals.

Earnings continue to produced mixed results for our stocks, forcing a decision to cut Vestis Corp. (VSTS) from Buy to Sell.

Comments on Portfolio Holdings

In a reversal of its previous position, Alcoa (AA) said President Trump’s plan to impose a 25% tariff on aluminum imports could result in the loss of 100,000 jobs while not helping lift production of the metal.

At a recent industry conference, the company’s CEO Bill Oplinger said the tariffs could cost 20,000 direct U.S. aluminum industry jobs and another 80,000 jobs in sectors that support it, while stating the tariff is “bad for the aluminum industry in the U.S. and bad for American workers.”

Oplinger also said the tariffs alone wouldn’t cause Alcoa to restart some of its shuttered U.S. production facilities, although the company would consider increasing domestic output if it had a cheap supply of power.

According to Seeking Alpha, U.S. aluminum smelters produced 670,000 metric tons of the metal last year, which is down by a whopping 82% from the 3.7 million tons produced in 2000, due largely to plant closures that have left the country largely reliant on imports. Alcoa retains a Hold rating in the portfolio.

Centuri Holdings (CTRI) beat top- and bottom-line estimates in this week’s release of its Q4 earnings report, although the stock’s response wasn’t favorable. The shares were down 12% in the two days since Wednesday’s report despite a number of improved performance metrics.

Revenue of $717 million increased 8% year-on-year, while earnings of 21 cents a share beat estimates by two cents while improving 250% sequentially. Adjusted EBITDA improved by $13 million, or 23%, and the net debt to adjusted EBITDA ratio improved to 3.6x in December 2024, from 4x in December 2023, which was in line with the company’s expectations.

The outfit exited 2024 with a backlog totaling $3.7 billion, of which 90% is related to Master Service Agreements (MSA) revenue.

The stock’s negative reaction to the otherwise sanguine earnings was likely because of investors’ concerns over potential risks in the firm’s energy infrastructure investments. There’s still a great deal of uncertainty over the energy sector outlook for 2025, although I believe the firm’s business related to natural gas, electric and servicing of the 5G and datacom sectors should surpass expectations this year. To that end, I suspect the stock correction is likely in reaction to the market’s fears that the stock may have been temporarily out of sync with its valuation metrics.

Going forward, Centuri said it will continue to focus on improving free cash flow and strengthening the balance sheet throughout 2025. It also raised its revenue outlook for the full year to $2.7 billion, which would represent 3% growth if realized. Earnings for 2025, meanwhile, are expected to jump 80%. The stock remains a Hold in the portfolio.

The shares of asset management holding firm Janus Henderson Group (JHG) were upgraded to a Buy this week by investment bank UBS. Janus was upped from a Neutral rating as the bank noted “early signs of business improvement have begun to manifest” in key performance indicators, including a positive inflection in net flows last year.

UBS further said it expects inflows to accelerate into 2025 and 2026, “given the scale established with some of their key products as well as the enhanced overseas distribution,” while Janus’s differentiated product offerings and strength in its retail channel is expected to result in sustained, positive organic growth in the coming years. The stock remains a Hold in our portfolio.

Paramount Global (PARA) released Q4 results on Wednesday that included revenue of almost $8 billion that increased 5% year-on-year and earnings of 11 cents that were in-line with estimates.

Most of the conglomerate’s revenue is derived from TV, which was down nearly 4% at $5 billion and fell below analysts’ estimates. According to Paramount, the decline in the segment reflected drops in the linear advertising market, along with fewer sporting events on CBS, but partially offset by higher political advertising.

By contrast, its direct to consumer (DTC) unit saw sales rise nearly 8% to $2 billion, as it added 5.6 million more subscribers and saw “record engagement” on the Paramount+ offering. The platform had 78 million subscribers, which increased 15% from last year while beating estimates.

The filmed entertainment segment saw a 67% jump in revenue at $1 billion, thanks to the strong performance of Sonic the Hedgehog 3, which is approaching nearly $500 million at the global box office, and Ridley Scott’s highly rated Gladiator II.

Paramount also said it expects to close on the $28 billion Skydance deal in the first half of this year. The shares retain a Buy rating in the portfolio.

In a high-profile news announcement, Starbucks (SBUX) announced Monday that it plans on reducing 1,100 jobs, while also eliminating several hundred open and unfilled positions.

