September 27, 2024

In today’s note, we discuss the recent developments concerning Tyson Foods (TSN) and Alibaba Group Holding (BABA), with a particular emphasis on exit strategies for both stocks.

The latest additions to this month’s Catalyst Report are also under discussion, as is a follow-up to a previous Catalyst Report candidate, Gap Inc. (GAP).

We also take a look at potential early-stage turnarounds among some players in the industries ranging from food and personal care to EVs and alternate power, as well as apparel retail: Hain Celestial Group (HAIN), Gap Inc. (GAP) and Aspen Aerogels (ASPN).

Comments on Portfolio Holdings

Tyson Foods (TSN) ran up by an impressive 12 points between mid-June and early August before pulling back in September. Hindsight is 20/20, and I’ll admit I didn’t anticipate the extent of the recent correction. But since the stock has managed to find support at the psychologically significant 200-day line, I’ve decided to maintain our long position.

The latest bout of selling pressure in Tyson was apparently catalyzed by a ratings downgrade from a major Wall Street institution, which warned of the potential for unfavorable beef costs in the coming months along with “a growing market supply of chicken” that could put downward pressure on poultry prices.

Frankly speaking, much will depend on how Tyson’s stock behaves in the next few days: if it breaks under the 58 level, I’ll be issuing a sell alert, which should get us out with a still respectable 10%-ish profit. On the other hand, if the stock rallies from here, we’ll stay long but with an eye toward exiting at some point in October. Given the magnitude of the recent pullback, I don’t foresee a new high in TSN anytime soon, so my strategy is to look for an exit opportunity on any meaningful rally that may occur in the coming weeks. In any event, I’ll inform you when that time comes. For now, I’m maintaining a Hold rating in Tyson.

We also took another one-quarter profit in Alibaba Group Holding (BABA) on Thursday as the stock soared on the aforementioned China stimulus strength. This leaves us with a half position in BABA and a net profit of around 30% since our initial entry point back in August. I’m maintaining a Hold rating on the remainder of our position.

RATING CHANGES: None this week.

NEW POSITIONS: We initiated a new long position in Intel (INTC) in the latest monthly edition of the Cabot Turnaround Letter.

Intel has a number of potential turnaround catalysts going forward. Along with a recent $3 billion award it received under the Chips Act, the company is building foundries in several U.S. states, which will help advance its already sizable investments in the AI chip market.

Most recently, Intel announced a partnership with Amazon Web Services (AWS) to produce custom AI chips for AWS on 18A, Intel’s most advanced process node—and a key part of its strategy to compete with other chip manufacturers. The partnership is being touted as a major move to help customers power any workload while accelerating the performance of AI applications.

Even more intriguing was the latest overture from semiconductor giant Qualcomm (QCOM) which, according to a September 20 Wall Street Journal report, has approached Intel about a takeover. While such a deal is said to be “far from certain” and likely to attract close regulatory scrutiny from an antitrust perspective, Qualcomm is said to be interested in buying Intel’s design business in an effort to improve its product line.

But even if the deal with Qualcomm isn’t approved by regulators, Intel has plenty of catalysts to power a turnaround, not the least of which is the ongoing AI boom. The deal with Amazon’s AWS is also widely regarded by industry experts to be of greater significance than a Qualcomm deal, with some analysts projecting a realistic return to ~$10 billion in annual profits in the foreseeable future.

The consensus view on Wall Street is that Intel’s top and bottom lines bottom out in Q3 and gradually recover from here, with triple-digit earnings growth projected for 2025. It’s an intriguing early-stage turnaround play. BUY

Friday, September 27, 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:

• Discussion of the impact China’s recent stimulus measures have had—and are likely to continue having—on U.S. equities and the gold price.
• Stocks with excellent, “slam dunk” turnaround potential are getting harder to find as the falling rate theme has likely already been largely discounted by the market.
• Instead of focusing on specific sectors, we’ll be looking more at high-probability turnaround candidates among a broad array of industry groups in the coming weeks, likely until the volatility-inducing U.S. presidential election is behind us.
• Comments on portfolio holdings.
• Elsewhere in the markets
  
  • A brief commentary on the recent rally catalysts for gold and silver stocks, particularly Pan American Silver (PAAS) and SSR Mining (SSRM).
• Final note
  
  • We cut our position in Alibaba (BABA) after this month’s 30% rally.

