January 24, 2025

In today’s note, we discuss pertinent developments and ratings changes for some of the stocks in the portfolio, including Agnico Eagle Mines (AEM), Alcoa (AA), American Airlines (AAL), GE Aerospace (GE), SLB Ltd. (SLB) and UiPath (PATH).

Projected strength in U.S. commercial loan growth and continued increases in M2 money supply bode well for the stock market’s liquidity backdrop.

The near-term broad market outlook remains positive based on several leading indicators.

Chemical companies are poised for a rebound in 2025, led by giants like Chemours (CC) and Albemarle (ALB).

Comments on Portfolio Holdings

According to the Metals Daily website, a surge in gold borrowing rates is a key reason behind the recent rally in the precious metal. In the words of the site’s chief analyst, Ross Norman:

“The U.S. is the global home for gold futures trading and these leveraged contracts are usually simply rolled or cash settled but, importantly, with the option to take physical delivery, which is rarely taken up. However, with the possibility that gold and silver imports might incur a significant additional cost, New York dealers are asking for physical delivery.”

It appears that while interbank gold lease rates are typically below 0.5%, interbank borrowing costs for one-to-three-month periods recently rose to a peak of about 12%. As Norman explained, “Speculators who have been running a leveraged short gold position are closing out these bets by buying gold because it is expensive to run (and likely taking a loss), hence the price rally.”

This was likely a catalyst for the latest strength in our position in Agnico Eagle Mines (AEM), which rallied to a token new high at 90 a share this week. The stock is also up a remarkably strong 15% just three weeks into the new year.

For the record, Norman has forecast a gold price increase of 21% with an average gold price of $2,888 for this year. I concur that 2025 should be another bullish year ahead for the yellow metal, hence my inclination to maintain the remaining half of our long position in AEM with a Hold rating.

Despite beating earnings estimates in Q4, Alcoa (AA) shares were down nearly 4% on Thursday after the aluminum maker warned that the White House’s threatened 25% tariff on aluminum imports from Canada would impact U.S. consumption despite otherwise strong demand.

Putting aside the downbeat market reaction, the earnings report was filled with favorable metrics, including a 34% year-on-year revenue increase, to $3.4 billion, and EBITDA that increased 50% to $677 million.

Alcoa went on to say it expects 2025 will bring the highest-ever demand for aluminum on the back of a projected 2% global consumption increase, but that view doesn’t include the potential implementation of tariffs by the U.S.

Moreover, aluminum futures just posted one of their best weekly price gains in several months, thanks to reviving industrial metals demand in China and indications that the nation’s government’s efforts to revive growth are paying off.

Despite the temporary setback, Wall Street is mostly positive on the Q4 results, with aluminum price strength the key positive in the quarter. An analyst at Jefferies noted that “continued positive [free cash flow] should lead to a reduction in net debt and a higher valuation for AA over the next six-plus months.” I share this assessment and continue to rate the shares a Hold in our portfolio.

Also reporting earnings this week was American Airlines (AAL), which saw Q4 revenue of nearly $14 billion increase 5% from a year ago, while earnings-per-share of 86 cents beat estimates by 30%. Another milestone of the quarter was the achievement of the company’s total debt reduction goal of $15 billion from peak levels, which occurred a full year ahead of schedule.

However, it was the company’s downbeat guidance that rattled the shares on Thursday, as management said it expects to report a loss of around 30 cents per share in this year’s Q1 as present demand trends, fuel costs and measures to realign its business strategy weigh on American’s bottom line.

But for full-year 2025, analysts are forecasting a 25% EPS increase as the company executes further on its plans to bring back lost corporate customers this year, and American itself expects growth to resume after the first quarter. Accordingly, I’m maintaining a Hold rating on the shares in the portfolio.

After an extended multi-month period of choppy trading for GE Aerospace (GE), the company finally announced some pleasant news for investors on Thursday with the release of its Q4 earnings. Revenue of almost $10 billion increased 16% year-on-year, supported by a 46% increase in orders of nearly $16 billion.

Meanwhile, earnings of $1.32 a share beat estimates by 28 cents in Q4 and more than doubled for the full year, while free cash flow increased by more than 20%. In terms of guidance, management said it expects 2025 to see double-digit revenue and EPS growth with greater than 100% free cash flow conversion. According to CEO Lawrence Culp, “Guided by FLIGHT DECK, our proprietary lean operating model, I’m confident in our ability to accelerate output and deliver for our customers.”