CEO Brian Niccol said the company “will share more on the timeline for this week and how we are taking care of partners shortly.”

Additional changes to be made to the partner roles, including responsibilities and reporting structures, are scheduled to be shared with affected partners by the end of this week. The decision does not affect in-store teams or store hours.

Also this week, Starbucks is said to be exploring options to sell a stake in its China business, with several buyout firms and Chinese companies reportedly expressing interest.

According to Reuters, Fountainvest Partners, PAG, China Resources Holdings and Meituan are among the potential buyers. The move comes as Starbucks aims to revitalize its operations in China, which is its second-largest market. The company is also facing strong competition from domestic competitors in China, which is another motivation for selling a stake in the business (the size of which has yet to be determined).

Should it be consummated, the Starbucks China deal could be valued at over $1 billion, and the firm plans to reach an agreement by the end of 2025. The stock remains a Buy in the portfolio.

Teladoc Health (TDOC) posted a disappointing Q4 report this week, resulting a 14% drop in the share price. Revenue of $640 million was 3% lower from a year ago but beat consensus estimates. However, the per-share earnings loss of 28 cents missed estimates by six cents.

And while the number of the firm’s U.S. integrated care members rose 5% year-over-year, average monthly revenue per member declined 2%.

In the earnings call, management said they’re working to pursue opportunities in what it called a “challenging environment.” To that end, Teladoc has taken several actions over the past several months to streamline the organization, deepen market focus and advance key initiatives, which the firm says has driven “significant cost savings and created additional capacity to invest.”

For full-year 2024, Teladoc added over four million members in the U.S. and grew underlying visit volumes by 6%, which it regards as a key metric as the market continues to move towards visit-oriented arrangements. It also recently implemented new technology at the point of care to support additional services for customers.

Chronic Care management enrollment grew by 4% in 2024, and the company sees opportunities to further expand in this space, including through its recently announced agreement to acquire Catapult Health. It also grew total visits by 10% in 2024, to one million.

Looking ahead, the company expects Q1 revenue of around $622 million at the midpoint and adjusted EBITDA of about $54 million dollars—both essentially flat from a year ago if realized.

In terms of valuation, the stock is considered to be cheap at 7x forward free cash flow, and analysts believe Teladoc can deliver around $190 million of free cash flow in 2025. Investor sentiment toward the stock, moreover, is at rock bottom, so it wouldn’t take much in the way of a positive news development for the stock to rebound.

We’ve already taken a partial profit on our holding in TDOC, and it’s currently down just 5% from our initial entry point, so I’m willing to give the stock a bit more leeway before making a decision on whether or not to cut it. For now, it retains a Hold rating in the portfolio.

RATINGS CHANGES: I’ve made the decision to cut Vestis Corp. (VSTS) from Buy to Sell in light of its recent drastic underperformance. Quite simply, the stock has failed to realize my expectations since first initiating coverage on it and I see more downside than upside potential in the near term. The company remains on my radar as a longer-term turnaround prospect, but as I believe we should be playing defense in light of increasing macro headwinds, it’s imperative that we keep the portfolio as lean as possible until market conditions improve. SELL

NEW POSITIONS: None this week.

Friday, February 28, 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 23 minutes and covers:

• My answer to the question, “Are we heading into a bear market?”
• Recent inflows into the financial sectors are at a nearly four-year high and support general equity market strength.
• Key indicators suggest the choppy trading range-type environment will continue.
• Earnings beats and misses among portfolio holdings.
• Final note
  
  • This month’s leading catalyst report stock candidate is in the economically-sensitive luxury market, but is supported by broad sector strength.

Market Outlook

A concern on the minds of many investors right now is the possibility that equities are entering a bear market. In just the past week, the number of Google searches for the term “bear market” increased by over 70% in a clear sign that worry is abounding. The question is, will this fear strengthen the stock market’s “wall of worry” and keep the uptrend intact, or will it become self-fulfilling and result in lower stock prices in the coming weeks and months? We’ll address that question here, along with a discussion of this month’s catalyst report and weekly portfolio review.

