Cabot Explorer Issue: April 10, 2025

Portfolio Changes: Buy Airbus (EADSF)

U.S.-China Trade Battle Intensifies

This has been a week for the history books with record-breaking volatility and uncertainty.

My advice? Stay on the conservative side, leaning to blue-chip dominating stocks not tied to U.S.-China trade. Buy more gold. Since early 2022, gold has strongly outperformed inflation-protected Treasurys, so gold is now the world’s preferred safe-haven asset by many investors.

The President Trump reversal yesterday as Treasury bond market yields jumped and the U.S. dollar fell sent markets soaring. The U.S. raised China tariffs and China responded in kind. Unfortunately, both sides remain on a collision course.

Keep in mind that foreign investors own about 18% of U.S. stocks and that as of last June, foreigners held $7 trillion of Treasury bonds (half by central banks). That is about a third of the total held by the public.

Like it or not, we live in a complex, interconnected world. Former Treasury Secretary Larry Summers reminds us that 45% of imported inputs go into U.S. exports.

I was ready this week to recommend Mitsui (MITSY), one of the Japanese trading companies, and a company that is considered the “Amazon of South Korea”, Coupang (CPNG), which has no tariff/trade risk. Instead, I have below re-recommended Airbus (EADSF) since it will be a major beneficiary and Boeing (BA) a major casualty of the U.S.- China trade escalation.

The media is full of discussions of the tariff issue but here is a brief overview in case you need it.

The new tariff regime is evolving and complex:

• A 10% baseline tariff on almost everything coming into the U.S.
• High “reciprocal tariffs” from 11% to 50% on countries with larger bilateral trade surpluses, with China (54% total), Vietnam (46%), Cambodia (49%), and the EU (20%) among them (now on 90-day pause)
• U.S. tariff rate on imports from China escalated to 125%
• Chinese tariff rate on imports from U.S. escalated to 84%
• The 25% rate on auto imports from Canada and Mexico remain in place.

Most of these countries have low tariff levels in the 2% range (this is the world average) but have other measures to boost exports and limit imports such as subsidies and domestic preference policies. There are some sectors exempted from the tariffs such as semiconductors, lumber, and energy.

China also added six U.S. companies including defense and aerospace-related firms to a trade blacklist, and imposed export controls on a dozen American companies. America has a trade surplus with China in services and China is the third-largest buyer of U.S. goods with soybeans, aircraft and petroleum among the top U.S. exports to China.

The reasons for the higher tariffs vary but in general seem to be payback and catch-up for the U.S. providing the global reserve currency and defense umbrella without adequate compensation by the rest of the world.

The 125% tariff on China’s exports is really taunting the dragon. These tariffs will slow exports to America, but China has in place a powerful, resilient, vertically integrated manufacturing machine, from the mine to the finished product. In China, suppliers and manufacturers are often close to each other cutting costs. Stiff competition and huge scale leads to high productivity. State subsidies, cheap land, and five-year industrial plans have supercharged manufacturing.

In addition, the tariffs will be managed by China shipping parts through countries such as Mexico, Vietnam, and Thailand. Over a quarter of China’s exports come from foreign firms including Apple. Keeping Chinese content out of internationally traded goods will be near impossible. You will see less of “Made in China” but perhaps more of goods with Chinese content.

Furthermore, China is investing in and ramping up manufacturing factory capacity in Africa, Latin America, and Southeast Asia. The dragon has many heads that all lead back to Beijing.

Other countries are also stepping in with countermeasures to offset the impact of the tariffs. For example, South Korea announced a sweeping auto financial support program while state-owned Chinese investment firms were this week buying stocks to support prices as well as letting the yuan drift lower or selling its holding of U.S. Treasury bonds.

The size of the tariffs and lack of clarity on aims is roiling markets.

In 1971, President Richard Nixon put a 10% surcharge on imports but he was also clear on what other countries had to do to take them off – revalue their currencies against the U.S. dollar.

They did, and the surcharge was dropped.

On the investment front, it is a challenging environment. No changes to the Explorer portfolio this week but several stocks are on the cusp of being removed if they don’t rebound next week.

Finally, I have to say as I leave Japan that I have been greatly impressed by Starbucks (SBUX) in Japan. The company has almost 2,000 stores in Japan in fantastic locations that are also very stylishly furnished. I’d look at the stock except that it has 7,500 stores in China which could get whipsawed if the trade battle escalates.

New Recommendation

Airbus (EADSF)

The news about Boeing (BA), a very strategically important company to America’s future, has not been good lately.

Tariff battles will only make it worse.

Boeing is America’s largest exporter, and therefore very exposed to any trade war. China is the largest global market for new aircraft purchases, with Boeing forecasting that China’s fleet of commercial jets will double in the next 20 years.

Boeing has lost money every year since 2018 and is falling behind Airbus in both orders and aircraft deliveries.

Connections between management and the shop floor are frayed since production/assembly in Seattle is now 2,300 miles from Boeing’s CEO and headquarters in Arlington, Virginia.

