Cabot Explorer Issue: April 24, 2025

Portfolio Changes: Aberdeen Asia-Pacific Income Fund (FAX) – Move from Buy a Half to Sell

The Global Search for Growth

I encourage you to sign up today for Cabot Wealth’s investment summit, August 13-15 in Salem, Massachusetts.

This will be a great opportunity for you you to discuss with the Cabot team stock and strategy ideas that can help you protect and grow your wealth. This is especially important this year as the U.S.-China rivalry intensifies and against the backdrop of dramatic changes in U.S. economic policies.

Markets recovered some gains yesterday following a climb down on both stiff reciprocal China tariffs and speculation that Fed Chairman Jerome Powell might be fired. Explorer stocks had a good week with Luckin Coffee (LKNCY) up 9%, while DBS Bank (DBSDY) shares were up 7.7% this week following last week’s 6.9% gain.

Little covered in the media this week is that a Japanese negotiating team came and left Washington with little progress on a trade deal. I’m not surprised since Japan’s two major trade markets by far are America and China.

Japanese consumers buy large amounts of Chinese goods and Japanese businesses are enmeshed in Chinese supply chains. Japan also has significant economic ties and of course a defense alliance with the United States. Therefore, it takes a long-term balancing approach to China to avoid conflict, accepting that its economy is deeply integrated with both countries. One example of Japan’s different approach to China is it is offering Chinese automakers the same subsidies available to all other producers of battery-powered cars.

Last month, top diplomats from China, Japan and South Korea reportedly met in Tokyo and pledged to promote cooperation among their countries. This is not what Washington wants to hear.

Meanwhile, the driving force behind America’s current tariff strategy seems to be growing manufacturing output and jobs at home.

The problem is that this is a goal shared by many countries since over the last few decades the move from manufacturing to services has happened across the world, and today roughly 50% of the world’s work force is employed in the service sector.

The challenge is that manufacturing entails higher capital requirements and higher labor costs, translating to weak profit margins. U.S. investors therefore tend to avoid investing in manufacturing and would rather import what’s needed. In 2024, steel, autos, machinery, electrical equipment and pharmaceuticals together accounted for 77% of America’s $1.2 trillion trade deficit.

Moreover, Chinese factories are poised to increase their edge because they have more factory robots per worker, many powered by artificial intelligence, than any other country except South Korea or Singapore, according to the International Federation of Robotics. Auto factories in the United States also use robotics, but ironically, much of the technology comes from China. The growth in robots is part of a strategy to deal with China’s shrinking population.

This news really caught my eye this week. Huawei is on the verge of beginning to ship its new AI chip to Chinese customers. In addition, Stanford’s Hoover reports that among DeepSeek AI researchers, 89% have been affiliated with Chinese institutions; more than half never left China for study or work. China’s universities now produce about eight times more mechanical engineering graduates per year than America.

I’m doing some research on quantum computing which, in combination with AI, represents the commanding height of the technology rivalry. I may have a quantum computing pick for you in the near future.

New Recommendation

Stoxx Europe Total Market Aerospace & Defense (EUAD)

I continue to search for companies and stocks that are insulated from U.S.-China-related trade tensions or stand to benefit from re-shoring and changing geo-economic trends and events. That means businesses in niche markets with strong positions in under-the-radar sectors.

Today we go to defense and national security as well as to Europe.

The 32-member NATO is in the headlines primarily due to cost sharing pressures related to supporting Ukraine, but the issue goes way back.

U.S. Senator Bill Roth, whom I worked with on the U.S. Joint Economic Committee as president of NATO’s parliament, the North Atlantic Assembly, made the following comment to the U.S. Senate Committee on Foreign Relations.

“Somehow an understanding must be made clear that the United States did not create the NATO alliance and prepare for war and send our troops to fight and die in Europe and spend our country into debt for 50 years simply to defend European real estate or European economic interests. Our commitment was first and foremost to the defense of democracy and the preservation of human liberty and it must remain so.”

Momentum is now clearly shifting to Europe being more responsible for its defense and this means European defense companies and stocks are on the upswing.

The law of unintended consequences means the repercussions of this trend won’t all be positive for America. Europeans will demand more control over NATO. U.S. defense company sales to European countries will decline. If this is not handled well, America will lose influence, jobs, and security.

Europe is also going to be a formidable military competitor and exporter, especially to Asia and the Middle East. However, investors gain benefit from allocating some capital to this sector and the best way is via a shotgun approach with Stoxx Europe Total Market Aerospace & Defense ETF (EUAD). This ETF tracks an index of top defense contractors including Leonardo, Rheinmetall, and BAE Systems, and is up roughly 24% this year while the S&P 500 is down.

