November 1, 2024

In today’s note, we discuss a flurry of key news developments for several of our portfolio positions, including Agnico Eagle Mines (AEM), Atlassian (TEAM), Intel (INTC) and Janus Henderson Group (JHG).

Two strong earnings reactions after Thursday’s market close bode well for two of our recent portfolio additions.

A brief discussion of our latest purchase in this month’s Cabot Turnaround Letter issue, American Airlines Group (AAL).

We’ll also discuss some catalysts for the under-the-radar restaurant group, including three very attractive potential turnaround plays in the hot-and-cold pharmaceutical sector.

Comments on Portfolio Holdings

It has been a very active earnings season, with next week expected to be even busier. We’ll start today’s review with the latest addition to the Cabot Turnaround Letter portfolio, American Airlines Group (AAL).

Although the stock came under mild selling pressure on Thursday in an industry-wide pullback, AAL is holding up as a solid mid-stage turnaround with additional potential in the coming quarter. The firm beat top- and bottom-line expectations in its recent Q3 earnings report and ended the quarter with $12 billion in total available liquidity, which should help accelerate the company’s turnaround efforts.

American Airlines is also on track to reduce total debt from peak levels by $15 billion by year-end 2025, and full-year adjusted earnings per diluted share are expected to be between $1.35 and $1.60, versus the $1.31 consensus estimate. I like the way the stock has been acting so far during the initial stages of the turnaround.

On the earnings front, Agnico Eagle Mines (AEM) reported Q3 earnings on Wednesday of $1.14 a share that increased from the year-ago 44 cents a share while beating estimates by a respectable 11%. Revenue of $2.2 billion increased 38% and beat estimates as well, while total production was 2% higher.

Free cash flow and margins increased, while the pipeline continues to improve in what was an impressive overall quarter. During the earnings call, management emphasized its cost control initiatives; year-to-date costs were $897 per ounce of gold, which is $3 below the midpoint of the firm’s prior cost guidance and considered to be very health, especially in view of increased royalty payments associated with the higher gold prices year-to-date versus Agnico’s budget assumption of $1,800.

The firm also highlighted that year-to-date, it has returned approximately $700 million directly to shareholders through dividends and share buybacks while also returning about $1 billion indirectly to shareholders through a reduction of net debt representing a roughly two-thirds reduction of net debt since the start of the year.

The stock barely reacted to the sanguine earnings, but it’s stretched on a short-term basis after the latest gold price rally, so the favorable results were likely already baked into the share price. The stock remains in a position of technical strength, however, and with gold prices being as strong as they are, I’ll maintain the Hold rating on our remaining half-position in the company.

Meanwhile, our holding in B2Gold (BTG) is worth monitoring next week as earnings are due out next Wednesday, November 6, after the closing bell. Analysts expect earnings to increase 5% year-on-year while revenue is expected to fall 6%, which should be an easy estimate to beat given the relentless strength in gold prices. It remains a Buy.

Barrick Gold (GOLD) releases Q3 earnings next Thursday before the opening bell. Revenue is expected to increase 17% from a year ago while earnings are predicted to rise by 31%. I’ll be monitoring the shares closely in the coming days after a major institutional bank just downgraded Barrick from Buy to Neutral on a combination of lower production in 2024 and persistent cost pressures, which it says creates “downside risk to the miner’s previous 2025 guidance for production and upside risk to costs that is not reflected in current consensus.” The shares remain a Buy for now in the Turnaround Letter portfolio.

Baxter International (BAX) will report earnings next Friday before the market opens. Top- and bottom-line growth of 4% and 14%, respectively, are predicted. The Hold rating is maintained for now.

Brookfield Wealth Solutions (BNT) releases its Q3 earnings report next Friday pre-market. No quarterly estimates are currently available, but with its Wealth Solutions segment having assets exceeding $110 billion and growing rapidly, the stock is well positioned for another favorable quarterly report. It remains a Hold in the portfolio.

Centuri Holdings (CTRI) will release third-quarter results next Wednesday with analysts expecting earnings of 30 cents a share and revenue of $741 million. The stock is a recent addition to the portfolio and remains a Buy.

Fidelity National Information Services (FIS) reports earnings on Monday before the opening bell. Wall Street has set the bar very low for the company, with EPS predicted to decline 22% year-on-year while revenue is expected to be 30% lower. The company just declared a 36-cent a share quarterly dividend, in line with the previous one, with a 1.6% yield and payable December 23 for shareholders of record as of December 9. We’re currently holding a half position in the stock.

Intel (INTC) has hit a bit of a rough patch in recent days, but may have finally gotten a break with Thursday’s post-market earnings release. The shares were up as much as 10% in late trading on Thursday after the company reported Q3 results and guidance that were largely ahead of Wall Street estimates and showed that the semiconductor giant is making progress on its turnaround plan.