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

In the last two months since I’ve taken over as your chief analyst here at the Cabot Turnaround Letter, we’ve been very fortunate to have experienced a market climate that has been ideal for thematic traders and investors. That is, we’ve been able to focus on specific sectors and industry groups—such as software, healthcare and real estate—all of which have benefited from the strong liquidity backdrop and the falling rate environment.

But as those events have now been largely factored into stock prices, I’m finding that it’s becoming more difficult to find conspicuously attractive sectors and industries that present a broad array of turnaround opportunities. Instead, I find myself having to pick and choose among individual stocks in several different industries as stocks with excellent turnaround potential are admittedly becoming harder to find. So, for this month’s Catalyst Report, we’ll be looking at an eclectic collection of individual stocks across an array of different industries.

Also, by way of disclaimer, I feel compelled to tell you that while I’ve felt a high degree of conviction in the turnaround candidates we’ve discussed in the last several CTL weekly podcasts, I’m not feeling that same degree of bullish conviction at this time. And it’s not that I sense a bear market is imminent, but I suspect much of the stock market strength from the falling rate environment and positive liquidity backdrop has largely been baked into stock prices, at least in the immediate term.

And while further strength is certainly possible, it’s equally possible that the weeks preceding the November U.S. presidential election could bring some increased market volatility. Accordingly, I’m hedging my bets here by stating that the following turnaround candidates in this month’s Catalyst Report should be taken with a grain of salt as they may, or may not, perform according to my assessment during the month of October. In other words, while I was emphatically optimistic in August and most of September, I’m now only cautiously optimistic until I see some better set-ups in the stock groups I regularly examine.

So, with that, let’s start with the first of our turnaround candidates: Hain Celestial Group (HAIN). It’s an international company that offers natural foods and organic personal-care items. It was originally founded as Hain Food Group but changed its name to Hain Celestial Group after merging with the well-known Celestial Seasonings tea company in 2000.

About a month ago, Hain released financial results for the final quarter of its fiscal year. The company emphasized that fiscal 2024 was the “foundational year” of its Hain Reimagined strategy, during which it made “substantial progress” in simplifying the business and generating momentum. During the past year, Hain transitioned to a global operating model, which improved logistics, reduced geographic complexity and increased scale. The turnaround strategy also allowed Hain to pay down debt, invest more in the business, as well as deliver on previous earnings guidance.

While revenue in Q4 was 6% lower year-on-year, earnings handily beat expectations, and cash flow for the full year was above guidance, which allowed the firm to reduce net debt by $86 million over the course of the year, as well as to drive improvement in its leverage ratio to 3.7x. Going forward, management said its top priorities include further reducing net debt and reaching a leverage goal of 2x to 3x by fiscal 2027.

The Beverage category is Hain’s strongest right now, and on that score, one of the catalysts for Hain going forward is tea via its Celestial Seasonings product portfolio. Tea is rapidly overtaking coffee in terms of popularity in the U.S. and other countries, particularly among Millennials. Hot tea season begins as the weather cools off in the Northern Hemisphere, and ahead of this year’s tea season, the company is launching a new master brand campaign with a focus on taste. Hain expects the campaign, and the expansion into black and green tea, to contribute to accelerating growth for the Celestial Seasonings brand in fiscal 2025.

Looking ahead, the top brass sees fiscal 2025 as “pivotal” for driving further margin expansion, generating “significant” free cash flow to reduce net debt, improve leverage and invest in its brands. Wall Street analysts see a 42% jump in earnings for fiscal 2025, with additional double-digit earnings growth in each of the next two years.

