September 13, 2024

In today’s note, we discuss the recent news developments concerning Nokia (NOK), Vodaphone (VOD), Janus Henderson Group (JHG), Fidelity National (FIS) and B2GOLD (BTG), with a particular emphasis on the latter due to recent precious metal market strength.

We’re also continuing our focus on primarily mid-stage turnaround with exceptional momentum potential in the short-to-intermediate-term outlook (albeit with a couple of potential early-stage turnarounds discussed in the latest update).

We further continue our focus on rate-sensitive stocks for a falling interest rate environment, with a focus on under-appreciated gold and silver mining companies.

Several stocks in the portfolio have benefited from recent company developments or institutional upgrades, and we examine them here. Four ratings changes are also included.

Comments on Portfolio Holdings

Nokia (NOK) recently announced an agreement for a fiber network expansion in the U.S. with AT&T (T) using American-made components. Nokia said it will provide the Lightspan MF and Altiplano platforms, which are Build America, Buy America-compliant, to expand and upgrade AT&T’s current fiber network under a five-year deal.

On the management front, Nokia further stated this week that while it’s not planning to replace its current CEO, it does aim to do “periodic succession planning.” According to the Financial Times, Nokia is also looking for a new chair to replace Sari Baldauf, a close ally of current CEO Pekka Lundmark. Outsiders have been approached, and the new chair is not expected to come from the current board, FT said. NOK is currently rated Hold in the portfolio.

Elsewhere on Thursday, Vodaphone (VOD) got a potential short-term catalyst boost when analysts at a major Wall Street phone added shares of the company to its American Depository Receipt (ADR) portfolio. The stock is currently rated a Buy in the Turnaround Letter portfolio with a target of 13.

Janus Henderson Group (JHG) got a small boost earlier this week after a major investment bank upgraded the shares from Sell to Neutral based on the bank’s observation that “recent results indicate improving fundamentals and early signs of success” under the CEO’s new strategic vision.

The bank specifically pointed to the company’s delivery of positive net inflows of $1.7 billion in Q2 which marked the first quarterly inflow in over a year, driven largely by ETF-related strength in fixed income, an area it sees as a “meaningful opportunity” for Janus to regain lost ground. The stock has a Hold rating in our portfolio with a target of 42.

RATING CHANGES: I’m moving Adient (ADNT) to a sell after the stock moved slightly under a psychological support level at 20 this week. The stock, which was initiated as a buy in the portfolio way back in October 2018, has had considerable difficulty gaining traction in the last few months, and I’m not prepared to wait for it to strengthen any longer, so I’m cutting the deadweight from the portfolio as of today. SELL

Fidelity National (FIS) is within 50 cents of our price target of 85 as of early Friday, providing a gain of 53% plus dividends, so I’m moving the stock to a partial sell rating. Specifically, I recommend selling half the position and keeping the remaining half for now as long as it continues showing strength. SELL A HALF

I’m also recommending selling half of our position in Agnico Eagle Mines (AEM) as of Friday after the stock recently exceeded the upside target of 75. The stock has thus far given us a profit of 64% plus dividends over the last two years, and my decision to cut the position in half paves the way for the introduction of a new position in the gold mining space—namely a stock with more in the way of intermediate-term turnaround potential. SELL A HALF

The stock I’m referring to is none other than Barrick Gold (GOLD), which was mentioned earlier in the podcast. I’m placing a Buy rating on Barrick with an initial upside target of 26. BUY

Friday, September 13, 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:

• Discussion of the tug-of-war between buyers and sellers in the broad market, with new 52-week highs and lows telling the tale.
• Recent activity in the energy sector, which is likely to be the catalyst for the next directional move in stocks, including the bulk of our turnaround portfolio holdings.
• Comments on potential turnarounds in gold and silver stocks.
• Comments on portfolio holdings.
• Elsewhere in the markets
  
  • A brief commentary on potential short-term catalysts for telecom companies Nokia (NOK) and Vodaphone (VOD).
• Final note
  
  • We’re cutting our profitable position in Agnico Eagle Mines (AEM) in half after the latest show of strength to make room for a new position in Barrick Gold (GOLD).

Turnaround Watch List

Returning to our theme of the falling rate environment, one of this week’s biggest beneficiaries of strengthening rate cut hopes was the precious metals arena. Specifically, gold and silver posted outsized gains as the consensus on Wall Street is that the Fed will lower its benchmark interest rate at next week’s FOMC meeting, since non-yielding bullion typically performs well when rates are declining.

There are likely other reasons for the strong performance in the metals, including the fact that gold and silver double as safety hedges in an uncertain equity market backdrop. But the main attraction here is the interest rate factor, with gold and precious metal-related stocks likely to be big beneficiaries if the Fed does in fact lower rates in the coming months.

On that score, one of this week’s biggest gainers in the Cabot Turnaround Letter portfolio was B2Gold (BTG), which rose by a whopping 17% in just the last four days. The stellar performance was a sympathy move with the latest breakout in the gold price to a record high of nearly $2,600 an ounce.

