March 28, 2025

In today’s note, we discuss pertinent developments for some of the stocks in the portfolio, including GE Aerospace (GE), Paramount Global (PARA), SLB Ltd. (SLB), Starbucks (SBUX) and UiPath (PATH).

This month’s catalyst report features a mixed bag of longer-term attractive turnaround candidates in industries ranging from car rentals to dental equipment to semiconductors.

We just added consumer health giant Kenvue (KVUE) to the portfolio in the latest monthly issue of the Cabot Turnaround Letter.

Comments on Portfolio Holdings

Admittedly, there weren’t very many new developments this week in the portfolio. There were, however, a few news headlines surrounding GE Aerospace (GE) in recent days. To begin with, Korean Air—Asia’s second-largest airline by capacity—has finalized major agreements with Boeing (BA) and GE to buy new planes and jet engines.

The airline signed a $7.8 billion deal with GE Aerospace for eight aircraft engines along with accompanying maintenance and support services. These transactions formalize a procurement plan first revealed in July, according to reports.

Meanwhile, in a just-released list of this year’s Q1 top performing stocks in each S&P sector, GE Aerospace led the list among Industrial stocks with a 24% year-to-date gain. GE remains a Hold in the portfolio.

Negative news headlines continue to swirl around Paramount Global (PARA). Last week, the chair of the Federal Communications Commission said it would block merger and acquisition activity from companies with diversity, equity and inclusion (or DEI) policies, according to a Bloomberg report.

The FCC specifically mentioned Paramount’s merger with Skydance Media, along with Verizon’s acquisition of Frontier Communications as examples of this, according to the report. FCC Chairman Brendan Carr was quoted by Bloomberg as saying, “Any businesses that are looking for FCC approval, I would encourage them to get busy ending any sort of their invidious forms of DEI discrimination.”

It should be noted, however, that Paramount is actively working to close its $8 billion deal with Skydance, and still anticipates to close on the transaction during the first half of this year.

Separately, FactSet just published this week a list of the 10 S&P 500 stocks that have the most analyst sell ratings. Paramount Global made that list, with 35% of analysts placing a recommending Sell rating on the stock.

However, the preponderance of analyst pessimism on Paramount can be regarded as a potentially bullish development from a contrarian perspective—especially given that such high concentrations of Sell ratings on highly liquid stocks tend to have a short covering inducement effect.

On a related note, Seeking Alpha published its own version of this same list based on its Quant Ratings, and assigned to Paramount’s stock a 4.04 rating, which is considered to be a fairly strong Buy reading. After taking a one-quarter profit in PARA earlier this week, the stock maintains a Hold rating in our portfolio.

On Thursday, the United Kingdom’s Competition and Markets Authority (CMA) said that SLB Ltd.’s (SLB) planned acquisition of oilfield services company ChampionX (CHX) may be expected to result in “a substantial lessening of competition” in that country’s markets.

The CMA said it will refer the merger for an in-depth, phase 2 investigation “unless the parties offer an acceptable undertaking to address competition concerns,” adding that the companies have until April 3 to offer steps they are ready to take.

Although the deal is still under regulatory review in some countries, including Norway and the U.K., the deal has already been cleared in the U.S. Meanwhile, SLB said it expects the ChampionX deal to close by the end of Q1 or in early Q2. The shares remain a Buy in the portfolio.

Starbucks (SBUX) was the recipient of a major Wall Street institutional upgrade this week, as Argus increased its rating on the shares from Hold to Buy. The brokerage firm thinks the recent sell-off has created a buying opportunity, based on a combination of Starbucks’ strategic initiatives.

This includes the company’s recent digital improvements, brand marketing and fewer sales promotions, all of which Argus said “looks promising.” Analyst John Staszak placed a 115 a share price target for SBUX and added that its “menu simplification and store remodeling efforts will likely lead to increased customer traffic and improved same-store sales growth.” After recently taking a 50% profit, the shares retain a Hold rating in our portfolio.

UiPath (PATH) announced Tuesday that it has launched a new tool for software testing using advanced artificial intelligence (AI). Its new offering is called UiPath Test Cloud, which includes features such as Autopilot for Testers and Agent Builder.

The company is touting the tool as “a revolutionary new approach to software testing that uses advanced AI to amplify tester productivity across the entire testing lifecycle for exceptional efficiency and cost savings.”

The product introduces agentic testing to quality assurance, engineering and testing teams at any organization and includes a toolkit for building custom AI agents tailored to unique testing needs, allowing companies to build to their own specifications.

Analysts view the new tool as a small, but important, step in UiPath’s attempt at becoming more of a player in the AI buildout trend. The shares remain a Buy in the portfolio.