In March, the European Commission released a proposal to step up defense spending by about $840 billion, including $165 billion in loans. The European Investment Bank also announced a big increase in funding for security projects and military equipment.

Germany and Denmark plan to increase defense spending to 3% of gross domestic product over the next two years, while the U.K. unveiled plans to boost military spending to 2.5% of GDP by 2027. America’s military R&D spending is currently 12 times as large as Europe’s, so some catch-up is warranted.

Most of the major weapons producers in Europe are partially state-owned, and each government has its own priorities, regulations and defense strategies so coordination with the Pentagon will be important. One leading constituent of the EUAD basket is Leonardo (DRS). The company is developing a next-generation fighter jet, the Global Combat Air Program, with producers in Britain and Japan. Perhaps Germany could benefit the most from this trend because of its underused industrial base and low public debt.

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.

Airbus (EADSF) shares declined this week as the industry is in a bit of upheaval as China returned a Boeing jet to the U.S. and Boeing’s CEO threatened to end aircraft shipments to China. The Chinese market is expected to account for 20% of global demand over the next two decades. Airbus has been gaining market share by beating Boeing to develop a line of fuel-efficient, mid-sized aircraft that are cheaper for airlines to fly. Buy a Half

Agnico Eagle Mines (AEM) shares hit a 52-week high but were off just short of 2% for the week. This gold stock is pricey but considered one of the world’s premier gold companies because of its global footprint with high quality mines in Canada, Australia, Finland, and Mexico, with exploration and development activities in Europe, Latin America, and the U.S. Buy a Half

Banco Santander (SAN) shares posted a 5% gain this week and are up 56% so far this year. The stock is still trading at about 8 times forward earnings and less than book value. Keep buying this stock as it escapes the tariff turmoil and is significantly outperforming bank and European indexes. Buy a Half

BYD (BYDDY) shares were up 4.5% this week and BYD trades at just 20 times forward earnings, significantly cheaper than rival Tesla (TSLA), which trades at a forward P/E of 80. BYD, meanwhile, expects sales in Europe to double in 2025, having grown its global sales almost 15 times over since 2020. BYD has a footprint in Morocco and Mexico, two countries with free trade agreements with the U.S. and the EU. Buy a Half

Dutch Bros (BROS) shares gained back some ground this week and I’m leaving it a hold for the time being as it seems to be facing some resistance after a nice run. Unlike Starbucks (SBUX), which benefits from 20% of sales from food, Dutch Bros has little to offer in this regard but has finally added mobile ordering. Hold a Half

Luckin Coffee (LKNCY) shares were up 9% this week and the stock is up 35% so far in 2025. The company expects to report its next earnings on April 29. Luckin’s model of flexible formats and menus and high levels of advanced mobile ordering is working well. Buy a Half

Sea Limited (SE) shares were steady again this week but have cooled off and seem to be at resistance levels. I’m keeping this stock a hold and again advising to take partial profits. It is unclear how tariff issues will impact the stock but all three of its market segments are doing well and supported by a healthy balance sheet. Hold a Half

Subaru (FUJHY) shares were up 3% this week as Japanese trade negotiators came and left Washington, D.C. The company makes most of the vehicles it sells in America and its 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 were up 7.7% this week following last week’s 6.9% gain. Headquartered in Singapore, DBS is Southeast Asia’s biggest bank by assets and the largest constituent of the Singapore Straits Times Index. Buy a Half

International Business Machines (IBM) shares were up 2% this week following a quarterly report highlighting that it earned an adjusted $1.60 per share on sales of $14.54 billion for the March-ended quarter. Software revenue rose 7% to $6.3 billion but consulting revenue fell 2% year-over-year and IBM’s infrastructure revenue decreased 6% to $2.9 billion. A mixed picture but above expectations. Buy a Half

Visa (V) shares were again steady this week. This is another stock in a dominant market position with over 4.7 billion payment cards and wallets, is accepted by over 150 million merchants, and processed over 310 billion transactions in the past year. 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. It has been a laggard in the Explorer ETF portfolio so I’m moving this to a sell. Move from Buy a Half to Sell

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 Miners ETF (GDXJ) is a basket of junior miners that has 84 positions with the top ten 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.

Airbus (EADSF) has gained market share by beating Boeing to develop a line of fuel-efficient, mid-sized aircraft that are cheaper for airlines to fly. Boeing is one of only two manufacturers, along with rival Airbus, 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.

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.

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 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 66% of book value. It also sports a 3.9% dividend yield, has a market value of $12.8 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 May 8, 2025.

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