The company reported a per-share loss of 46 cents and revenue of $13.3 billion that was 6% lower from a year ago, but management said the firm made “significant progress” on its $10 billion cost reduction plan that was announced last quarter. It took a $2.8 billion restructuring charge in the third quarter, including $528 million in non-cash charges and $2.2 billion of which will be cash settled in the future.

According to CEO Pat Gelsinger: “Our Q3 results underscore the solid progress we are making against the plan we outlined last quarter to reduce costs, simplify our portfolio and improve organizational efficiency. We delivered revenue above the midpoint of our guidance, and are acting with urgency to position the business for sustainable value creation moving forward. The momentum we are building across our product portfolio to maximize the value of our x86 franchise, combined with the strong interest Intel 18A is attracting from foundry customers, reflects the impact of our actions and the opportunities ahead.” Buy

British-American asset management firm Janus Henderson (JHG) released Q3 earnings on Thursday, which featured a 20% year-on-year revenue increase, to $625 million. Earnings of 91 cents a share beating the consensus by 16%. Management drew attention to what it called “solid investment performance” with most of its assets under management (AUM) outperforming relevant benchmarks on a one-, three-, five- and 10-year basis.

Other quarterly highlights include positive net inflows at $400 million, which marked the third quarter out of the last seven with positive flows, and which the top brass said demonstrated “real progress towards our aspiration of delivering consistent organic growth over the long term.”

The shares reacted favorably to the earnings report, briefly hitting a new high of 42.50 intraday. A post-earnings pullback is possible in view of the recent share price run-up, but I’m maintaining a Hold rating on the stock.

Pan American Silver (PAAS) reports Q3 results on Tuesday after the closing bell. Analysts are looking for revenue to increase 15% from the year-ago quarter and for earnings-per-share of 20 cents to drastically exceed the year-ago 1-cent EPS. The stock remains a Buy.

Solventum Corp. (SOLV) releases earnings next Thursday post-market where revenue of $2.1 billion and earnings of $1.39 a share are expected. The shares remain a Buy in the portfolio with an upside target of 90.

Good news on the earnings front for our recent addition of Atlassian (TEAM). The stock reported fiscal Q1 (ended September) results on Thursday, with revenue of $1.2 billion increasing 22% year-over-year and earnings of 77 cents beating the consensus by 19%.

For the entire fiscal year of 2025, the team collaboration and productivity software specialist guided for revenue to grow 17%. Chief Financial Officer Joe Binz stated:

“We continue to focus our investment and execution against our key strategic priorities of serving the enterprise, delivering AI innovation, and further bringing together technology and business teams with the Atlassian System of Work.” The company’s board of directors also just authorized a $1.5 billion share repurchase program.

The stock was up 18% in after-market trading and remains a Buy in the portfolio for now.

Viatris (VTRS) reports next Thursday before the opening bell and is expected to see earnings-per-share decline 14% while revenue declines 5%. No predictions on my part of how the earnings pan out, but the low bar set by analysts makes it easy for a beat to occur. Also, the stock is setting up for a potentially positive earnings-induced reaction based on my observation. Hold

RATING CHANGES: None this week.

NEW POSITIONS: American Airlines Group (AAL) was added to the portfolio this week as a Buy with an initial upside target of 20 to 21.

Friday, November 1, 2024 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:

• Recent market volatility jump and tech sector selling pressure related to biopharma sector weakness.
• Despite the weakness in the drug space, there are plenty of strong-looking turnaround candidates in pharma stocks.
• Comments on portfolio holdings.
• Final note
  
  • Next week will be very busy for earnings, including several in our portfolio. I’ll be keeping an especially close watch on the gold/silver stocks.

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.

The Catalyst Report

With the recent increase in broad market volatility as measured by the CBOE Volatility Index (VIX), I can only reiterate my assessment from last week’s podcast, namely that the growing number of new 52-week lows in the Nasdaq—plus the tendency for the new lows to outnumber the new highs—is a sign that the tech sector isn’t firing on all cylinders right now and that judicious stock selection is paramount at this time.

I can’t predict if we’ll see additional weakness ahead of next week’s election, but if we do, it almost certainly will be led by the pharmaceutical and biotech stocks, with the former category being the worse for wear right now.

That said, my focus of late has primarily been on stocks in that category. Now, you may be wondering why we should look at the biopharma space when I just pointed out that those types of stocks are heavily populating the Nasdaq new lows right now. Well, in spite of that, there’s also a surprising amount of relative strength to be found within this sector. And the number of therapeutic stocks that are showing turnaround potential right now is too great to ignore.

