November 15, 2024

In today’s note, we discuss a number of earnings results and new developments for several of our portfolio positions, including Barrick Gold (GOLD), Centuri Holdings (CTRI), Intel (INTC), Pan American Silver (PAAS) and Super Hi International Holding (HDL).

The favorable liquidity backdrop should continue for the rest of Q4, which is ideal for initiating new turnaround trading positions.

We’re adding Starbucks (SBUX) to our portfolio on the basis of potentially bullish seasonal factors in the food and beverage retail sector.

We’ll also discuss some catalysts for three stocks in the retail and energy sectors.

Comments on Portfolio Holdings

Third-quarter earnings for Super Hi International Holding (HDL) are due out November 25 after the market closes, so we’ll need to watch the stock closely as that date approaches. But to further explicate why I like the stock and see the turnaround potential, here’s something to consider.

A recent restaurant industry report has concluded that Asian cuisine is one of the fastest-growing takeout and dine-in categories in the entire industry. Moreover, this is a global phenomenon which encompasses Europe, North America and the Asia Pacific region. The report forecasts that 2025 will be a huge sales year for Asian dining in general, with Chinese cuisine being a big recipient of the projected higher sales trend.

That’s where Super Hi should see benefits, as the company is well known for its branded Chinese cuisine restaurants in Asia, North America and internationally. The company is also involved in the food delivery business, and it’s especially known for its hot pot condiment products and food ingredients.

Chinese cuisine is a major market in North America with lots of growth potential, according to a number of industry research reports. The company’s top brass sees the U.S. market as potentially its biggest one globally, and it’s accordingly putting more of its chips into this basket. To that end, Super Hi plans to expand its physical footprint in several U.S. cities, including more outlets in New York and Los Angeles in 2025.

However, Southeast Asia is currently Super Hi’s biggest market, accounting for about 70% of annual sales, and while more store openings in that region are expected, that particular market is becoming saturated. By contrast, the market opportunity in North America is huge, which according to one research report was $55 billion in 2022, which compared favorably to the $19 billion opportunity in the Southeast Asia cuisine market. Hence, the company’s increased focus on North America going forward.

Super Hi’s revenue is expected to grow by around 15% in each of the next three years based on Wall Street’s consensus forecasts. I still rate the stock a Buy in the portfolio.

As noted last week, I’m moving Barrick Gold (GOLD) to a Sell after it violated the 17.70 level this past week. Gold has been a big underperformer ever since last week’s U.S. presidential election completely changed the precious metals landscape. Donald Trump’s victory has convinced investors that a more favorable regulatory environment for business lies ahead, in turn resulting in a rotation out of defensive assets like gold and into riskier asset categories. We will, however, maintain our remaining half-position in Agnico Eagle (AEM) and our full position in Pan American Silver (PAAS) for now, with the latter being downgraded from Buy to Hold.

On the semiconductor stock front, a growing number of Wall Street analysts are beginning to turn bullish on the industry. One major investment bank released a report this week maintaining that it’s “almost time to buy again” beaten-down chip stocks after the recent earnings season-induced selling pressure, including the early August selling in our recently added holding, Intel (INTC).

However, the bank said, “the downside/sell-off is almost over and attention will shift to 2025,” and it estimates global semiconductor sales will be up another 9% year-on-year in 2025, following last year’s 17% growth.

On a related note, the CHIPS and Science Act under which Intel has been approved to receive billions of dollars in grants and loans should remain intact under a Trump administration, according to a major Wall Street institution’s research report this week. “After all,” the research report noted, “the CHIPS Act was initially drafted during Trump’s first term, and was one of the most bipartisan bills passed during the Biden administration. We expect policy continuity of the CHIPS Act, which will be a positive for Semicap.” Intel remains a Buy in the portfolio.

Yesterday it was announced that activist investor Carl Icahn upped his stake in Centuri Holdings (CTRI) to 3.6 million shares, a 38% increase from Q3. After taking a one-quarter profit in Centuri this month, the stock remains a Hold in the portfolio.