In the wake of the sanguine results, the company announced its intent to increase the dividend by 30% (a 0.6% yield) and repurchase $7 billion in shares, or around 4% of the market cap. The stock retains a Hold rating in the portfolio.

Oilfield services giant SLB Ltd. (SLB) saw its revenue rise 3% in Q4, to $9.3 billion, as per-share earnings of 92 cents were in-line with estimates, resulting in a sizable rally in the stock price. The upbeat results were largely driven by strong demand for its drilling equipment and technology, prompting the board to approve a 4% dividend increase and a $2.3 billion stock buyback. The shares retain a Buy rating in the portfolio.

On a final note, to replace the gap in our portfolio made by last week’s sell of our remaining shares in Super Hi International Holding (HDL), I’m placing UiPath (PATH) on a Buy with an initial target of 18 a share. The robotic process automation software firm was discussed at length in last week’s update, and I’ll have more to say about it in upcoming issues.

RATING CHANGES: None this week.

NEW POSITIONS: UiPath (PATH) has been initiated as a Buy with an 18 initial upside target.

Friday, January 24, 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:

• After expanding to dangerously high levels, new 52-week lows have returned to normal levels while new highs continue to expand.
• Treasury yields remain elevated, but opportunities in inflation-sensitive sectors abound.
• Q4 earnings have been mostly benign for our portfolio holdings this week.
• Final note
  
  • Robotic process automation software firm UiPath (PATH) has been added to the portfolio to replace last week’s sell of Super Hi International Holding (HDL).

Market Outlook

Heading into January, one of the biggest fears on Wall Street was the persistent rally in the 10-year Treasury Yield Index (TNX), which prompted worries that equities were becoming vulnerable to selling pressure. And there indeed were signs that some income-focused investors were beginning to dump stocks in favor of higher-yielding assets.

However, last week saw some relief on the Treasury market front, with yields pulling back and inflation-sensitive stocks rallying to new highs. And while it’s true that longer-term Treasury rates remain elevated, the leading indicators show there are no imminent signs of danger, while liquidity indicators remain supportive for now.

My number one concern for stocks heading into the New Year was the extreme elevation in the number of NYSE stocks making new 52-week lows, which was beginning to enter the triple digits—a sign that selling pressure was becoming untenable. Thankfully, that situation didn’t persist, and in the last several days, we’ve witnessed a dissipation of that selling pressure with new lows coming down to healthier levels while new highs are exceeding the lows by at least a 3-to-1 or 4-to-1 ratio on most days.

More importantly, two of the most important measures of the market’s liquidity backdrop are still supportive for the bulls. One of those measures is the commercial loan standards for U.S. banks. Typically, whenever loan standards are tightening it has been bad news for the stock market, while loosening standards are bullish.

As of the latest update for this metric, loan standards are much looser than they were between 2022 and 2024 and are essentially in a neutral condition. In other words, not too loose but not tight, either. I consider this an ideal backdrop for equities from an intermediate-term (three-to-nine-month) perspective.

Also, the rising trend in M2 money supply provides a strong backdrop for equities and is a sign that liquidity remains abundant. This metric made a trend reversal from declining to rising in 2023 and has been trending higher ever since in support of the bull market.

What this means is that the Fed isn’t tightening in the classical sense, as loan creation remains fairly vibrant and is expected to continue growing, based on most commercial lending surveys I’ve read. And according to a recent issue of Barron’s, “Recent data indicates that large-cap banks reported a median loan growth of 1.13%, with projections for 2025 at 2.6%, which, while still below pre-pandemic levels, suggests a positive trend.”

Of course, this positive dynamic could change if Treasury rates continue to rise and become a headache for borrowers. For now at least, the market is enjoying the well-earned and much-needed respite from the recent selling pressure.

Catalyst Watch

An area of the market that keeps popping up on my screens for out-of-favor stocks that have likely hit a long-term bottom is the chemical industry. Chemical makers were very much in fashion during the pandemic years along with virtually every other sector, but unlike other areas of the market, the bigger, more established name in the industry remained resilient when the bear came to Wall Street in 2022. It wasn’t until the following year that they categorically fell out of favor, and the selling pressure continued without relent until late last year.