B2Gold was the last stock recommended by my predecessor, Matt Warder, and it’s finally starting to live up to its turnaround potential after coming off a multi-month low just under the 2.50 level and closing most recently at 3.10. The company is actively embarking on a strategic expansion in Mali, where its flagship asset is located, as well as in the politically friendly mining jurisdiction of northern Canada, where it has access to an upcoming high-grade project.

The catalyst for this week’s move higher was the firm’s announcement that it has agreed to terms with the government of Mali that will allow it to proceed with extension projects at its primary complex, including the development of both the underground project at the Fekola Mine and Fekola Regional.

Additionally, it’s worth noting that B2Gold maintains a very low debt-to-equity ratio of approximately 0.01, which means the company has little reliance on debt financing. The company has access to a $650 million of a $700 million revolving credit facility, putting the company in an excellent condition to continue its expansion plans going forward.

And with B2Gold having total all-in sustaining costs (AISC) of around $1,450 an ounce—which is $1,200 below the current gold level—it puts the company in an excellent position to benefit from additional gains in the gold price. All told, the company’s intermediate-term turnaround potential looks solid.

Also looking attractive in a falling rate environment are some of the more established blue-chip miners, including Barrick Gold (GOLD). Barrick, which can be categorized as a mid-stage turnaround, has been focused on replenishing and replacing gold reserves rather than buying them at a premium like many of its fellow producers. This places the company on a sound footing to benefit from additional gold price strength in the coming months, and its strategy has lately attracted positive attention in the form of ratings upgrades from major Wall Street institutions.

Like B2Gold, Barrick is also on the lookout for opportunities in the politically friendly jurisdiction of Canada to purchase or build out a new project. But gold isn’t Barrick’s only focus, as its copper business is set to deliver results from two world-class projects in a high-demand environment for the red metal. Its Zambian super pit expansion will increase the Lumwana mine production from 130,000 tons to 240,000 tons per year, while its project in Pakistan is targeting 400,000 tons of copper and 500,000 tons of gold annually.

Analysts expect significant double-to-triple-digit earnings growth in each of the next three quarters. From a technical perspective, the stock has been building a major launching pad over the last two years, and I’m OK with starting a conservative long position at current levels.

On a related note, after a lagging performance for most of this summer, silver is finally starting to show signs of strength in sympathy with gold’s rally. Historically, some of the best gold price rallies are led or confirmed by corresponding strength in the white metal. With silver prices now on the rise, it’s time to give a closer look to some beaten-down silver mining stocks. And one such stock that has the potential to be worthwhile is Pan American Silver (PAAS).

A key consideration here is that the “electrification of everything” trend is not only dramatically boosting electricity demand, but it’s also putting a tremendous strain on the electrical grid. The more recent buildout of AI data centers is further adding to this strain, as artificial intelligence requires up to 10 times more electricity than a typical Google search. This is where Pan American comes in, as its main product, silver, plays a critical role here due to its excellent electrical conductivity (the highest of all metals), not to mention its widespread use in applications ranging from wind and solar energy production to electric vehicles and other industries associated with alternative energy.

Pan American is also one of the world’s biggest silver producers, as well as a miner of gold, zinc, lead and copper, with operations in several countries throughout North and South America. Management guided for silver production to expand in the coming months, as global demand for the precious metal strengthens. Specifically, company-wide silver production is expected to increase by more than 15% in the second half of 2024, while gold production should come in at similar levels.

What’s more, the key metric of all-in sustaining costs for both gold and silver is expected to fall substantially in the second half of the year for Pan American—including a decline to $1,525 for gold and a drop below $13 per ounce for silver—setting up the potential for margins to soar going forward, prompting a major bank to recently single out Pan America as a top pick for investors wanting some silver exposure (a reason for the stock’s strength). Analysts see the bottom line booming nearly 400% this year and over 130% in 2025. It’s a solid mid-stage turnaround play in my estimation.

On a far more speculative note, a potential early-stage turnaround in this category is the long-neglected and seemingly forgotten SSR Mining (SSRM). The company operates one of Argentina’s largest commercial silver projects (Puna), also producing gold, zinc, lead and tin. While the company is known historically for its silver mining, gold is where it has put the most emphasis in recent years, with a pipeline of high-quality development and exploration assets in the U.S., Turkey, Mexico, Peru and Canada.

Formerly known as Silver Standard Resources, the company changes its name to SSR Mining in 2017 to reflect its evolution from a silver-focused explorer to a producer of intermediate precious metals. Its principal assets are located in four jurisdictions: the U.S. Turkey, Canada and Argentina, all of which are located within several of the world’s most prolific precious metal districts.

In the past month, the company has experienced production setbacks at one of its mines in northern Saskatchewan due to forest fires in the area, as well as a far more serious setback at a mine in Turkey, where it laid off nearly 200 workers after a mud slide halted operations. SSR estimated that site remediation costs could cost upward of $300 million, but with the 3.3 million ounces of proven and probable gold at the site, the infrastructure is still in place to act as an important turnaround catalyst in the intermediate-to-longer-term.

It’s not for the faint of heart, but if you’re willing to assume the risk, you could do a little nibbling around the current level of 5.80 with a stop-loss slightly under the 5 level.

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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