September 6, 2024

In today’s note, we discuss the recent news developments concerning Nokia (NOK), Tyson Foods (TSN), Baxter International (BAX), Gannett (GCI), and Alibaba Holdings (BABA). We also discuss the latest nationwide headline development that could have a material impact on AMMO Inc. (POWW).

I’m also keeping close watch on our recently initiated position in YETI Holdings (YETI) with an eye on a key support for the stock that will likely determine the success or failure of its cyclical turnaround.

We examine the seasonal tendency for stocks in September, and we also review the key indicators to determine overall market health in the near-term outlook. With volatility refusing to recede, defensive sectors remain in a position of strength, but at least one “risk-on” sector (software) looks promising, as discussed in the podcast.

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

Turning our attention to our Cabot Turnaround Letter portfolio stocks, none reported earnings this week and only one stock is subject to a ratings change.

Shares of Nokia (NOK) have strengthened in recent days after a report that potential buyers are interested in the telecom firm’s mobile network assets, including Samsung Electronics. Nokia has reportedly been in talks with advisers on the options for its mobile networks business, and according to Bloomberg it’s evaluating its options, which include selling some or all of the unit, spinning it off or combining it with a rival. The stock is up 16% in the last month. HOLD

Tyson Foods (TSN) recently appointed Curt Calaway as its Chief Financial Officer, succeeding John R. Tyson, who remains with the company but is on health leave. Calaway has been with Tyson since 2006, most recently serving as interim CFO. The stock has been on a tear this summer, gaining 23% since June. HOLD

Shares of Baxter International (BAX) rallied 4% on Thursday after a major institution listed Baxter near the top of its list of 50 stocks likely to benefit from “bull steepening,” which occurs when the U.S. 2-year Treasury yield falls more than the 10-year yield. The analysts said defensive companies like Baxter should benefit in such a scenario. BUY

On Thursday, Gannett (GCI) reported that from the beginning of the third quarter through the close of business on September 9, the company expects to have sold approximately $13 million in real estate and non-strategic assets. Proceeds from the asset sales are expected to be used to repay approximately $13 million of a five-year senior secured term loan facility, allowing the company to reduce debt by $53 million year-to-date. Gannett further expects to repay at least $110 million for the full year. HOLD

Also on Thursday, Alibaba.com, an e-commerce platform of Alibaba Group Holding (BABA), announced a partnership with payment processors Mastercard and Cardless. The partnership aims to offer a credit card that rewards businesses for cross-border and domestic sourcing purchases. The Alibaba.com Business Edge Credit Card is set to be available for application later this year. BUY

Shares of ammunition maker AMMO Inc. (POWW) were unchanged on Thursday after a highly publicized shooting incident at a high school in Georgia. As reported by Seeking Alpha, the firearms sector typically exhibits its greatest volatility when the potential for new gun-related legislation increases, or after FBI background check data releases, but not after mass casualty events. However, the proximity to the shooting with U.S. and local Georgia elections in November could increase the likelihood of new firearm legislation proposals.

Putting that aside, the stock still hasn’t been able to gain any meaningful traction for a turnaround and I’m frankly losing patience with it. I’ve decided to give Ammo until the end of September to show signs of progress or I’m cutting it from the portfolio. Alternately, if the stock breaks under its recent support, I’ll also issue a sell rating on it. For now, Ammo remains a HOLD.

Finally, I’m keeping a close watch on our newly initiated position in YETI Holdings (YETI). The stock has weakened since we bought it last month, and I’m not prepared to endure more than a 14% loss on the stock. For that reason, if YETI falls under the 36 level on even an intraday basis, I’ll move the stock to Sell. This is also a key chart support, as YETI has refused to fall under 36 in the last three times it pulled back to this level, so a break at 36 would certainly suggest a loss of institutional support. Either way, we’ll remain long YETI above 36, but I’ll be keeping a close eye on the stock in the coming days. I’m downgrading YETI from BUY to HOLD.

