November 8, 2024

In today’s note, we discuss a number of earnings results and new developments for several of our portfolio positions, including Alcoa (AA), Atlassian (TEAM), Barrick Gold (GOLD), Viatris (VTRS), and Pan American Silver (PAAS).

Continued strong earnings reactions this week bode well for several of our recent portfolio additions.

We’re adding our very first ETF recommendation, namely the SPDR S&P Retail ETF (XRT), on the basis of potentially bullish seasonal factors in the retail sector.

We’ll also discuss some catalysts for three stocks in the biotech, banking and communications sectors.

Comments on Portfolio Holdings

Pharmaceutical firm Viatris (VTRS) reported Q3 earnings on Thursday, and while analysts expected to see earnings per share decline 14% with revenue down 5%, both metrics ended up beating expectations. I noted last week that the stock was setting up for a potentially positive earnings-induced reaction, and that’s what happened as shares exploded 14% higher in the wake of the earnings report.

Net sales improved to $3.7 billion, indicating a 3% growth on an operation-adjusted basis, with generics driving the sales expansion by adding $1.4 billion to the topline with 4% growth thanks to new product performance in developed markets and continued strength in complex products.

I realize that my upside target for Viatris is 19, but I’m now sensing the stock will encounter potentially strong resistance between here and 14, which has proven problematic for shares in the past. Therefore, I’m recommending that we exit the stock here as a continuation of our purging of older portfolio stocks that have underperformed for most of this year.

Also on Thursday, B2Gold (BTG) reported Q3 earnings with revenue of $448 million down 6% from a year ago, while earnings of 2 cents a share missed estimates by three cents.

Total gold production in the third quarter of 2024 was 181,000 ounces, which was down 28% from last year’s third quarter, while gold ounces sold was 32% lower. The stock didn’t react well to the earnings and was off from last month’s high by almost 50 cents.

This is a lower-priced stock recommended by my immediate predecessor, and while the stock is still currently above break-even, I’m recommending that we exit our position in B2Gold. A number of gold mining stock analysts still see turnaround potential in this company, but I’m not convinced the turnaround will be anything other than a slow, grinding affair. And as we already have plenty of exposure to the precious metals sector, I’m recommending that we sell BTG today.

Another gold stock in our portfolio that reported earnings this week was Barrick Gold (GOLD). The company reported revenue of $3.4 billion for Q3, which was up 18% from a year ago, with earnings of 30 cents a share missing estimates by two cents.

Gold production in the quarter fell 9%, to 943,000 ounces, while copper production was down 6% to 48,000 metric tons. All-in-sustaining costs for gold jumped to $1,507 an ounce, from the year-ago $1,255, while copper production costs jumped 11%.

The company said it’s on track for an improved overall performance in Q4 and expects to reach its fiscal 2024 production guidance of around 4.1 million ounces. Barrick is also projecting 30% growth in the production of gold equivalent ounces from its existing assets as it continues to advance growth projects and unlock other value-adding opportunities still embedded in its portfolio.

Moreover, earnings and revenue are expected by analysts to substantially improve in the next few quarters going forward. That said, the stock is down 10% from my original recommendation price and hasn’t performed according to my expectation. It’s also perilously close to penetrating the key 200-day trend line as of Friday morning.

If Barrick stock falls under the 17.70 level on even an intraday basis from here, I’m going to go ahead and move the stock to a Sell. For now, though, it remains a Buy rating in the portfolio.

Meanwhile on Tuesday, Pan American Silver (PAAS) released Q3 earnings that featured a 16% year-on-year revenue increase and a 12-cent earnings beat. Highlights of the quarter included record cash flow from operations and a 21% increase in cash and short-term investments.

Management said the company is on track to achieve its 2024 production guidance, and it sees a strong finish for the year from a back-end-loaded production profile. Another highlight was the addition of 1.2 million ounces of new gold-inferred mineral resource at Pan America’s Jacobina asset, which the firm called “a long-life mine with excellent exploration potential,” adding that it believes there is opportunity to capture more value from this high-margin operation. The stock remains a Buy in the portfolio.