Call it the “pharmaceutical paradox” if you will, but for a variety of reasons, pharma stocks are back in the crosshairs of big Wall Street institutions and hedge funds. The turnaround catalysts vary from stock to stock, so let’s get started.

Our first featured stock is TG Therapeutics (TGTX), which is known for its targeted and immune therapies for B-cell cancers, but in recent years the firm has shifted more of its focus toward discovering treatments for autoimmune disorders like relapsing multiple sclerosis (RMS).

Last year, the firm received regulatory approval for its latest RMS therapy known as Briumvi (bree-um-vee), which is also indicated to include treating clinically isolated syndrome, relapsing-remitting disease and active secondary progressive disease in adults. Recent data has highlighted strong sales for Briumvi, and it has payor coverage policies in place for over 50% of covered lives across the U.S. Not surprisingly, the drug is the primary catalyst for the company’s recent show of strength.

In fact, shares of TG recently hit new 52-week highs thanks to new data presentations for Briumvi, which suggested that switching from other multiple sclerosis therapies is seamless, and that the IV infusion of Briumvi can be completed in as little as 30 minutes.

Moreover, there exists the potential for additional revenue strength based on the company being able to successfully develop a subcutaneous version of Briumvi, as well as the expansion of use of Briumvi for other indications. The pipeline already includes numerous new indications for Briumvi in various stages of testing, including Phase I and Phase III studies, so this catalyst is more likely than not to propel TG Therapeutics to significant revenue growth in the coming years.

The Q3 earnings report is due out next Wednesday, and while quarterly revenue is expected to decline 50% from a year ago, analysts see the top line growing by triple digits beginning in Q4 as Briumvi’s sales growth continues to accelerate. I would categorize the stock as a mid-stage turnaround, but its already well-established forward momentum should give buyers an edge for continuing the push higher if next week’s earnings don’t miss expectations.

Next up is Eyepoint Pharmaceuticals (EYPT), which is a clinical-stage biopharmaceutical that develops therapies for patients with serious retinal diseases. The company’s pipeline is largely based on its proprietary bioerodible Durasert E technology for sustained intraocular drug delivery, and its lead drug candidate is EYP-1901, an investigational sustained delivery treatment for a specific type of retinal disease.

Earlier this week, the stock popped on positive data for the ongoing mid-stage trial evaluating a Durasert-related delivery therapy for patients with diabetic macular edema called Duravyu. The study demonstrated an early, sustained and clinically meaningful improvement in best-corrected visual acuity and anatomical control versus the control medicine. The company expects to report the full topline results in the first quarter of 2025, once all patients complete the trial.

The Q3 report is due out today, November 1, so there will undoubtedly be an earnings-related reaction in the immediate term. Analysts aren’t expecting much in the way of sales growth for the next few quarters, but Duravyu is the key catalyst for Eyepoint in the next several months. It’s an early-stage turnaround candidate and doesn’t enjoy the same revenue growth or momentum profile as TG Therapeutics, but it’s worth keeping an eye on (pun intended).

And while we’re still on the subject of eyes, Tarsus Therapeutics (TARS) is another worthy watchlist candidate, in my estimation. It’s a commercial stage biopharmaceutical company focused on the development and commercialization of eye care treatments for patients in the U.S. The company’s lead product candidate is Xdemvy, a novel therapeutic for the treatment of a common eyelid inflammation, known as blepharitis, caused by the infestation of demodex mites and which affects 25 million Americans.

Tarsus received FDA approval for Xdemvy for the treatment of demodex blepharitis in July 2023, and in the past year, the drug has seen an acceleration of sales, with nearly 40,000 bottles dispensed to patients at pharmacies nationwide, while some 11,000 eye specialists have prescribed the treatment.

The drug’s revenue was $41 million in Q2, which represented a 65% year-over-year increase, and when Tarsus releases Q3 results next Friday, analysts expect the drug will drive sales of $43 million which, if realized, would amount to a 5% sequential increase. More importantly, Wall Street sees the top line ramping up significantly in the next several quarters as Xdemvy uptake is expected to surge thanks to an expanded sales force being deployed by the end of this year’s third quarter, with a planned direct-to-consumer campaign expected later this year to encourage more patients to see their optometrist.

Another reason for the stock’s latest show of strength involves takeover speculation. There was talk on Wall Street this week that Tarsus has attracted takeover interest from two larger rivals, who are said to be considering Tarsus. One report cited a Betaville “uncooked” alert that was circulating on Tuesday, and while the report remains an unconfirmed rumor at this point, it’s another potential catalyst for a completion of the company’s turnaround.

On that score, Tarsus is in the later stages of its turnaround, but the forward momentum is too strong to ignore, and I wouldn’t be averse to nibbling around current levels if you’re willing to ride next week’s earnings-related volatility.

Portfolio

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.