RATING CHANGES: YETI Holdings (YETI) has been moved from BUY to HOLD.

Warner Bros. Discovery (WBD) has been downgraded from HOLD. Although the balance sheet has improved in recent quarters, management has failed to deliver promised structural changes, and the anticipated turnaround continues to stall. Moreover, the company is carrying a significant debt load despite the latest attempts to slash it. Accordingly, it’s time to cut the stock, in my estimation. SELL

I’m also cutting shares of toymaker Mattel (MAT) as softer doll sales continue to weigh on the firm’s financial outlook. The stock has been in the portfolio since 2015 and has had plenty of time to gain traction but has consistently failed to do this, so it’s time to let it go. SELL

It’s time to take profits in Mohawk Industries (MHK) after a torrid rally over the last nine months, leaving us with a 45% profit. The stock reached my predecessor’s price target of 162 back in July, so there’s really no need to hold onto MHK further as I don’t envision further strength in the near term. What’s more, cutting MHK will bring the portfolio to a more manageable 23-stock position. (My goal is to maintain at all times a minimum of 15 holdings, and not more than 25, albeit with possible exceptions depending on market conditions.) SELL

Friday, September 6, 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:

• Discussion of the tendency for September to be the weakest month of the year for equities.
• Intermediate-term broad market strength continues, but near-term trend is weakening, which favors defensive sectors.
• Comments on potential turnarounds in computer software stocks.
• Comments on portfolio holdings.
• Elsewhere in the markets
  
  • A brief commentary on what could be in store for ammunition maker AMMO Inc. (POWW) in the wake of this week’s Georgia school shooting.
• Final note
  
  • Comments on recent weakness in YETI Holdings (YETI).
    

Turnaround Watch List

Software application and infrastructure stocks are among the top performers right now from a relative strength, revenue growth and even momentum perspective, but it’s the big-picture turnaround potential that really stands out. Most of the turnarounds in this industry have already established the early-to-middle stages of a rebound, so it’s more a matter of riding the newly developed uptrend than trying to guess when, or if, a trend reversal is going to take place.

Now you may be asking, “Why the focus on software?” Well, one of the reasons for this is the tendency for software stocks to outperform in—what else?—a falling interest rate environment. With the bond market predicting a looser Fed policy ahead, computer software companies—especially those in the earlier phases of growth—will likely benefit the from reduced borrowing costs that falling rates entail, since they typically rely on debt to finance expansion.

Lower rates also tend to increase the present value of future earnings for software companies, and a falling rate environment can also result in higher demand for computer software among enterprise customers, since companies are more inclined to invest in software when capital is cheaper. And of course, this in turn stimulates growth for software providers.

Another consideration is the industry-wide rebound such companies are experiencing right now. Software spending slowed significantly in the last couple of years, but 2024 has shown itself to be a turning point for the industry, with analysts expecting software spending to increase 14% year-on-year to more than $1 trillion dollars.

That said, let’s take a look at some individual software stocks that I think can benefit not only from falling rates, but from the acceleration of a new software spending cycle.

First up is Doximity (DOCS). It’s the leading digital network for healthcare professionals in the country, with 90% of all medical school graduates, over 80% of U.S. doctors, and 50% of all NPs, physician assistants and pharmacists as verified members. The company’s contention is that, aside from the iPhone, “There’s never been a piece of technology adopted by clinicians as quickly as Doximity.”

Among its features, the cloud-based platform allows clients to conduct virtual patient visits, send and receive electronic faxes while on-the-go, securely collaborate on patient treatment while on-call, as well as stay up to date with the latest medical news and research.

Doximity’s focus of late has been on expanding its offerings while increasing user engagement and using artificial intelligence to customize experiences and enhance its product suite. The company said the increasing integration of AI into its platform is a “cornerstone” of its growth strategy, and its recent efforts on this front are paying off: Its AI-powered Doximity GPT tool is seeing wide adoption among doctors, with over 1.5 million letter requests or prompts, enabling clients to streamline administrative burdens.