Shares of Alcoa Corp. (AA) were up 14% this week in the wake of the U.S. presidential election. In his previous term of office, Donald Trump imposed a 10% tariff on imported aluminum in 2018, which were later revoked by the Biden administration in 2021. The market believes aluminum could benefit from the victory if Trump imposes similar tariffs on aluminum imports as he did six years ago.

Additionally, Alcoa shares benefited from an increase to five-month highs in the aluminum price after the company said Thursday it had stopped all bauxite shipments from a Brazilian port a day after declaring force majeure at its bauxite mine in the region as an inaccessible waterway hindered its ability to supply its customers.

According to a Reuters report, an Alcoa vessel has been stranded near Juruti port since late October and bauxite has not been moving for nearly 10 days. The incident is the latest in a series of aluminum’s global supply chain, which have raised prices for key input alumina to record highs while bolstering aluminum prices.

As our trading position in Alcoa has increased 17% since initiating it last month, I recommend that we take a one-quarter profit at this time. We’ll retain the remaining three-quarters position with a Hold rating.

Centuri Holdings (CTRI) on Tuesday announced it has appointed Christian Brown as its new CEO and President, effective December 3. Brown, who had formerly served as CEO of global energy and infrastructure company EnerMech from 2020 to 2024, will succeed Paul Caudill, who was appointed interim CEO and president since July 31.

The stock was up sharply this week and has gained 16% since our initial recommendation last month. I recommend taking a one-quarter profit in CTRI at this time. We’ll retain the remaining three-quarters position with a Hold rating.

Atlassian (TEAM) benefited from this week’s release of a research report from a major Wall Street bank, which named the company as a likely beneficiary from newly elected president, Donald Trump. The stock rallied to new highs after the bank said that it sees “a likely backdrop of lower corporate taxes, which would be broadly positive for high-tax-paying companies within our coverage.” The stock remains a Hold rating in the portfolio after we sold half our position last week.

RATING CHANGES: Alcoa Corp. (AA) has been moved from a Buy to a Hold.

Centuri Holdings (CTRI) has been moved from a Buy to a Hold.

B2Gold (BTG) has been moved from a Buy to a Sell.

Viatris (VTRS) has been moved from a Hold to a Sell.

NEW POSITIONS: SPDR S&P Retail ETF (XRT) is being added to the portfolio this week as a Buy with an initial upside target of 88.

Friday, November 8, 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 17 minutes and covers:

• The market posting one of its best weeks in recent memory in the wake of the U.S. presidential election.
• Fed’s latest rate cut decision adds to the bullish backdrop for equities.
• Drug stock space remains a potential stumbling block heading closer to the New Year.
• Comments on portfolio holdings.
• Final note
  
  • Small-cap stocks are in fantastic shape and, as they’re under-represented in the portfolio, my top priority going forward is to increase our exposure to this space.

Turnaround Watchlist

Strength has lately been skewed toward small-cap stocks. In fact, most of my recent searches for turnaround candidates have been among the Russell 2000 stocks. I’m aware that the portfolio is currently under-represented by small-cap stocks and I plan on adding some new names to this category in the coming weeks, not so much for the sake of balance as for the sake of taking advantage of what I see as a treasure trove of opportunity in this space. I’ll have more to say about that later.

Gold and silver, meanwhile, were initially hard hit by the election results as Wall Street’s inflation hedging efforts were temporarily abandoned in favor of riskier assets, but the yellow metal soon returned to favor on Thursday with a 1.7% rally. Bond rates also remain stubbornly high, which suggests investors are still worried about inflation—a stance that should bode well for gold and silver going forward.

The market’s overall liquidity backdrop remains favorable, which means I’m not expecting the bears to make a successful raid anytime soon. However, I still have a lingering concern about the very pronounced relative weakness in the pharmaceutical stocks. As we’ve talked about in recent weeks, drug stocks continue to dominate the list of new 52-week lows on the Nasdaq, with the NYSE Pharmaceutical Index (DRG) sinking to lower lows on almost a daily basis.