For nearly 40 years the company built the 737 fuselage itself in the same plant that turned out its B-29 and B-52 bombers. In 2005, it sold this facility to a private investment firm and the link between management and production became even weaker. Boeing has pledged to fix its quality-control problems by strengthening oversight and training, but many remain skeptical.

Having Jack Welch financial “bottom line”-focused executives did work for a while for Boeing. Boeing stock surged more than 600% from 2010 to 2019. But since then, performance has deteriorated. The company has suffered nearly $40 billion in losses since 2019.

Ratings agencies recently cut Boeing’s credit to just above “junk” status. Boeing needs to rebuild its reputation which has been battered by two fatal accidents in 2018 and 2019 and severe problems with a fuselage panel this past January. FAA approval for two new versions of the 737 Max is on hold.

Boeing’s defense unit has also taken big write-downs on several Pentagon contracts, including one to convert two 747 jumbo jets into new Air Force One jets. The unit is also part of a joint venture that built the Air Force’s V-22 Osprey crash, killing eight.

Boeing is one of only two manufacturers, along with rival Airbus (EADSF), that make the full-size commercial jets needed by the world’s airline industry. China’s COMAC is making gains but is probably a decade away from being a competitive rival.

Boeing’s troubles and the U.S.-China trade battle are Airbus’s opportunity.

Airbus, which I visited last fall, is incorporated in the Netherlands but based in Toulouse, France and has been making planes as fast as it can and has a backlog of more than 8,600 orders to fill. Airbus last year beat Boeing for the fifth straight year in the orders and deliveries race, with 2,094 net orders and 735 delivered planes. I visited its facilities recently and while it shares some of Boeing’s supply chain challenges, Airbus has a clear edge right now.

Airbus has gained market share by beating Boeing to develop a line of fuel-efficient, mid-sized aircraft that are cheaper for airlines to fly.

Airbus is benefiting from its decision to deliver the fuel-efficient, ready-to-launch A321neo, a single-aisle aircraft with 180 to 230 seats. Fuel is one of the airlines’ biggest costs. Airbus’s new A321XLR model will also enable airlines to use cheaper narrow-body jets on long-haul flights.

We wish Boeing the best, but Airbus will likely continue to gain market share as well as outperform in the interim.

BUY A HALF

Explorer Weekly Stock Commentary

Below is a brief update on each Explorer stock. Any changes in ratings will be highlighted. This section is all you need to read each week.

Explorer Disrupter Recommendations – need to watch more closely and have a 20% trailing stop-loss in place.

Agnico Eagle Mines (AEM) shares ended up down 1.6% for the week and I recommend that you continue to incrementally buy shares. Agnico offers us a global footprint with mines in Canada, Australia, Finland, and Mexico, with exploration and development activities in Canada, Australia, Europe, Latin America, and the U.S. Buy a Half

Banco Santander (SAN) shares were up 10% yesterday but still pulled back 4% for the week. This is a good stock to hold right now as it is significantly outperforming bank and European indexes. Santander’s market value recently passed €100 billion, making it the first bank in the European Union to cross that threshold in the last decade. Buy a Half

BYD (BYDDY) shares pulled back 8.5% this week as India announced it will not allow BYD autos into the country. We need to watch this stock closely to protect profits. As an aside, India has 8% tariffs on U.S. imports which is a bit high. BYD projects total vehicle sales for 2025 of 5.5 million and claims technology that can charge almost as fast as it takes to refuel a regular car for nearly 300 miles of driving range. Buy a Half

Cloudflare (NET) shares were down 8% for the week but given the strategic importance of the stock we will keep its buy rating in place backed by Cloudflare’s ability to profit from both cybersecurity services and artificial intelligence services which broaden its moat and market. Buy a Half

Dutch Bros (BROS) shares ended the week down 3.6% as management recently confirmed a target store count of 2,000 by 2029. I’m leaving it at hold for the time being as it seems to be facing some resistance after a nice run. Hold a Half

Luckin Coffee (LKNCY) shares were down about 19% this week which is difficult to understand since the company is not impacted by the U.S.-China trade conflict. Last week they were up 10%. The company is looking at other overseas markets as well. Luckin’s model of flexible formats and menus is working well. Buy a Half

Sea Limited (SE) shares were steady this week and have followed a stellar 2024 with a 25% rise so far this year. All three of its market segments are backed by a stronger balance sheet. Hold a Half

Subaru (FUJHY) shares were up 4% this week despite the 25% auto import taxes imposed by the U.S. The company is somewhat protected by making most of the vehicles it sells in America in U.S. manufacturing plants. Based in Tokyo, Subaru stock sells for only five times trailing earnings and about 70% of book value. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

DBS Bank (DBSDY) shares pulled back a disappointing 15.7% this week. DBS is the strongest bank in Southeast Asia and perhaps this reflects concern that trade activity will slow in the region, impacting DBS’s potential growth. We will see if this stock comes back next week before perhaps moving it to a sell. Headquartered in Singapore, DBS is the largest constituent of the Singapore Straits Times Index. Buy a Half

International Business Machines (IBM) shares were down 5.9% this week but this is exactly the kind of stock to hold in this unpredictable market. IBM offers us exposure to growth opportunities in areas from cloud computing to quantum computing and is building a strong market position in artificial intelligence. Buy a Half