Thanks to these innovations, the firm continues to grow its user base, as a record 590,000 unique healthcare providers used its AI, telehealth, messaging and workflow tools during fiscal Q1 (ended June). On the financial front, revenue increased 17% from a year ago, while earnings topped estimates by 24% and adjusted EBITDA jumped 42%.

Going forward, Doximity said it’s focused on delivering “industry-leading products” to sustain the long-term growth story. And while the stock is down almost 70% from its all-time peak three years ago, the turnaround is accelerating, and I think it has legs. Investors who don’t mind the volatility can do some nibbling on the dips.

Next up is Braze (BRZE), which is a leading facilitator of first-party data collection, and that refers to information that a company collects directly from its customers used for marketing purposes. This in turn is being widely hailed as the future driver of e-commerce and retail sales.

The New York-based company provides a cloud-based customer engagement platform used by mid-to-large-sized businesses for multi-channel marketing to attract and onboard new customers. Its software-as-a-service (SaaS) offerings combine messaging, audience segmentation, analytics and user support in a single integrated solution.

Braze is a fairly young company (founded in 2011) and it has struggled to be profitable, but its latest financial quarter suggested the firm is well on its way to the black. On Thursday after the market closed, the company posted fiscal Q2 earnings of 9 cents a share—its first ever positive EPS—and it also exceeded analysts’ expectations by 12 cents in what was a major milestone.

The stellar earnings were driven by a 26% year-on-year revenue increase, mainly due to new customer additions. Going forward, management is focused on the goal of building the world’s leading customer engagement platform, while driving exceptional returns for shareholders. For the full fiscal year, Wall Street expects revenue to rise 23% and earnings to increase 72%.

From a technical perspective, there’s a ton of short interest in this stock, and I think if Braze can decisively clear the 46 a share level (which is just two points away), we just might have a major short-covering event on our hands. So, this stock bears very close watching.

Klaviyo (KVYO) is billed as an intelligent email marketing and short message service platform with automation for faster and more efficient growth. The software allows businesses to turn their customer data into hyper-personalized text messages for promotional purposes.

Klaviyo landed a record number of net-new $50K customers in the second quarter, with analysts seeing an international opportunity that is growing nearly 40% with the foundation still being laid.

Klaviyo also grew revenue 35% year-over-year to $222 million, earnings of 16 cents a share beat estimates by over 50%, and it delivered $37 million in free cash flow during the second quarter. The firm said it’s “well positioned for the back half of the year and beyond” as it continues to invest in strategic initiatives to drive durable growth.

As a result, major Wall Street institutions are raising their share price outlooks for the company, as well as raising sales and earnings forecasts, with both top and bottom lines expected to grow by almost 34% in 2024. The stock is more of a short-term cyclical turnaround story, as it went public last October and Klaviyo is still under the IPO price, but I think it has the potential to eventually exceed that level which, if realized, would amount to a 25% gain from here.

And finally, after falling out of favor with investors earlier this year, software giant MongoDB (MDB) is lately showing signs of turning around. The company provides very robust and flexible document database systems that have become the industry standard for software developers. Among other things, its products allow advertisers to efficiently gather data and glean insights from social media posts and other online sources, which is a major draw right now.

In fiscal Q2 (ended July), MongoDB posted solid revenue and earnings beats, driven by strong continued customer growth, and pushing the stock price higher by 15% last week. Analysts believe the company, which boasts the leading unstructured database platform, is well-positioned to win additional share of the $108 billion database market. In the words of one analyst, “With stabilizing consumption patterns, ongoing new workload strength and a healthy pipeline heading into the second-half, [we] think visibility for a solid beat and raise quarter is improving.”

Wall Street further believes the firm is on a path to accelerate back to mid-30% revenue growth by the fourth quarter of next fiscal year, which would be a catalyst for the stock over the coming quarters. It’s clearly more of a cyclical turnaround, but I like what I’m seeing here in MondgoDB.

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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