I won’t hold you in suspense and will tell you straight away that I don’t believe we’ve entered a bear market. The indicators I look at to make that determination aren’t yet confirming a comprehensively bearish environment for the broad market. What I am seeing, however, is a very mixed environment with bearish action in some segments of the market while others are holding up fairly well. The net result is a market in what could be described as a neutral state, albeit with a growing level of volatility. And as I’ve emphasized in recent weeks, this will necessitate a certain level of caution when considering new stock positions.

Most of the weakness of late has been in growth-oriented areas of the market, including semiconductors and software stocks. Nvidia’s (NVDA) earnings report was a big reason behind the latest show of tech sector weakness, as the semiconductor giant’s latest results worried investors over what many view as the company’s excessive AI spending, as well as the potential for economic headwinds to bite into its profit margins despite an overall solid Q4 report.

Weakness is also increasingly showing up under the market’s surface in the form of elevated new 52-week lows on both the NYSE and the Nasdaq. On the Big Board, new lows have entered triple-digit territory, which is always a concern for the immediate-term outlook. There also seems to be a mix of industries making new lows, as opposed to just a couple of areas, which suggests selling pressure is broadening.

That said, I think there’s still enough strength in the market’s key sectors to keep the dominant uptrend intact for now. Significantly, there is still residual strength in the all-important financial sector, with bank and broker/dealer stocks still acting well and sitting just under 12-month highs. Highlighting this trend, Bank of America recently noted that financials have logged inflows over the past seven weeks, the longest recent buying streak of any S&P 500 sector—and with the rolling four-week average of inflows constituting the largest it has seen since September 2021.

What’s more, the NYSE advance-decline (A-D) line is also still holding up in confirmation of the market’s intermediate-term uptrend. As mentioned previously, this indicator is one of my favorites for reflecting the availability of liquidity in the broad market. Plus, bear markets are typically presaged by a breakdown in the A-D line before the major indexes break down, and that hasn’t happened yet.

Then there’s the latest AAII weekly sentiment survey, which revealed that bearish investors have reached 60% as of February 26. That’s an abnormally high percentage of bears by historical standards and the highest reading of bears in the AAII poll since October 2022, which marked the bottom of that year’s bear market.

However, it should be noted that a single week’s reading of even this magnitude isn’t always enough to signal a market bottom. Rather, it sometimes takes up to three or four consecutive weeks of extremely high bearish readings in this poll before a buyable low is firmly in place (as was true in 2022).

It should also be noted that investors have been increasingly reticent to commit to equities in the past several months despite an overall bullish backdrop during most of that time. According to analysts Robert Carey and Peter Leonteos of First Trust Portfolios, “Investors have been piling cash into money market accounts (see chart) despite compelling returns in the U.S. equity markets and declining interest rates.”

The analysts found that net assets invested in U.S. money market funds totaled nearly $7 trillion on February 19, an increase of 15% from a year ago. The current tally rests just below an all-time record. For comparison, the S&P 500 Index increased by 26% on a total return basis over the same one-year period.

What this tells me is that while there’s still an abundance of liquidity to potentially drive stock prices higher longer term, in the near term that money is being increasingly parked on the sidelines due to investors’ reluctance to invest—likely due to a mix of concerns ranging from inflation to the still-shaky geopolitical outlook.

And while the rising level of money market fund assets is supportive for the stock market’s “wall of worry” (from a contrarian perspective), it’s not exactly helping the stock market right now in terms of providing the necessary fuel for sustainable rallies. Hence the market’s jittery, range-bound nature right now.

By the same token, this isn’t a typical defensive-style market, either, in that defensive sectors that normally thrive when participants are cautious aren’t necessarily outperforming. For instance, although the defensive consumer staples are showing strength, utilities are wilting a bit, and the healthcare sector is a mixed bag.

Where I’m seeing most of the strength right now is in the above-mentioned consumer staples, as well as pharmaceutical stocks that seem to be responding well to increased biosecurity fears. But overall, it’s getting harder to find stocks in any specific industry that stand out as great buys. Thus, I recommend we maintain our cautious stance for now, possibly trimming some laggards while pulling back on new positions until the market environment improves.

Catalyst Report

As a consequence of the lack of categorical market strength, this month’s issue of the catalyst report is also something of a mixed bag. While past catalyst reports have focused on attractive turnaround stocks in specific sectors or industry groups, the latest report is more of a mix-and-match across multiple market spaces.