Visa (V) shares retreated 4% this week and this is another stock in a dominant market position. You may want to add some shares to your portfolio. Buy a Half

Watch List – Stocks we like but do not follow day-to-day

ConocoPhillips (COP), Franco-Nevada (FNV), MOOG (MOG-A)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a close ended fixed income mutual fund launched and managed by Aberdeen Standard Investments (Asia) Limited in Singapore. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Buy a Full

Morgan Stanley China A Share Fund (CAF) offers exposure to a basket of top Chinese-listed stocks. Buy a Half

Oberweis Micro-Cap Fund (OBMCX) fund stands out for several reasons. The fund’s sound investment process and strong management team earns it a rare Morningstar Medalist Rating of Gold. Over the past five years it has posted an impressive average annual return of 21.1%. Buy a Half

Sprott Platinum and Palladium ETF (SPPP) offers direct exposure to both platinum and palladium which are selling at a sizable discount to gold offering potential upside appreciation. Buy a Half

VanEck Junior Gold Miners ETF (GDXJ) is a basket of junior miners that has 84 positions with the top 10 accounting for 44% of total assets. Half of the stocks are Canadian, 21% Australia, and 7% from South Africa. BUY A HALF

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. Buy a Half

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Agnico Eagle Mines (AEM) follows a conservative strategy and with a history spanning more than 60 years, and now operates a sizable portfolio of 11 assets located in four countries. Management forecasted gold production of approximately 3.45 million ounces in 2024. The company estimates it has about 54 million gold ounces of proven and probable reserves. Furthermore, Agnico Eagle has paid a dividend for 41 consecutive years with a dividend compounded growth rate of 23% per year since 2005 and paid a dividend of $1.60 per share in 2024.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. About 55% of deposits and loans are in Europe with the balance in Latin America. In its most recent quarter, Santander’s revenue was up 8% while net profits increased 16%.

BYD (BYDDY), in both 2021 and 2022, more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., Europe, and Asian markets. BYD is the world’s largest EV battery maker and with CATL and others, is working on sodium-ion batteries. Much less energy dense than lithium batteries, sodium batteries should be much cheaper. BYD will also launch a next-generation Blade battery in 2025, with longer range and faster charging. That, along with various other models, could help rev up BEV sales growth next year. BYD expects solid-state batteries for high-end models by 2027, but not fully reaching lower-end models until 2030-2032.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields, though cloud computing is its bread and butter. Its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data – from where it is located to where it is needed (edge computing) – is a massive business opportunity in which Cloudflare already excels.

Watch List: ConocoPhillips (COP) is a global energy industry giant and one of the largest independent exploration and production (E&P) companies in the world, as measured by production levels and proved reserves. The company, founded in 1917 and based in Houston, has operations in 13 countries, although almost half the company’s production is derived from U.S. sources.

DBS Bank (DBSDY) is one of the largest banks in Southeast Asia with a presence in 19 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index. The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore. DBS has assets of roughly $750 billion and a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India. It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.

Dutch Bros (BROS) is an operator and franchisor of drive-through coffee stores, with 982 stores as of the end of 2024, including 32 that it opened in the fourth quarter. It’s expanding at a steady pace, expecting more than 150 new stores in 2025, and it envisions up to 4,000 stores over the next 10 to 15 years.

Watch List: Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

International Business Machines (IBM) is a blue-chip artificial intelligence (AI) and India play with a nice dividend yield. Known as “Big Blue,” IBM now primarily helps businesses and governments manage their information technology in the cloud era. The stock sells at a discount to the S&P 500 multiple and the information technology sector’s forward earnings multiple. IBM has paid a dividend every quarter since 1916 and has had 29 consecutive years of dividend increases.

Luckin Coffee (LKNCY) is a leading purveyor of coffee and specialty drinks in China. The price of a cup of Starbucks coffee is more than double that of Luckin coffee. In addition, Luckin is adept at adapting to local tastes and launching new products that broaden the market. For instance, it brings to market about 60 new products each year, offering a new drink every week. Its new coconut latte sells nearly $140 million worth annually. All this shows in the numbers as Luckin’s latest quarter revealed strong sales and store count growth.

Watch List: Moog, Inc. (MOG-A) supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350, Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer (ERJ) and Gulfstream, owned by General Dynamics (GD).

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.

Subaru (FUJHY), based in Tokyo, Subaru holds a 10% market share in Japan, making it the third-largest automaker in the country. In America, the Subaru brand has a cult-like following and Subaru’s stock sells for only five times trailing earnings and about 70% of book value. It also sports a 4.4% dividend yield, has a market value of $12.7 billion and has a strong balance sheet with a net cash position of $7 billion.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa’s financial infrastructure also underpins much of the world’s commerce. The duopoly between Visa and Mastercard is often referred to as one of the best businesses in the world, with insurmountable moats, low operating costs, and plenty of opportunities for unlocking additional value. Visa currently trades at a discount to its archrival MasterCard.

The next Cabot Explorer issue will be published on April 24, 2025.

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