March 21, 2025

In today’s note, we discuss pertinent developments for several of the stocks in the portfolio, including Agnico Eagle Mines (AEM), Alcoa (AA), Atlassian (TEAM), GE Aerospace (GE), Paramount Global (PARA), SLB Ltd. (SLB) and Starbucks (SBUX).

Gold and silver continue to benefit from safe-haven buying, boosting our holding of Agnico Eagle Mines (AEM).

The impact of the ongoing tariff war continues to be analyzed as it relates to Alcoa (AA) and SLB Ltd. (SLB). The favorable longer-term outlooks for both stocks remain unchanged, however.

Comments on Portfolio Holdings

Agnico Eagle Mines (AEM) has agreed to subscribe 4.7 million common shares in capital to Canada-based Collective Mining (CNL). Collective is an established exploration and development company operating mainly in Colombia, with a focus on gold, silver, copper and tungsten.

The closing of the offering is conditional upon, among other things, Agnico Eagle concurrently exercising the common share purchase warrants of the company it currently holds to acquire an additional 2.3 million shares at a price of C$5.01 per share. At the closing of the offering, Agnico’s ownership interest in the shares is expected to increase to approximately 15%.

Agnico’s strategic investment with Collective Mining is aimed at enhancing its growth prospects and strengthening its position in Colombia’s promising gold exploration potential. More specifically, the investment provides Agnico with exposure to Collective Mining’s early-stage gold exploration projects in Colombia, particularly the Guayabales project, which has demonstrated promising high-grade mineralization.

According to a company statement, the proceeds from the investment will support Collective Mining’s ongoing exploration activities, including an aggressive drilling program aimed at expanding and defining mineralized zones within the Guayabales project (where Collective’s management thinks it can ultimately mine up to 10 million ounces of gold). In an interview with Kitco, Collective Mining CEO Ari Sussman said having Agnico as a partner provides his company with “every tool we need” to advance the firm’s mining projects in Colombia.

The collaboration also strengthens Agnico’s project pipeline and positions it to benefit from potential future discoveries and developments resulting from Collective Mining’s exploration efforts. AEM retains a Hold rating in the portfolio.

Speaking at the J.P. Morgan Industrials Conference last week, CFO Molly Beerman of Alcoa (AA) said that while tariffs on imports of steel and aluminum are creating uncertainty within the broader industry, she expects Alcoa to post a strong first quarter, helped by higher metal prices.

According to Beerman, “Some customers are rushing to secure supply ahead of the tariffs, while others are playing wait and see, to see how the final tariff structure will exist,” resulting in “more uncertainty” in both the company’s revenue and working capital.

Alcoa said it’s working closely with the White House, as well as with trade groups in the U.S. and Canada, on the tariff issue. She said, “While we’re very supportive of [the administration’s] efforts to improve the industry, as well as strengthen U.S. manufacturing jobs, we do see that there could be some harm from the tariffs,” adding that Alcoa is working on obtaining a Canadian exemption.

Beerman said that Alcoa would benefit from the tariffs, but that the firm’s Canadian operations produce three times more than its two U.S. smelting operations, so a 25% tariff on Canadian aluminum would be a “net negative” for the company. She further stated that tariffs wouldn’t serve as a catalyst for Alcoa to build a new smelter in the U.S. since such a decision is typically undertaken on a 20-to-40-year proposition.

Other industry analysts echoed Alcoa’s assessment of the tariff’s likely impact, with several of them stating that the tariffs aren’t likely to increase domestic aluminum production. In a recent note, RBC Capital Markets said that the first set of steel and aluminum tariffs introduced in 2018 resulted in U.S. steel and aluminum production increasing by only 7% and 4%, respectively.

Meanwhile, although U.S. steel and aluminum imports by weight are down 15% and 13% since 2018, the U.S. imports of those metals on a net basis remain at 13% and 47% of domestic consumption, respectively, according to RBC. The analysts added, however, that aluminum should be far less impacted by the tariffs than steel.

What’s more, many analysts believe that the tariffs could make U.S. aluminum more expensive, pushing buyers to alternative suppliers or the spot market for more competitive prices. This would in turn have the anticipated effect of pushing spot aluminum prices higher and providing a tailwind for Alcoa. AA retains a Hold rating in the portfolio.