The chemical sector bear market began in late 2022, as Covid-era supply chain issues began to improve and key end markets began destocking, leading to a broad demand decline for chemicals. By the end of 2023, industry-wide sales decreased 8% year-over-year, operating margins fell to their lowest level since the Great Recession, while returns on capital fell back to pre-pandemic levels.

It goes without saying that chemical companies in the aggregate tend to be riskier than other industries due to the greater sensitivity to changes in the economy and to higher regulatory burdens. But if the Trump administration keeps to its promise of being less restrictive on chemical firms than the previous one, the industry backdrop should support a turnaround in 2025 given how fundamentally attractive it looks right now.

Indeed, the industry’s leading trade group, the American Chemistry Council (ACC), predicts that 2025 will be the year when it turns the corner. That forecast is based on improving equipment investment trends within the industry, plus the continuing data center buildout boom, which has dramatically increased chemical demand across a number of categories.

What’s more, the trade association expects that U.S. sales of motor vehicles, which is another major chemical consumer, will increase from 15.7 million last year to 16.2 million this year. All told, it’s the brightest backdrop the industry has seen in at least three years.

Chemical makers spent much of 2024 preparing for what they hope is a rebound year in 2025. According to a recent study by Deloitte, the industry made progress in 2024, with production increasing moderately above 2023 levels. It further estimated that production levels “will continue to rise as the destocking cycle wanes and demand rises across most products.”

And in a move aimed to further support revenue growth, chemical companies have announced cost-reduction plans while beginning to increase margins. All of which suggests the stage has been set for an industry-wide turnaround that should begin this year.

With that said, let’s turn our attention to some names within the chemical space as we evaluate the turnaround prospects of each one. We’ll start with one of the biggest names in the industry, Chemours (CC).

The stock crashed nearly 40% last February after the company announced a loss for 2023 and the need to replace its CEO, CFO and controller, and is down 55% on a three-year basis. Earnings experienced a decline in recent years as the company’s prospects waned in the wake of the hyperactive chemical demand during the Covid era.

But lately earnings appear to be stabilizing, and in last year’s third quarter, Chemours reported adjusted EBITDA of $85 million, a 23% increase from the previous year’s quarter. Moreover, per-share earnings are projected to turn a sharp corner in 2025 according to consensus estimates, with EPS of $2.11 forecast to increase 72% for the full year, with additional double-digit earnings growth projected for each of the next two years.

A significant underpinning behind the potential rebound for Chemours is that in Q3, all of its key reporting segments saw positive volume growth with its most profitable division, Thermal & Specialized Solutions, reporting record Q3 sales, driven by the growth in Opteon refrigerants and thanks to growing demand in stationary air conditioning and auto markets.

What’s more, Chemours is carrying out a transformation plan of its largest division, Titanium Technologies, with progress reportedly advancing at a rapid pace. Sales of its titanium dioxide products going forward is expected to be driven by strong demand in the automotive and aerospace industries, as well as electronics and construction.

More recently—and a potential near-term catalyst for the stock—is the company’s addition of Google Vice President of Data Centers, Joseph Kava, to its board of directors. One major investment bank described Kava’s appointment as a “potentially giant step” for Chemours’ data center sales outlook by way of its burgeoning immersion cooling business.

All told, it’s a solid story, and while I don’t anticipate an immediate-term rebound in the stock, I see CC as an attractive investment at current levels for long-term investors.

Another stock of interest is Albemarle (ALB), the specialty chemicals company known for its production of lithium, potassium, bromine and various catalysts. As such, Albemarle has exposure to two major industries that I regard as having strong turnaround potential this year, EVs (lithium) and agriculture (bromine and potash).

In fact, a big part of Albemarle’s potential turnaround hinges the lithium outlook. Prices for the battery metal have fallen 85% from their peak, but a predicted decline in production, along with robust demand in Asian and European markets for electric vehicles, bode well for a lithium price rebound this year. If realized, that would support the bullish thesis for Albemarle.

Albemarle is well positioned in the industry as the world’s largest lithium producer, with a market cap of about $12 billion. It runs the only producing lithium mine in North America, with additional operations in Chile and Western Australia. More importantly, the company is forecasting a near-tripling in worldwide lithium demand by 2030.

On the earnings front, after a bad year in 2024, analysts expect EPS to dramatically reverse higher in 2025 and continue accelerating into 2030 on the back of the anticipated global lithium demand boom and supported by strong revenues. It’s not without near-term risks, but I like the stock from a longer-term standpoint.

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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