RATING CHANGES: Barrick Gold (GOLD) has been moved from a Buy to a Sell.

Baxter International (BAX) was moved from a Hold to a Sell earlier this week.

Pan American Silver (PAAS) has been moved from a Buy to a Hold.

Solventum (SOLV) was moved from a Buy to a Sell earlier this week.

NEW POSITIONS: Starbucks (SBUX) is being added to the portfolio this week as a Buy with an initial upside target of 118.

Friday, November 15, 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 15 minutes and covers:

• Strength in the small-cap arena continues to accelerate in the wake of the U.S. presidential election.
• A favorable regulatory environment, plus a stronger U.S. dollar, should bode well for small-cap firms.
• The energy sector should yield an increasing number of turnaround candidates heading into 2025.
• Comments on portfolio holdings.
• Final note
  
  • Starbucks (SBUX) and other players in the food and beverage industry are showing outsized strength, with further turnaround potential anticipated in the coming months.

Turnaround Watchlist

In recent weeks, I’ve emphasized the growing strength I’m seeing in the small-cap arena, and that continues to be the case—especially in the aftermath of last week’s presidential election.

As the asset manager Roger Montgomery recently observed, the small-cap stocks of innovative businesses with pricing power should perform well under the incoming pro-business Trump administration. He sees a likely repeat of Trump’s first presidency in 2025, including tax cuts and a deregulatory environment, both of which theoretically bode well for small-cap companies.

“The last Trump administration emphasized policies that stimulated domestic economic growth,” said Montgomery, “such as infrastructure spending and tax reforms, benefiting these companies.” What’s more, as small-cap companies typically derive a big portion of their revenue from domestic operations, a stronger U.S. dollar—which many analysts anticipate under the new administration—should also boost the small caps.

And with the Russell 2000 Index just recently nudging up to its late 2021 high, small caps are far from being overcrowded and have only just begun to attract attention from retail investors. Cabot’s resident small-cap expert, Tyler Laundon, certainly has many more insights into this realm than I do, but we both see the small-cap arena as being one of the best opportunities in town for value-oriented investors heading into 2025.

With that said, let’s take a look at a couple of small-cap stocks that I see having sustainable turnaround potential from an intermediate-term perspective. One of them is Warby Parker (WRBY). This is an eyewear specialist with a market cap $2.5 billion, and for whatever reason, I’ve noticed quite a few eye-related stocks are showing up on my turnaround screens of late (whether ophthalmic pharmaceutical companies or eyewear retailers like Warby).

The company is seeing some major sales growth in the categories of glasses, sunglasses and contact lenses. Consequently, it has lately been expanding its retail footprint by opening 40 new retail outlets this year alone, with plans to open many more next year.

Last week, the company reported a 13% year-on-year revenue increase, to $193 million, in the third quarter and raised its net revenue guidance for the full year by 15%. The mostly sanguine results were primarily driven by the sales growth of contact lenses and increased doctor headcount, and management said it’s particularly encouraged by the early holiday sales momentum it’s seeing in early Q4.

Looking ahead, the firm believes the integration of recent insurance partnerships will scale in 2025 while sales continue to expand, and Wall Street expects the bottom line to grow by more than 30% in each of the next two years.

Warby’s turnaround is still in its early stages, but the stock is beginning to establish forward momentum. I have it very high on my watch list and will likely pull the trigger on a buy recommendation on the first pullback after the latest rally.

The energy sector is also yielding some potentially favorable turnaround opportunities—particularly in the small-cap space. And I suspect it’s because investors recognize that the sector should benefit from the policies of the incoming administration, as Trump has promised to “unleash energy” across a number of energy-related industries. One of those industries is the much-maligned coal space, which could see a comeback of sorts in the next couple of years.

