Cabot Explorer Issue: April 11, 2024

Portfolio Changes:
Franco-Nevada (FNV) – Move from Buy a Half to Buy a Full Position
WisdomTree’s Japan ETF (DXJ) – Move from Buy a Half to Buy a Full Position

Inflation Persists as Gold and Japan Both Shine

Inflation appears stuck at a much higher level than acceptable for the Federal Reserve so lower interest rates are on pause. Gold is one beneficiary.

This means that some high-flyer tech stocks may be vulnerable.

For example, Nvidia’s (NDVA) trailing 12-month sales are around $27 billion, and its market cap is $2.2 trillion. Nvidia is now priced at an amazing 37 times trailing annual sales while Microsoft (MSFT) is valued at 14 times sales.

Super Micro Computer (SMCI) shares pulled back to 909 this week but the stock is still up 220% in 2024. Hopefully you have heeded my call to take profits along the way.

This is a big week in Asia news with South Korea’s President Yoon losing a parliamentary vote yesterday, Japan’s Prime Minister Kishida in Washington for last night’s state dinner, and today’s summit between the U.S., Japan, and the Philippines.

Driving all this is America’s rivalry with China and closer economic and security ties between China and Russia. This closer cooperation between the U.S. and Japan combined with China falling out of favor with investors is pushing capital to the benefit of regional competitors Japan, India and their respective stock markets.

Apple (AAPL) doubled its iPhone assembly output in India in the last fiscal year, but India’s stock market is on the expensive side.

Japan is finally past its era of negative interest rates, boards are paying more attention to shareholders and dividends, tourism and foreign direct investment is booming, and lastly, a more entrepreneurial culture is taking hold leading to many interesting opportunities. One benefit of our Wisdom Tree Japan (DXJ) growth and dividend-oriented ETF is that it allows us to play defense and offense.

Meanwhile, the gold rally continues as prices have pushed past $2,300 per ounce.

The uncertainty regarding the U.S. and China bloc rivalry plus Ukraine and the roiled Middle East is spurring investors to buy gold to hedge financial and geopolitical risk. In addition, China and other central banks are also hedging to get around economic sanctions and reduce their greenback holdings.

The United States has bullion holdings that represent 70% of its reserves with China’s central bank being the biggest gold buyer in 2023. China added 225 metric tons of gold to its reserves in 2023 and has stockpiled the metal at a fast clip for the last year and 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 20% trailing stop loss in place.

Cloudflare (NET) shares were steady at 95 this week as it was announced that the company is partnering with Booz Allen Hamilton, a leader in cyber expertise, to deliver a comprehensive solution to mitigate cyber threats swiftly. Cloudflare is forecasting 28% revenue growth in 2024. Buy a Half

Exscientia (EXAI) shares went from 4.9 to 4.8 this past week. Exscientia gets upfront payments from its development partners but the big potential paydays will come from royalty payments after its drug candidates clear clinical trials, get FDA approval and become patent-protected treatments. However, the company is sitting on $363 million, sufficient to fund operations through 2025. Rest assured, the world’s major drugmakers are paying close attention and have all shown interest in using AI to create new medicine. Hold a Half

Franco-Nevada (FNV) shares rose to 122 this week as this stock is now up 10% in 2024 buoyed by geopolitical uncertainty and persistent inflation. This gold-silver-platinum royalty and streaming company offers us exposure to precious metals without the operational risks associated with traditional mining. Move from Buy a Half to Buy a Full Position

IperionX (IPX) finished its third week as an Explorer stock at just over 15. This company aims to become a leading American titanium metal and critical materials company using patented environmentally-friendly metal technologies to produce high-performance titanium alloys. Buy a Half

Novo Nordisk (NVO) shares dipped from 127 to 125 this week as the company faces new competition. Novo Nordisk should make more progress this year in its core areas of diabetes and obesity care and is waiting for the approval of icodec, a potential once-weekly insulin product. The company remains a leader in the insulin market with a 40%-45% market share. There are an estimated 800 million people with obesity worldwide and only 2% of these patients are being treated. Hold a Half

