February 7, 2025

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

The Fed’s latest release of U.S. bank credit standards was mixed but suggests a still-supportive liquidity backdrop for the equity market.

Lending standards across multiple categories are expected to ease further into 2025.

Turnaround opportunities still abound in the white-hot precious metals sector.

Comments on Portfolio Holdings

In the wake of the ongoing tariff conflict between the U.S. and China, the aluminum industry has come under close scrutiny by Wall Street analysts, Shares of U.S.-listed aluminum makers like Alcoa (AA) have come under selling pressure of late as the market struggles to assess what impact the tariffs are likely to have on the broader industry.

Earlier this week, analysts at BMO Capital Markets said aluminum will be the most heavily disrupted commodity from the tariffs as Canada accounted for 69% of U.S. imports in 2023. The firm added, “Heightened disruption will also be seen in the aluminum market, with U.S. premiums likely to spike until Canadian producers and U.S. consumers alike can reroute supply chains to avoid the new duties.”

Since then, however, the White House has suspended tariffs on Canada, providing some relief for the aluminum market with prices for the metal on the London Metal Exchange (LME) rallying this week.

Further supporting aluminum prices in February are recent strong indications for an improved manufacturing outlook in several countries that heavily consume the metal, including ISM data that showed that the U.S. manufacturing sector rebounded strongly in January and recorded its first expansion in over two years.

Moreover, analysts at Morgan Stanley noted, “Constructing and ramping up new smelters/mills can take three or more years, so any import tariffs applied to metals or mined products are likely to result in higher domestic prices for local buyers of these materials.”

Other industrial metals have seen renewed strength in recent days even as the aluminum market remains somewhat unsettled, but the overall metals outlook remains buoyant. For now, we’ll maintain a Hold rating on Alcoa.

Asset management holding firm Janus Henderson Group (JHG) reported Q4 earnings last Friday that beat consensus expectations on both the top and bottom lines, resulting in the shares making new highs this week.

Revenue of $708 million increased 25% year-on-year with earnings of $1.07 a share beating estimates by 12 cents. Assets under management (AUM) increased 13% to $379 billion, and assets across multiple categories handily outperformed relevant benchmarks on a one-, three-, five- and 10-year basis.

For the full year, $2.4 billion of net inflows compared favorably to a $700 million net outflow in 2023 and was a major improvement from the $31 billion in net outflows two years prior.

During Q4, the company’s strategic acquisitions included NBK Capital Partners and Victory Park Capital, which Janus said “enhanced the company’s private markets capabilities,” adding that they also position Janus to “skate to where the puck is going” in emerging markets and asset-backed lending.

For the year ahead, the company expects its expense compensation ratio to range between 43% and 44%, reflecting investments in strategic initiatives and operational efficiencies while targeting mid- to high-single-digit non-compensation expense growth.

Janus also declared a 39-cent quarterly dividend that was in-line with the previous one and with a yield of 3.4%. The stock remains a Hold rating in the portfolio.

In the ongoing controversy surrounding the deal between Skydance Media and Paramount Global (PARA), Sen. Tom Cotton (R-Ark.) has requested a national security review of the deal in a letter sent to the Treasury Department on Thursday.

Cotton called the deal a “national security risk” due to Tencent Holdings’ involvement, which he said shouldn’t be allowed to own part of the combined Paramount/Skydance merger.

The deal is expected to close in the first half of this year, subject to FCC approval of a required transfer of broadcast licenses of Paramount’s 28 owned-and-operated local TV stations. PARA maintains a Buy rating in the portfolio.

The efforts of turnaround specialist Brian Niccol continue to pay off for Starbucks (SBUX) as reflected in the recent share price performance, with the stock hitting new 52-week highs this week. In the latest development, the company announced on Thursday that it’s placing some limits on its mobile orders as part of a broad plan to return to a coffeehouse vibe and to speed up service for in-store customers.

Starbucks has also further reduced the maximum number of items allowed per order from 15 to 12 in effort to speed up in-store customer service. Additional changes include the simplification of the menu and the removal of some modifications. The firm also plans to trim about 30% of its food and beverage lineup by late September.

CEO Niccol said he wants Starbucks’ physical locations to be “a welcoming coffeehouse where people gather and where the company serves the finest coffee handcrafted by skilled baristas.”

Another major priority is to improve the time it takes for store customers to receive their orders and to separate them from the mobile pickup area. Customers will also have more high-quality brewed coffee options as part of the strategic improvement plan. SBUX maintains a Buy rating in the portfolio.

Teladoc Health (TDOC) announced this week the acquisition of virtual preventive care services provider Catapult Health in an all-cash transaction for $65 million, with up to $5 million in additional contingent earnout consideration.