Atlassian (TEAM) was among a handful of software names that received a bullish assessment when a major investment banking firm initiated coverage on the stock this week.

Stephens assigned the stock a $255 near-term upside target based on a number of positive attributes in the firm’s favor. Among the positives in Atlassian’s favor according to Stephens are its growing share in in Enterprise Service Management, as well as the migration to the cloud and “wall-to-wall” seat growth opportunities.

When the company releases its fiscal Q3 earnings report next month, Wall Street expects 14% growth on the top line and 4% earnings growth, both of which I think will prove too conservative. TEAM retains a Hold rating in our portfolio.

GE Aerospace (GE) has been awarded a U.S. Air Force contract with $5 billion for F110 Foreign Military Sales engines.

The contract provides five years of pricing for F110-129 install and spare engines, with engine monitoring system computers and spare engine accessories supporting FMS customers, according to a U.S. Defense Department press release.

The contract will be fulfilled at GE’s Cincinnati and San Antonio manufacturing centers and is expected to be complete by Dec. 31, 2030. The shares remain a Hold in the portfolio.

In a Nielsen report this week, it was disclosed that time spent watching traditional cable TV in the U.S. declined in February, while streaming viewership continues to expand. Streaming gained 0.9 share points during the month, according to Nielsen, to comprise 44% of total viewing time.

Traditional TV viewership stood at 22% in February, while cable comprised 23%, down 1.3% and 1.2%, respectively. Among alternative platforms, YouTube was the viewership leader for the month with a 12% total watch time.

Nielsen said February witnessed “a record for YouTube and the streaming category overall,” noting that during the month, nearly 27% of time spent streaming was dedicated to watching YouTube.

Across other streaming platforms, Netflix garnered 8% of total TV viewership in February, driven by its original action-thriller series “The Night Agent”, which had 6 billion viewing minutes across the month, while Disney came in third at 4%.

Of interest, Paramount Global’s (PARA) Paramount+ streaming platform accounted for 1.3% of all viewership, and while it lagged behind its competitors, an AOL report pointed out that several of the company’s original series on Paramount+ experienced “notable success,” with the second season of the show “1923” seeing a 56% increase in viewership compared to its first season while attracting 17 million global viewers to date.

In view of its recent viewership successes with “1923” and with the series, “Blue Bloods,” analysts see the potential for Paramount to grow its audience by continuing to produce compelling original content despite its smaller share of the streaming market. PARA retains a Buy rating in the portfolio.

SLB Ltd. (SLB) was listed by Goldman Sachs as one of its recommended stocks offering stability and visibility in the face of global uncertainty, particularly surrounding tariff policies.

SLB is one of several lower-volatility, defensive-oriented stocks that have recently outperformed in the volatile market climate of recent weeks, leading Goldman to place SLB on its list of companies with defensible revenue streams, consistent growth and attractive valuations.

Specifically, Goldman rated SLB as a worthy investment for income-focused investors, citing its strong dividend growth and yield potential. The stock retains a Buy rating in the portfolio.

Financial consultancy Argus upgraded Starbucks (SBUX) from its former Hold rating to a Buy rating this week.

The upgrade was based on what Argus sees as “a buying opportunity because investors have ramped up their fears about faltering same-store sales across the restaurant sector due to the weakening economy,” with an above-average dividend yield and the ending of its share repurchase efforts in favor of unit expansion further contributing to the upgrade.

Argus analyst John Staszak said Starbucks’ recent emphasis on digital sales initiatives and brand marketing, along with a reduction in its in-store promotions, should support the company’s turnaround efforts.

Staszak also sees Starbucks’ streamlined menu and return to its “coffeehouse vibe” in terms of store remodeling contributing to higher foot traffic at its physical locations while improving same-store sales.

Staszak boosted his fiscal 2025 earnings outlook on Starbucks to $3.18 per share and forecasts fiscal 2026 EPS of $3.80. After recently taking a 50% profit in the stock, SBUX retains a Hold rating in our portfolio.

RATINGS CHANGES: None this week.

NEW POSITIONS: None this week.