PayPal (PYPL) shares were up 11% in March and sit about 80% below their peak price, which was set in July 2021. I believe the stock is a great opportunity because it trades at a cheap forward price-to-earnings ratio of just over 12. Its payments volume increased 15% year over year in the fourth quarter of 2023 and 400 million-plus users leads to PayPal wallets being accepted by 80% of retailers in North America and Europe. Buy a Half

Sea Limited (SE) shares reached 57 this week but the stock is down 85% from its all-time high and is a better buy than Amazon stock today. Sea stock trades at just two times sales and has the potential to grow in the most dynamic markets in the world. For example, Sea in 2020 entered the Brazilian e-commerce market. This February, just four short years later, it had already opened its 10th distribution center in Brazil. Sea Limited generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment with revenue growth of 24%. Buy a Half

Super Micro Computer (SMCI) shares pulled back to 909 this week but the stock is still up 220% in 2024. Hopefully you have heeded my call to take profits along the way. For the full fiscal year, Super Micro is estimating revenue of more than $14 billion and consensus estimates suggest that Super Micro’s earnings could increase at 48% compounded over the next five years. The company reports its next earnings on May 2. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares finished the week at 186 and are up about 15% so far this year. IBM is the world’s sixth-largest cloud infrastructure provider, and the company is a conservative play on cyber consulting and AI. The stock remains a long-term buy. Buy a Half

Visa (V) shares settled at 275 and are one of Warren Buffet’s longest held positions. It is easy to understand why, as its fiscal year ended last September yielded an operating margin of 64%. Visa has more than 4.3 billion cards in circulation and more than 130 merchants in its network. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)

Explorer ETF/Fund Positions

Global X Lithium & Battery Tech ETF (LIT) offers solid exposure to other beaten-down lithium names at a low cost. With an expense ratio of 0.75%. 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 the largest Chinese-listed stocks. 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

WisdomTree’s Japan Hedged Equity ETF (DXJ) offers exposure to a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Move from Buy a Half to Buy a Full Position

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Watch List: BYD (BYDDY) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). The company also manufactures and supplies EV batteries, including to Tesla, and makes its own chips. This is vertical integration that would make Henry Ford proud. BYD is in a strong position to be one of, if not the leader of the EV revolution in terms of size, scale, and growth.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields: cloud computing, AI, cybersecurity, and edge computing. 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.

Exscientia (EXAI) was founded in 2012 and is based in Oxford, England. The company is using AI to develop new medicines and is attracting high quality partners. Exscientia (EXAI) stock is trading way off its high at 4.76. It went public at 22 a share so the company has about $500 million in cash on the books – a big number for a company with a market capitalization of just $600 million. Finally, keep in mind that this is an attractive speculative stock which may have a bumpy ride. It is a young company that is not yet profitable.

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 28 consecutive years of dividend increases.

IperionX (IPX) aims to become a leading American titanium metal and critical materials company. It is using patented metal technologies to produce high performance titanium alloys, from titanium minerals or scrap titanium. And it is trying to do it at lower energy costs and lower carbon emissions. The company also has backward integration to titanium minerals via control of the largest U.S. titanium resource in Tennessee. Installation and commissioning of the HAMR titanium furnace is expected during the second quarter, before producing its first titanium metal in mid-year 2024.

Novo Nordisk (NVO) specializes in treatments for diabetes, hemophilia, and obesity. The company supplies half of the world’s insulin, and its diabetes care products are used by over 34 million people today. Novo highlights that more than 750 million people are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on sizable and growing demand for this weight-loss drug, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

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. Some of you may recall this stock was an Explorer recommendation in the fall of 2019 at around 30 a share and became more than a 10-bagger to its 2021 high.

Super Micro Computer (SMCI), commonly known as supermicro, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro stock looks relatively inexpensive right now for the growth that it has been delivering. The company trades at just two times sales. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. Furthermore, both Dell and HPE have relatively high debt whereas Super Micro has a net positive cash position. This is an aggressive pick in a sector experiencing extraordinary growth.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa has the largest card network in the U.S., processing $14.8 trillion of payment volume in the last 12 months. 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. This leaves it much better poised to outperform the latter going forward.

The next Cabot Explorer issue will be published on April 25, 2024.

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