But traditional oil and gas is also showing its fair share of turnaround setups. One of them is Comstock Resources (CRK). It’s a Russell 2000 component with a market cap of just under $4 billion. Comstock is an independent energy company that explores and produces natural gas and oil properties in the U.S., mainly in the Haynesville and Bossier shales located in North Louisiana and East Texas.

Comstock is something of a contrarian play, mainly because natural gas has been in a well-publicized bear market for the last couple of years. In fact, many analysts seem to have thrown in the towel on Comstock, which provides an ideal contrarian backdrop for a turnaround to develop. The company’s recent Q3 earnings report was nothing to write home about, with misses on both the top and bottom lines, as weak natural gas prices weighed heavily on the Comstock’s financial results in the quarter.

However, natural gas prices have likely turned a corner and are starting to perk up, with futures prices soaring on nationwide weather forecasts calling for a colder-than-normal late November to December. Prices have also been supported by lower wind-power generation, which raised gas demand in some European countries.

These are admittedly short-term cyclical factors—and tenuous ones at that. But key producing basins in the U.S. are falling into inventory exhaustion, which as one analyst has noted, means natural gas producers must either add inventory by mergers and acquisitions or exploratory drilling. And this is where Comstock enters the picture: For the last four years, the company has expanded its inventory through exploration in its new Western Haynesville play. Moreover, since 2020 it has secured 450,000 net acres in Western Haynesville and has drilled 18 wells over an area of 26 miles to give birth to a major natural gas field close to the LNG demand corridor, which management says “could potentially add decades of additional drilling inventory.”

All told, I see Comstock as a worthwhile turnaround play on a developing natural gas price rebound in the coming quarters. Analysts see sales and earnings for the company bottoming out this year and turning the corner in 2025. The stock is already well off its low from earlier this year, but I think the turnaround has legs and will recover more of its lost ground from last year’s natural gas-related bear market.

And finally, with the holiday shopping season gearing up, I think it’s time to re-examine Starbucks (SBUX). America’s favorite coffee chain was highlighted as a high-probability turnaround candidate in my very first catalyst report after assuming duties as your chief analyst back in August, and the stock ended up popping 30% on the news that Brian Niccol was chosen as the turnaround CEO. The recent presence of the well-known activist investor Elliott Management was another reason for my bullish outlook for Starbucks.

I was hesitant to pull the trigger on a buy, however, due to the market’s obviously euphoric reaction, which I assumed would have to be digested before further gains could be made. But now that the stock has had a few months to consolidate, combined with recent favorable company developments, I’m inclined to add SBUX to the portfolio to fill the gap created by our recent portfolio divestitures.

In its latest conference call, the company said it still sees store growth opportunities since new stores in low-density regions are outperforming. Niccol also said he wants the stores to be a welcoming coffeehouse where people gather and where the company serves the finest coffee handcrafted by skilled baristas.

To that end, he said Starbucks will bring back condiment coffee bars in all outlets by early next year, along with the re-introduction of ceramic mugs, plus it will bring back more comfortable seating and other amenities to make stores a place “where customers want to gather.” Customers will also have additional high-quality brewed coffee options as part of the turnaround, he said.

Of significance, Niccol said Starbucks would not raise prices for its North American menu offerings in 2025, which I think will be a key selling point to bringing in more customers in the coming months.

Meanwhile, Starbucks just launched its 2024 holiday beverage menu which includes a mix of returning favorites and new items, such as the Cran-Merry Orange Refresher, alongside classics like the Peppermint Mocha and Caramel Brulée Latte. The company also held its extremely popular Red Cup Day on November 14, which is an annual event that helps promote the holiday beverage menu. (Customers who purchase a holiday drink receive a free reusable red holiday cup, an offering that historically has resulted in a big spike in foot traffic as customers scramble to buy the cups before they run out.)

All things considered, I think the turnaround has legs and I’m willing to do some nibbling in the stock around current levels, with a suggested stop-loss just under 90 (intraday basis).

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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