The transaction is expected to close in the first quarter of this year, subject to customary closing conditions. Following the closing of the transaction, Catapult Health will operate within the Integrated Care segment of Teladoc Health.

Teladoc further plans to “leverage Catapult Health’s approach to patient-centric at-home diagnostic testing, as well as its high-touch engagement and clinical support model, to complement its suite of integrated solutions.”

The shares rallied 20% this week in the wake of the latest development, and I think this would be a good time to take a one-quarter profit. The remaining position will retain a Hold rating in the portfolio.

RATING CHANGES: Teladoc (TDOC) shares have been downgraded from Buy to Hold after taking a one-quarter profit following the stock’s 20% rally. HOLD

NEW POSITIONS: Pan American Silver (PAAS) was initiated as a Buy with a 30 upside target this week.

Friday, February 7, 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 19 minutes and covers:

• Bank credit standards suggest stocks still have a tailwind going forward.
• The latest tariff/trade war tensions are supportive for gold and silver prices, in turn boosting the prospects for some lower-price mining shares.
• Quarterly earnings and the latest company-related headlines continue to be mostly bullish for our holdings.
• Final note
  
  • We initiated a Buy rating in gold, silver and copper miner Pan American Silver (PAAS) earlier this week.

Market Outlook

One of the major areas I look at for signs that a trend change is on the horizon for equities is bank credit standards. Specifically, tightening standards for personal and commercial loans often presage a negative shift in the demand for stocks, while loosening standards frees up money that finds its way into the financial market, often pushing stocks higher.

In recent quarters, U.S. loan standards have been neither particularly tight nor very loose. And as I noted in a recent podcast, this paradigm has been good enough to keep investors nonplussed while keeping the major averages on an even keel. However, lending standards appear to be tightening, though not enough to pose a serious threat to the bull market.

This week’s quarterly release of the Federal Reserve Senior Loan Officer Opinion Survey shows that bank lending standards for households and businesses tightened between September and December. In particular, banks reported higher demand for commercial and industrial (C&I) loans for large and mid-sized businesses in the fourth quarter, with no change in demand for loans for small borrowers.

According to Andrew Berlin of the Loan Syndications and Trading Association (LSTA), “Banks that reported tightening standards and terms for C&I loans cited a less favorable, more uncertain economic outlook, industry-specific weakness and a reduced tolerance for risk. Banks that reported easing standards or terms cited more aggressive competition from other lenders and a more favorable, less uncertain economic outlook.”

On the household front, however, standards were more relaxed in the latest quarter. Residential real estate recorded some banks easing their standards as mortgage demand fell, while standards for auto loans, personal loans and home equity lines of credit were unchanged.

Meanwhile, demand for auto and consumer loans outside of real estate saw some recovery that was attributed to rebuilding after recent hurricanes. And for loans to small businesses (i.e. those with annual sales of under $50 million), fewer banks reported tightening their standards compared to a few months ago.

Looking ahead, the Fed’s loan survey also indicated that banks expect C&I lending standards to ease or remain unchanged heading further into 2025, while overall demand for loans, along with improvements in loan quality, are also expected. Banks further anticipate that multifamily commercial real estate loans, mortgage loans and auto loan standards will ease the most.

All told, I don’t regard the current credit outlook as problematic for the equity market in the near term.

Stocks of Interest

While the bulls continue to maintain their overall control of the equity market trend, they’re exerting even greater control over the trend in the precious metals market. Gold in particular is in very strong hands and has hit new highs almost every day this week as it continues to see hedging demand from worries over rising inflation, geopolitical uncertainties, tariffs and trade tensions. And after lagging gold for several weeks, silver is beginning to show signs of life and could soon catch up with its big brother metal.

Given the supportive backdrop for gold and silver, I think this would be a good opportunity to take a closer look at some potential turnarounds within the mining sector, with a particular focus on gold.

While most actively traded mining shares are closer to 52-week highs than lows, a few mid-tier and even senior miners are trading at what could be regarded as bargain prices while lagging their stronger brethren for several months—or even years. What follows are some of the more attractive turnaround candidates, in my opinion.

DRDGOLD (DRD) is what some might call a perpetual laggard. It’s a South African gold miner that engages in the extraction of gold from the retreatment of surface mine tailings, while also selling gold and silver bullion.

After being one of the most actively traded mining stocks in the 1990s and early 2000s, the miner fell out of favor and crashed from a lifetime high of around 90 a share to a low of 1.15 a share by 2015 and then remained in penny stock status for some time afterward.

However, the company’s prospects began improving in 2019, and by 2020, the stock took on new life as it benefited from both the broad gold market boom along with the revival of interest in underpriced mining shares during the lockdowns of that year. The stock made it all the way to 18 later that year before reversing course and falling 70% for the next two years afterward.