I’m not sure what this means for the equity market outlook beyond the short term, but if this dichotomy persists, pharma sector weakness could serve as a catalyst for profit-taking—if not outright selling pressure—as we head closer to 2025. Needless to say, I’ll be keeping a very close eye on the situation.

In surprising contrast to the pharmaceutical stocks, biotech stocks have been star performers of late. In fact, a great many of the potential turnaround stocks in the small-cap arena that I’ve discovered lately are biotechs. Last week we looked at TG Therapeutics (TGTX), Tarsus Pharmaceuticals (TARS) and Eyepoint (EYPT) as potential biotech turnarounds, and in the next couple of weeks I’ll have some more to add to the list, including a potential addition to our portfolio. But since we focused on the biotechs last week, let’s shift our focus this time to other areas of the market.

We’ll start with the telecom group, specifically IDT Corp. (IDT). This is a Russell 2000 stock with a market cap of $1.3 billion. It’s a multinational provider of cloud communications, point of sale systems, unified communications and financial and merchant services for clients across a range of industries.

All three of its reporting segments have shown exceptional performance in recent quarters, and the company is returning excess capital to shareholders via dividends and share repurchases. Last month, IDT reported fiscal Q4 earnings that were favorable on the top and bottom lines, led by solid remittance transactions that increased by 42% year-over-year and revenue that rose by 41%.

The company enters fiscal 2025 with “strong momentum,” in the words of management, with each of its segments profitable and with each having a long growth runway. IDT emphasized it remains committed to maximizing the cash generation from each of its segments, building dynamic businesses for long term value creation and returning value to our stockholders through investments in new initiatives, share buybacks and dividends.

It’s a late-stage turnaround, and while I have no plans to add it to the portfolio, investors who are of a speculative bent might consider a nibble around current levels, but be sure to use a conservative stop-loss.

Another group of stocks within the small-cap universe that keep crossing my screens are banking and financial sector stocks. Banks are arguably one of the strongest groups right now for various reasons, but one I can’t resist mentioning—even though it’s a mid-stage, bordering on late-stage turnaround candidate—is Heritage Financial Corp. (HFWA).

With a market cap of right around $1 billion, the company provides various financial services to small- and medium-sized businesses and individuals in the U.S. It accepts various deposit products, such as money market accounts, savings and checking accounts and certificates of deposit, and owns an extensive portfolio of loans, including real estate construction and land development loans, residential home loans, consumer loans, etc.

The stock’s Q3 earnings report late last month wasn’t anything to write home about and included earnings and revenue misses, but loan and deposit growth and margin expansion were impressive, with yields on the loan portfolio increasing to healthy levels.

Wall Street sees a downward earnings trend bottoming out this year and a rebound beginning in 2025 and into the next couple of years. It’s in an industry group that’s a little too rate-sensitive for my liking, so I can’t formally recommend it for the portfolio, but speculators with a taste for bank stocks should take a closer look at it.

And finally, the retail sector has entered the picture as we head into what should be a fairly buoyant holiday shopping season. Retail sales for Christmas 2024 are expected to be steady, with the National Retail Federation predicting 3% to 4% growth, but it sees online shopping as being a bigger contributor to the sales picture compared to previous years.

I’m seeing a growing number of turnaround setups within the broader retail category, but rather than focus on any one company, I’ve decided to do something different and make what could well be the first ETF recommendation in Cabot Turnaround Letter history.

Specifically, I’m recommending that we add the SPDR S&P Retail ETF (XRT) to the portfolio as of today. Since this is a short-term turnaround trading position and not a longer-term proposition, I’m also going to make a fairly conservative stop-loss recommendation for XRT (something I don’t normally do): If this fund violates the 75 level on a closing basis, we’ll exit the trade. But with the potential for a stronger-than-expected holiday sales season, I think we should have some additional exposure to retail, hence my recommendation of this ETF.

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

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.