RATINGS CHANGES: We took a one-quarter profit in our position in Paramount Global (PARA) after the recent share price rally. The remaining three-quarter position in the stock has been re-rated to a Hold. HOLD

NEW POSITIONS: We initiated a long position in Kenvue (KVUE) in the latest monthly edition of the Cabot Turnaround Letter as of Wednesday. BUY

Friday, March 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 20 minutes and covers:

• A quick review of the broad market’s progress in the last couple of weeks.
• Extremely accurate historical tendencies suggest stocks will be higher on a two-month, three-month and 12-month basis.
• Activist investor interest in two of our catalyst report entrants increase the odds of a successful turnaround for both companies.
• Updates on several portfolio holdings, including the latest development in the ongoing Paramount Global (PARA)-Skydance Media saga.
• Final note
  
  • Institutional analyst upgrades continue to support some of our portfolio stocks.

Market Outlook

After last week’s market rebound, stocks ran into resistance earlier this week and have pulled back a bit into Friday. It’s normal action following such a post-sell-off recovery, so no major worries, although it’s a little concerning to see new 52-week lows on both major exchanges creeping upward this week.

The bottom line is that it’s still too early to call this a decisive market bottom, and I think we’ll need another week or so before we get a better idea of the market’s intentions for the near term. But for now, at least, the selling pressure has been contained mainly in certain areas of the transportation industry in light of this week’s auto tariff announcement from Washington.

Putting aside the tariff-related pessimism, on the optimistic side of the ledgers are the latest results from this week’s investor sentiment polls. For the AAII poll, bearish investors continue to outpace the bulls by a notable margin, which bodes well for the market from a contrarian perspective.

On that score, Jason Goepfert of SentimenTrader noted on Thursday that more than half of individual investors were bearish for a fifth consecutive week, a development he called “Crazy town.”

Pertinently, he also pointed out that similar developments in the past have been followed by extended rallies in the S&P 500 index. So perhaps this time will witness a continuation of that tradition and we’ll see a resumption of the rebound next week.

Another piece of potentially good news for the longer-term outlook was provided once again by Goepfert. Admittedly, this bit of evidence might be too statistically-oriented for some investors to swallow, but as Jason is a renowned market statistician on Wall Street, I think we owe it to him to at least give it a hearing.

He wrote this week, “The S&P 500 just recorded its second straight day with 90% advancing stocks after hitting a six-month low.” Whenever this has happened going back to 1933, the S&P has been higher 12 months later with only two exceptions—1940 and 2014 (in both cases the S&P was still down by only 0.5% and 3%, respectively).

Tellingly for the short-term, the pattern has a 100% accuracy for the market being higher two months later, with an average S&P gain of 6%, and has a 94% accuracy for being higher three months later, with an average gain of 7%. Thus, if the statistical pattern repeats once again this time, we can expect to see stocks in the aggregate higher in May and (likely) June, then higher on a year-over-year basis in December.

Catalyst Report

Continuing with the auto tariff theme, it’s no secret that new cars today are as expensive as they’ve ever been. Starting with the supply chain disruptions of five years ago, the price tag for a new car in the U.S. today has increased by 22% from 2019, with the average selling price now around $49,000.

The bad news is that the auto inflation trend is expected to accelerate. According to an article in The Auto Wire this week, car prices could rise by as much as 25% in response to the latest proposed auto tariffs from Washington. But even if the tariffs are delayed or remitted, as some are expecting, the currently high car prices aren’t likely to decline anytime soon.

However, what’s bad news for prospective car owners could be good news for Lyft (LYFT), the San Francisco-based ride-hailing service that also offers motorized scooters and bicycle sharing in the U.S. and select cities in Canada.

The company also has a rental program called Express Drive, which partners with car rental companies like Avis, Flexdrive and Hertz. Importantly, Lyft stands to benefit if more people turn to rentals and ride hailing in the face of rising car ownership costs.

Lyft’s share price is down from its early 2021 peak of around 68, having spent the last couple of years bottoming around 10. The price decline was justified as the company has reported significant operating losses over the past five years, and as some analysts see it, profitability may prove elusive, especially given what is described by industry experts as “stiff competition.”

However, in its final earnings release for 2024, Lyft reported revenue of $1.6 billion in Q4 that increased 27% year-on-year and earnings of 27 cents a share that beat estimates by 18%, driven by growth in active riders and record growth in total rides, which increased 15% year-on-year to 219 million.

Lyft also said 2024 was a “record smashing” year across several key metrics, and it achieved its first year of GAAP profitability and positive free cash flow (FCF), with FCF of $766 million for the full year. Lyft said 2025 will be the year it shows millions of riders and drivers. The sanguine results prompted the firm to announce a share repurchase authorization for $500 million.

Looking ahead, the company guided for full-year rides growth in the mid-teens, which management called “strong,” and by industry-leading service levels, as well as improvements in EBITDA and EBITDA margin.