But DRD never fell anywhere near its long-term low from 2015 and instead began grinding out a base over the next couple of years while etching out a series of higher lows. And even more recently, the shares are showing signs that a longer-term reversal is likely underway.

In fiscal Q1, DRD reported reaching most of its targeted gold production despite some mining-related setbacks, with its throughput increasing. Production increased 7% on a quarter-over-quarter basis, while costs declined. Gold sales volumes also increased 4%.

The company produced 1.3 metric tons of gold in the quarter—a 7% improvement—while all-in sustaining costs (AISC, a key metric) declined 5% and AISC margins increased by an impressive 18%.

Other metrics were equally sanguine, including adjusted EBITDA which increased 17%, revenue that increased 14% and earnings that improved 4%. Management said higher gold prices increased the company’s liquidity and cash generated during the quarter, which will be applied to this year’s extended capital spending program.

The main catalyst for DRD going forward is clearly higher gold prices, and with the yellow metal expected to continue benefiting from relentless safe-haven demand, DRD should have a solid tailwind to continue its share price rebound in the coming months.

For those of you who have entertained the market musings of the famous W.D. Gann, you may be familiar with his observation that every trader seems to have at least one stock that, for whatever reason, he can never seem to properly time. Gann, of course, had a typically mystical explanation for this phenomenon, but I suspect the actual reason is decidedly more psychological in nature.

For me, Barrick Gold (GOLD) has always been something of a stumbling block when it comes to timing. I candidly confess that in the past, I’ve had trouble entering the stock at the opportune moment, or else I’ve lacked the patience to hold it through turbulent times.

So, taking what I’m about to say with a grain of salt, it appears that Barrick may be on the cusp of finally turning the corner. While the stock is still down on both a five-year and a three-year basis, it has spent the last two years establishing what looks to be a solid base above the 14 level, with the last test of this level coming a year ago. Significantly, the stock also etched out a higher low in December and is now finally beginning to harmonize with the rising gold price.

The stock is attractively priced, has a solid balance sheet and production profile, with excellent gold and copper reserves and a strongly supportive project pipeline. The pipeline features several key growth projects currently underway, including the Goldrush mine, the Pueblo Viejo expansion, the Donlin Gold and the Lumwana Super Pit, all of which are expected to significantly contribute to expansive production and future growth.

Moreover, Barrick’s CEO Mark Bristol recently said the firm’s Reko Diq copper and gold project in Pakistan could generate a whopping $74 billion in free cash flow over the next 37 years, based on consensus long-term prices.

Barrick considers this one as of the world’s largest underdeveloped copper-gold areas, and it’s owned 50% by Barrick and 50% by the governments of Pakistan and the province of Balochistan. The project is expected to start production by year-end 2028 and is anticipated to produce 200,000 tons per year of copper in its first phase.

When the company reports fourth quarter 2024 results next Wednesday, analysts expect year-over-year revenue growth of 38% and earnings growth of 60%, followed by several more quarters of double-digit growth in both metrics. A 2.3% dividend yield is an added attraction.

To be fair, Bank of America just downgraded Barrick to Neutral with an 18 share price target—or about a dollar above where it currently trades—citing increased risk around guidance, particularly relating to its Loulo-Gounkoto mine in Mali. But I think BofA is being too conservative in its outlook, and while I don’t expect Barrick to be one of this year’s top performing gold miners, I do think it has the potential to at least recover to last year’s high of 21.

Finally, Equinox Gold (EQX) is another stock that looks to be crossing a major threshold after several years of underperformance. The company engages in the exploration, acquisition, development and operation of gold and silver deposits in the Americas, holding interests in properties in California, Mexico, Brazil and Canada.

The stock has shown particular strength in the wake of its Q4 2024 earnings report, which featured full-year production that not only came in within the company’s guidance of 590,000 to 675,000 ounces from its seven operating gold mines in the U.S., Canada, Mexico and Brazil, but also set records on both a quarterly and yearly basis.

This was especially significant given that Equinox had previously set a record of four consecutive annual guidance misses while also setting the far more ignominious record of having one of the worst track records for average beats/misses versus guidance within the entire sector.

Having finally broken free of that negative trend, Equinox is now poised to continue growing thanks to its 100% ownership of the Greenstone mine in Ontario, which has produced more than 111,700 ounces of gold in the mine’s first, partial year of operations. At full production, Greenstone will be one of Canada’s largest and highest-grade open-pit gold mines, with output estimated at 390,000 ounces per year on average for the first five years and 330,000 ounces per year over an initial 15-year mine life.

Looking ahead, Wall Street expects revenue to nearly double for 2025 and earnings to more than triple, followed by several more years of strength as the company’s production profile presumably accelerates.

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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