Friday, March 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 17 minutes and covers:

• The broad market got a much-needed respite this week, but much technical repair work remains. A key clue is the shrinkage of the new 52-week lows.
• Investor sentiment suggests a potentially significant bottom is forming.
• Final note
  
  • The crude oil market is shaping up for a possible short-covering rally, which should boost SLB Ltd. (SLB).

Market Outlook

The market caught a much-needed break following last week’s climactic selling event, with the S&P 500 index up 3% from a week ago as of Thursday. Granted, it’s not much of a bounce, but any respite from the intensive selling pressure of recent weeks is certainly welcome.

There were also a couple of promising signs internally as the number of NYSE stocks making new 52-week lows shrank below 40 for the first time in weeks, and on Thursday, for the first time this month, the new lows didn’t exceed the new highs.

A lot of work remains to be done before the damage can be fully repaired, but this is an important step in the right direction, and if the new highs and lows situation continues to improve into next week, it will increase the odds for a meaningful recovery rally.

For now, though, the burden of proof is on the bulls as they continue to struggle with lifting the leading stocks above their nearest trend line of any importance, the 15-day moving average. As of the close of Thursday’s session, only two of the six major indexes—the Russell 2000 small-cap and the NYSE Composite—are above this minor trend line, which tells us that the market’s near-term momentum hasn’t reversed higher yet.

However, given the enormous levels of bearish sentiment we’re seeing right now among retail investors, I think the bulls enjoy a psychological advantage. We’ve now seen four consecutive weeks when the percentage of bears in the AAII sentiment poll has been close to 60% with the bulls being around 20%, and this type of disparity over a full month has historically preceded a significant short-covering rally, and sometimes even an extended recovery.

Meanwhile, another widely watched sentiment indicator, the Investor Intelligence Bull Bear poll, hit the historically low ratio of 0.8 this week. My colleague here at Cabot, Michael Brush, noted that “below 1.0, stocks are a clear buy.” (By way of caveat, he cautioned that this indicator isn’t a precise timing tool.) Food for thought at any rate.

Moreover, there has lately been a conspicuous amount of relative strength in the high-grade corporate bond market as the recent stock market sell-off caused a flight to safety to the bond market. This is a sign that liquidity remains ample, while credit markets continue to function smoothly. Credit spreads also remain tight in a further testimony to the abundance of liquidity and the lack of concern among investors over corporate default risk.

Given the presumably large buildup of short interest over the last few weeks, the pessimistic sentiment that currently prevails could easily serve as tinder for the fire of a short-covering rally that could kick off at any time in the coming days. This of course would be welcome news for the portfolio, but more importantly, it would provide an opportunity to add a couple more names to our holdings as the market environment improves.

One of the areas of the market that has a fair number of out-of-favor stocks that could benefit from a general rebound is the energy sector. Despite growing fears that the U.S. economy could fall into a recession, the energy sector is this year’s second-best performing sector in the broad S&P 500 and has even managed to outperform the defensive-oriented utilities sector by around 3% year to date.

According to First Trust’s Robert Carey, of the Cash Flow and Carey newsletter, “Electricity demand is surging as resource-intensive workloads such as training AI models, electric vehicle charging, and electric appliances are introduced into more U.S. homes. As we see it, the disparity in trailing 12-month returns for energy companies (2.80%) compared to Utilities (27.51%) reflects this phenomenon.”

Normally, oil and natural gas stocks would be vulnerable to the headwinds of a turbulent stock market in the face of tariff war concerns. But as Carey points out, the wider energy sector is apparently undergoing a foundational shift that could surprise traditional near-term expectations. As he put it, the emergence of the U.S. as a global leader in crude oil production, plus the increase in electricity demanded by AI, electric cars and electric household appliances, could keep energy stocks elevated despite tariff-related headwinds.

As Carey put it, “The fact that natural gas is expected to account for 40% of U.S. electricity production this year further solidifies the point. As a capstone, the current administration appears to have taken an energy friendly stance.”

An additional consideration was provided by market analyst Tom McClellan, who noted last week that in the latest Commitments of Traders (COT) report, that commercial traders—the ones who produce or use the subject commodity in their business—have been net short crude oil in varying degrees since 2009.

However, “Right now they are at a very small net short position”—indeed, one of the smallest positions in years—which he regards as a bottoming sign for the oil futures market. If so, it should bode well for our long position in SLB Ltd. (SLB).

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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