Lyft also announced future plans for its autonomous vehicles (AV) program through partnerships with May Mobility and Marubeni, with a fleet deployment starting in Dallas by 2026. The AV strategy includes leveraging Lyft’s fleet management expertise and rider network.

Another significant potential catalyst for Lyft shares going forward is the just-announced $500 million position in the stock taken by activist investor, Engine Capital. As reported by Seeking Alpha, the firm is “expected to push the Lyft board for a broader review of the company’s direction,” including a push for the addition of multiple directors to Lyft’s board.

Wall Street is look for 13%-ish growth on both the top and bottom lines for 2025, with earnings expected to accelerate by even more next year. I think the stock has definite longer-term turnaround potential, and I’d be OK with starting a conservative position around current levels.

Now we’ll turn from the world of cars to the medical realm, where shares of Dentsply Sirona (XRAY) look intriguing at current levels. The company is regarded as one of the leading solutions providers in the dental industry, manufacturing and selling a comprehensive range of dental equipment supported by cloud-enabled solutions, as well as healthcare consumable products in urology and enterology worldwide.

The stock is down nearly 80% from its peak four years ago, and it remains deeply out of favor with investors, with one major Wall Street firm just publishing a report noting that the company faces headwinds in the form of lowered willingness to spend on dental care on the part of patients in the face of a drop on consumer sentiment.

However, a recently passed ban in the state of Utah on fluoride in public drinking water, which the state’s governor said he plans to sign into law, could provide a catalyst for dental stocks. Other states plan similar fluoride bans, including Montana, North Dakota and Tennessee. According to BofA Securities analyst Allen Lutz, with cavities taking around five years to form, eliminating fluoride from water would cut this time to four years and lead to a potential 25% jump in cavities annually in those states.

The outlook for 2025 for Dentsply, however, isn’t very strong, with consensus estimates for full-year revenue to decline 6% from a year ago, while earnings are expected to improve 9%. However, Wall Street believes investments in equipment upgrades and new products, along with perhaps the catalyst mentioned here, will result in better top- and bottom-line improvements starting in 2026 and continuing into 2028.

Moreover, analysts see the long-term investment horizon up to 2028-2030 as particularly compelling, with long-term capital appreciation potential deemed “very strong” by one institutional firm, with expectations of a share price between 35 and 50 by that time frame. The mid-point of this target range, if realized, would amount to a 60% premium to the current share price.

I’m not as keen on Dentsply as I am on Lyft, so I’m not recommending any nibbling around current levels just yet. But I’ll be keeping an eye on this stock and will keep it in the catalyst report watch list for the next few months until a potentially attractive entry point is identified.

Our final catalyst report addition for this month is Qorvo (QRVO), an international provider of semiconductor solutions for wireless, wired and power markets. Specifically, it provides radio frequency (RF) devices for various markets, including mobile, infrastructure, IoT and defense/aerospace, and is a major supplier of RF chips to Apple and Samsung. The North Carolina-based company is the result of the merger of RF Micro Devices and TriQuint Semiconductor in 2015.

Like the other catalyst report additions, Qorvo’s stock price peaked in early 2021 and underwent a sharp drop in the next couple of years before bottoming around the 70 level, and it’s currently around 80% below its all-time high.

Part of Qorvo’s problems have centered around declining profitability and a slowdown in China’s smartphone market since 2021. Subsequently, the firm’s China revenue has seen negative growth since then, with a slight recovery of 2% in the first half of last year. However, in recent years, Qorvo has been shifting away from the Chinese market while diversifying its business operations in China.

Meanwhile, the company has also been shifting focus to premium 5G products while also abandoning mid-tier Android markets. This has had a temporary impact on revenue, but the latest signs suggest an improvement in long-term margins and growth prospects.

And while Qorvo continues to face some challenges in the Android 5G market, the firm is taking actions to focus on its long-term profitability objectives. Management recently stated that its 5G product development spending is now “focused solely on premium and flagship tiers,” with its Advanced Cellular Group (which provides RF solutions for smartphones and other consumer devices) expected to return to growth in the mid-single digits by the beginning of next year.

Also serving as a potential catalyst for the stock is the recent 8% stake taken by activist shareholder Starboard Value. That news also prompted a number of major investment banks to increase their share ratings for Qorvo, which should provide some additional intermediate-term support.

Analysts at Piper Sandler recently expressed their view that there could be $250 to $300 million in operating efficiencies if Qorvo were run with a similar operating expenses structure as its closest competitor, Skyworks Solutions (SWKS). The firm also believes that Starboard’s presence can improve margins and increase efficiencies at Qorvo’s manufacturing plants.

Analysts see Qorov’s bottom line declining 14% year-on-year for 2025, but see earnings turning the corner next year and increasing 25% in 2027 as the aforementioned improvements are presumably realized. I like the stock at current levels and think it can be conservatively purchased for long-term-focused accounts.

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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