Cabot Explorer Issue: April 25, 2024

Portfolio Change: Buy Unilever (IL)

A Blue-Chip European Stock on Sale

Tech stocks steadied a bit this week as quarterly earnings started coming in. Sea (SE) was up this week on two analyst upgrades. Super Micro (SMCI) will report crucial quarterly earnings early next week.

The Explorer’s one current European stock recommendation is Danish drugmaker Novo Nordisk (NVO). It has passed French luxury group LVMH Moët Hennessy Louis Vuitton to become Europe’s most valuable company.

At the core of its recent growth is Semaglutide, which helps the body regulate blood sugar levels. The patent developed by Novo also proved remarkably effective for weight loss because it causes people to feel fuller when they eat and reduces cravings.

Novo Nordisk is treating about 40 million people globally with its diabetes and weight-loss treatments. The market for obesity medications could grow to $100 billion in the next decade, according to Barclays and Goldman Sachs. The U.S. patents on Ozempic and Wegovy don’t expire until 2033.

Novo has been a great stock, but for some time, U.S. stocks have led the world in performance by a wide margin.

But there are signs that this may be changing as international stock markets from Europe to Asia demonstrate some momentum.

European stocks are also cheaper than U.S. equities but overall have produced lower revenue and profit growth largely due to tech being a smaller proportion of the market. The stocks in the Stoxx Europe 600 are priced at about 14 times earnings, while the S&P 500 index is trading at roughly 25 times earnings.

This is the biggest gap in two decades. There is plenty of room to catch up as since 2000, U.S. markets have posted a 256% increase while the Stoxx Europe 600 has only risen by 42%.

European multinationals also provide investors with more international exposure since about 60% of European companies’ sales occur outside Europe, versus 30% for S&P 500 American companies, according to a study by Wellington Management.

High-quality European multinationals are a good place to start as they are widely recognized as being well-run and have tentacles spread throughout the world. Many of them make as much money in America as Europe, underlining the key truth that where a company operates and makes money is much more important than where it bases its headquarters.

Some of these European multinational stocks either trade on the NYSE or Nasdaq but many trade over the counter in a category I refer to as “Pink Sheet Blue Chips.”

These European stocks can be largely divided into several groups.

The first group is the pharmaceutical giants like Novo Nordisk (NVO), Roche (RHHBY), Novartis (NVS), and GSK (GSK), all of which benefit from a healthcare spending boom to post impressive profits.

Another is the luxury goods brands such as LVMH (LVMUY) and L’Oreal (LRLCY). China has been the key driver to both companies, so this story is already starting to sputter as Chinese luxury spending is slowing down along with its overall economy. However, luxury spending is resilient globally and any pullback in these stocks is an opportunity to take a stake in a high-margin persistent market.

Then there are the well-known consumer stocks such as Nestle (NSRGY) and Unilever (UL). These are conservative ways to tap into global consumer markets and earn some steady dividend income. These stocks tend to be less volatile but have a decided upward trend in stock price over time.

Next are tech companies such as ASML Holding (ASML), the strategically important semiconductor chip equipment business from Holland, and software company SAP SE (SAP) from Germany.

Which European multinational is the best stock pick today?

New Recommendation

Unilever (UL)

For our new recommendation, I like the U.K.-headquartered, global consumer goods heavyweight Unilever (UL).

Unilever is a dominant consumer goods giant with a trove of 400 recognizable brands in its diversified portfolio – from Vaseline to Dove – that it sells in over 190 countries.

However, thirty “power brands” account for almost 75% of Unilever’s total sales.

It is a steady, stable stock for an uncertain environment, and for a change, its stock is selling at a rare discount – down about 25% from all-time highs and at less than two times sales.

It also offers a nice dividend yield supported by a robust free cash flow.

Two other reasons I like Unilever are that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

This is a stock to tuck away for the long term and for your buy list whenever the market pulls back sharply.

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 20% trailing stop loss in place.

Cloudflare (NET) shares were unchanged this week after Cloudflare announced that it expects sales to grow from $1.3 billion to $5 billion over the next five years. Cloudflare handles and protects data from over 180 countries, 30% of Fortune 1000 companies, and the company projects 28% revenue growth in 2024. Buy a Half

Franco-Nevada (FNV) shares finished the week at 119 as the company announced it expects to report earnings on May 1^st. Gold stocks are supported by persistent inflation and vexing geopolitical uncertainty. This gold-silver-platinum royalty and streaming company offers us exposure to precious metals without the high capital costs and operational risks associated with traditional mining. Buy a Full Position

IperionX (IPX) shares drifted a bit to 13.9 as we await more visible signs of success in addition to U.S. government support of the company. IperianX aims to be a leading American titanium metal and critical materials company using patented cleaner technologies to produce high-performance titanium alloys. Buy a Half

Novo Nordisk (NVO) shares ticked up a couple of points as the company’s next-generation weight-loss pill amycretin outperformed blockbuster Wegovy in an early-stage study. Amycretin recipients lost more than 13% of their body weight. By comparison, people taking Wegovy lose about 6% body weight over the same time period. The market for obesity medications could grow to $100 billion in the next decade, according to Barclays and Goldman Sachs. Hold a Half

PayPal (PYPL) shares trended up this week as fintech stocks gained more traction overall. PayPal is best known for its namesake payment platform, but the company also owns the popular Venmo app. This stock is a good value given its substantial base of users and the upward trajectory of online shopping. According to Boston Consulting Group, the worldwide fintech sector is expected to be worth $1.5 trillion by 2030. Buy a Half

Sea Limited (SE) shares went from 56 to 63 this week as JP Morgan and Bank of America both upgraded the stock with a price target of 70. Sea stock trades at just over two times sales and has the potential to grow in the most dynamic markets in the world. Sea generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment. Buy a Half

Super Micro Computer (SMCI) shares have had a rough week as we look forward to its next earnings report next Tuesday, April 30^th. As I pointed out in an alert sent out Monday morning, the stock is still up 180% so far in 2024 and we have taken partial profits along the way. Tech stocks are jittery as they have led the market, and near-term expected Fed interest rate cuts seem to be off the table.

This is an aggressive high-growth AI stock so pullbacks should be expected from time to time. If you held the stock all year, the best course is most likely to do nothing. Make sure you blend aggressive disruptive stocks such as Super Micro with Explorer dominator blue-chip stocks and global ETFs to have a balanced portfolio. Hold a Half

Explorer Dominator Blue-Chip Recommendations - More Buy and Hold

International Business Machines (IBM) shares after a good week, look as though they will open down this morning after the company announced tepid 1% sales growth in the first quarter. On the positive side, IBM announced it has agreed to buy HashiCorp, which sells software that helps companies manage their cloud-computing operations, for an enterprise value of $6.4 billion. The acquisition is IBM’s largest since buying Red Hat in 2019 for $31.8 billion. Buy a Half

Visa (V) shares reached 275 this week as its first quarter top and bottom lines beat expectations. Heading into the quarter, analysts had projected that Visa would earn $2.29 per share on $8.1 billion in revenue. In fact, Visa earned $2.51 per share on $8.8 billion in sales. 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) – At a recent conference, BYD announced that the company expects deliveries to hit 3.6 million units this year, which is about 20% more compared to last year’s 3 million units. BYD expects to see vehicle exports more than doubling to 500,000 units in 2024.

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. 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.

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 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, as well as 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 in 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 May 9, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.