We’ll start with Freshworks (FRSH), a cloud-based, software-as-a-service (SaaS) service provider based on California, but with much of its workforce based in India. The company uses AI on its cloud platform to provide customer relationship management and IT service management. It boasts a burgeoning list of clients, including enterprise customers like Bridgestone, Fila and American Express.

Among its offerings is the recently unveiled Freddy AI Agent, a new generation of autonomous service agents to assist companies with customer relations. Freshworks says it has helped resolve an average of 45% of customer support requests and 40% of IT service requests, while delivering substantial productivity and efficiency gains.

The stock’s fortunes have declined since its public debut in late 2021, chiefly due to declining revenue growth rates. But Freshworks is making strides among enterprise customers, including a recent win with a multi-billion-dollar hard drive manufacturer that dropped ServiceNow to embrace Freshworks.

On the revenue front, growth is expected to steadily pick up in the coming quarters, with 15%-ish sales growth anticipated for this year and next. A 24x forward free cash flow multiple, no debt and solid profitability are further reasons for believing the stock can turn around in the coming months.

Next up is Mytheresa Group (MYTE), a leading curated digital platform for high-end luxury fashion. The German-based outfit offers men’s and women’s wear, children’s wear and lifestyle products. It also sells clothes, bags, shoes, accessories and fine jewelry through online and retail stores.

The company has recently acquired online luxury retailer YNAP from Richemont. While YNAP has struggled with losses in recent years, many analysts believe Mytheresa can turn things around for the brand.

It’s admittedly a speculative acquisition on Mytheresa’s part, but the growth potential the YNAP brand offers the company is substantial and is expected to allow Mytheresa to reach mid-single-digit EBITDA margins.

And while the company operates in the highly cyclical retail sector, its high-end customers should provide it with a degree of insulation from economic headwinds that are anticipated this year, as many of its luxury cohorts are also currently performing strongly.

As an aside, MYTE is a stock that almost—but didn’t quite—make the cut for this month’s edition of the newsletter, but which I have at the very top of my watch list.

Nutrien (NTR) was a favorite stock of one of my predecessors here at the Turnaround Letter. It’s a crop inputs provider, selling fertilizers, pesticides, feed products and seeds through a network of farm centers in North America, South America and Australia.

The stock has been trying to bottom out for the last couple of years, but just when a turnaround seems imminent, something happens to curtail the rebound. The latest such occurrence was the big increase in input costs for farmers, which has made new investments difficult for members of the ag sector.

And while economic headwinds and geopolitical risks are still factors, it looks like 2025 could finally be the year Nutrien turns the corner. The company’s cost-cutting efforts look to be paying off, as it has accelerated the time it expects an estimated $200 million in savings will be achieved this year.

What’s more, management optimized capital spending for 2024, reducing total expenditures by $450 million compared to 2023. Margins have also stabilized, while demand for key crops like corn and soybeans in the first half of this year are expected to increase.

Collectively, the firm sees these actions positioning Nutrien to “countercyclically deploy capital towards high conviction opportunities that improve earnings and cash flow per share through the cycle.” Analysts, meanwhile, expect earnings to grow around 10% this year, which could easily be too conservative given the strengthening global demand for crop nutrients.

Finally, AMN Healthcare Services (AMN) provides healthcare workforce solutions and staffing services to acute and sub-acute care hospitals and other healthcare facilities in the U.S. Although the company has experienced declining revenue and profit margins in recent years, owing mainly to a sharp post-pandemic decline in demand for travel nurses (a key part of its business), there are signs that revenues are turning a corner.

The company recently launched a couple of new products, including ShiftWise Flex, which leverages the power of automation to increase efficiency of talent matching, credentialing and candidate self-service, enabling clients to deliver better outcomes for patients and caregivers.

It also offers a leading service called AMN Passport, a mobile app and website that helps healthcare professionals find, book and manage travel assignments. Together, these offers are expected to contribute to a reversal of the company’s earnings and revenue downtrends in the next couple of years, with this year’s Q2 expected to be the turning point.

Admittedly, AMN isn’t as compelling as the other companies mentioned in this month’s catalyst report, but I still believe it merits inclusion due to the longer-term turnaround potential I see in this stock.

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.

Portfolio

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