While I’m not quite ready to add HAIN to the portfolio, last month’s earnings did see some of the highest-volume buying interest the stock has seen in years. And I do believe the stock has likely bottomed. All told, I’ll continue to monitor it closely in the coming weeks.

Next up is apparel retailer Gap Inc. (GAP), a stock I covered in my very first catalyst report back in early August when I took over duties here at the Turnaround Letter. I mentioned last month that Gap is in the middle stage of its turnaround, making it a prime candidate for inclusion in our Catalyst Report.

The company has lately benefited from upgrades from some major Wall Street banks, as well as from the successful turnaround strategy of CEO Richard Dickson, formerly of Mattel (MAT), who has introduced trendier styles across the brands while ramping up marketing efforts to attract fastidious shoppers, and the strategy is paying off. Dickson also remains focused on improving cost savings and margins going forward, as well as the stability of revenues.

Admittedly, since first covering Gap a couple of months ago, the stock has gone nowhere and sits precariously above a key chart support at the 20 a share level. If the stock ends up breaking decisively under 20, all bets are off and my intermediate-term bullish thesis for Gap will have been compromised. But I’m somewhat encouraged by the fact that recent financial results have been favorable for Gap, and if the stock is going to rally, it’s likely now or never (i.e., October) since we’re soon entering the start of the traditional holiday shopping season.

In Q2, total sales were up 5% to $3.7 billion, which was $90M more than analysts expected. Comparable sales for the quarter rose 3%, which was also above consensus, and online sales increased 7% while comprising 33% of total sales.

Macro headwinds are still a concern for Gap and its fellow clothing retailers, but the company sees a sizable opportunity in its children’s business and thinks it can capitalize on it during the upcoming holiday sales season. The firm is also continuing to invest in turning around its Banana Republic brand and is reporting strength on that front. All in all, the company is broadening its customer base, enhancing its advertising outreach through new forms of media and technology and modernizing its capabilities through the better use of data and digital optimization.

Technically speaking, the stock is still in a somewhat tenuous position, but in view of the factors we’ve discussed here, I remain optimistic Gap can realize its cyclical turnaround potential this Fall.

Finally, while it’s not my highest conviction turnaround idea, I think Aspen Aerogels (ASPN) merits inclusion in the Catalyst Report.

The main catalysts here are the twin booms in electric vehicles (EVs) and alternate energy generation, which are heavily dependent on batteries and other forms of power generation that require thermal insulation. This is where Aspen enters the picture. The Massachusetts-based firm uses aerogel technology that helps energy companies design and operate more efficient, safe and profitable facilities (including power plants, steam distribution systems, buildings and pipelines). Its products are also used to optimize the performance and safety of EVs and other energy infrastructure assets.

Aerogels are a class of porous, ultralight material derived from a gel, in which the liquid component of the gel has been replaced with a gas without significant collapse of the gel structure. The result is a solid with extremely low density and extremely low thermal conductivity. (Indeed, aerogels have been compared to frozen smoke due to their virtual weightlessness and translucent appearance—a huge benefit for reducing the weight and improving battery performance for EVs and high-tech other applications.)

On the financial front, Aspen reported Q2 revenue of $118 million that increased a whopping 144% year-on-year, with earnings of 21 cents blasting past estimates by 15 cents. Adjusted EBITDA grew to $29 million, a big improvement from the year-ago $11 million loss, resulting in an adjusted EBITDA margin of 25%. Revenue and profitability growth were seen across both of Aspen’s business segments, with Thermal Barrier sales accelerating as clients ramp production to capture demand, while supply to Energy Industrial segment customers is also increasing, nearly doubling revenue from its external manufacturing facility.

Going forward, management plans to expand product supply in the Energy category, which it said is supported by a tightening global emissions regulatory environment and an EV market that favors recently launched models (many of which are equipped with Aspen’s PyroThin aerogel thermal barrier material). Wall Street sees revenue jumping 70% this year, followed by several more years of 30%-ish growth.

Portfolio

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