Cabot Explorer Issue: April 6, 2023

The Dominance of Apple and Tesla Loses Steam

More than $15 trillion in assets are linked to the performance of the S&P 500 index in some way, according to S&P Dow Jones.

Apple, at about $2.4 trillion, and Microsoft, at $2.1 trillion, are so large that, taken together, the two companies would be the third-largest sector of the index, behind tech and health care. This share is trending lower as other companies rise.

Electric vehicles (EVs) are on the move with many competitors jostling each other around the world. EVs accounted for 7% of new vehicle registrations in the U.S. this January, up from 4.1% in January 2022. We are a long way from Norway, where about 87% of the cars sold last month were electric.

As the EV pie grows, Tesla’s market share is inevitably declining. For example, since January 2022, Tesla’s market share in America has fallen from 72% to 54%. As we wait for a Tesla pickup truck, the new, all-electric 2025 Ram 1500 REV, unveiled yesterday by Stellantis (STLA) at the New York International Auto Show, will have a range of up to 500 miles per charge.

This week’s recommendation is a critical and overlooked part of EV infrastructure.

New Recommendation: ChargePoint (CHPT)

ChargePoint is an industry leader in EV charging.

ChargePoint operates in both North America and Europe, with more than 225,000 charging points on its networks. ChargePoint has more than 5,000 fleet and commercial customers worldwide.

The company has a 70% market share in the Level 2 charging market in North America, giving it a powerful advantage over even its closest competitor.

EV adoption is accelerating for both consumers and fleets.

The potential for scaling up growth and leveraging its network for profits is massive.

This is because, according to Bloomberg, only 5% of passenger cars in the U.S. are EVs and in Europe the number is 8%. By 2035, these numbers could be 50% for America and 80% for Europe.

That’s a long potential runway for ChargePoint.

Another positive is ChargePoint’s business model.

It sells hardware directly to site owners for upfront revenue, plus gains a longer trail of subscription revenue for system software and maintenance that accrues as deferred revenue. The company also uses a capital-light model via its use of contract manufacturers.

The world’s EV fleets are growing, increasing demand for charging stations, and ChargePoint has built on that to show steadily rising quarterly revenues since going public just over two years ago.

Here are two data points: ChargePoint has posted seven quarters in a row of increasing revenues. ChargePoint’s full-year revenue for fiscal ’23 came to $468 million, which is a year-over-year gain of 94%.

We need to accept the company’s heavy investments in growth; profits will appear as the company monetizes and leverages its charging network.

ChargePoint ran a heavy net loss in fiscal 2023, totaling $344.5 million as it invested in growing its installed base. Even so, the company did have available liquidity of $399.5 million as of January 31, 2023.

The price of ChargePoint’s stock is just under 10 per share – where it was two years ago as a SPAC before jumping to 40 on EV euphoria.

Now we get a second chance with more reasonable expectations. BUY A HALF POSITION

Weekly Explorer Stock News

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 and will be followed by a new recommendation every other week.

Portfolio Changes: None

Butterfly Network (BFLY) shares shot up from 1.65 to 2.5 and then drifted back to settle at 2 after the company announced regulatory approval for an AI-enabled powerful ultrasound product. The company expects revenue growth of about 20% this year. Hold a Half.

BYD (BYDDY) shares were largely unchanged this week. Its fourth-quarter profit was $1.06 billion equivalent, up from $87.4 million a year earlier. That represents an 11-fold increase year over year with gross margins for BYD increased to 20.3%. Buy a Half.

Corteva (CTVA) shares ticked up this week. The company recently announced that that it is collaborating with Chevron Corp. and Bunge Ltd. to produce renewable fuels from canola crops. This is a high-quality, conservative stock but it’s a bit expensive right now. Hold a Half.

Kimberly-Clark de México (KCDMY) shares were flat this week. Founded in 1925 and based in Mexico City, its parent, Kimberly Clark (KMB), was founded as a paper company in Neenah, Wisconsin in 1872. This is a play on Latin American markets and Mexico’s wages now being about 25% lower than China’s. Buy a Half.

Kraken Robotics (KRKNF) shares almost broke 0.4 this week and finished at 0.38. The company designs and manufactures software-centric sensors, batteries, and underwater robotic systems for unmanned underwater vehicles used in military and commercial applications. This small maritime and defense company needs to get its story on the radar screen of more investors. It remains a buy for aggressive investors. Buy a Half.

Novo Nordisk (NVO) shares paused this week after adding 15 points over the prior two weeks. A JPMorgan Chase analyst estimates that in the last week of January, American doctors wrote over 300,000 prescriptions for Ozempic – a 78% increase from the same period last year. Ozempic is approved for type 2 diabetes, but people have been taking the drug to lose weight because of its effectiveness. Hold a Half.

Polestar (PSNY) shares lost some ground this week as the Swedish automaker, backed by Volvo and China’s Geely, looks forward to the launch of the Polestar 3 SUV. The company has high expectations that overall sales volume will increase by 60% this year to 80,000 units. Buy a Half.

Explorer ETF/Fund Positions

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 China ex-State-Owned Enterprises Fund (CXSE) is a smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.

Model Portfolio

Explorer Stocks Summary

Brief company overviews that will not change week to week.

Butterfly Network (BFLY): Butterfly’s breakthrough software can be tied into a medical network to provide instantaneous images and improve both the speed and quality of healthcare. This is so much better than scheduling a test in a week and then having the patient come back and must pay for another appointment.

However, if your doctor has the Butterfly iQ+ in their pocket, he (or she) just connects it to an iPhone, it scans your body and has a digital image right in front of him. Plus, while an MRI machine can cost more than a million bucks, the Butterfly iQ+ costs a little over $2,000. Since it also requires a subscription service, it’s a steady source of recurring revenue for the company. The top 100 hospitals in the country already use Butterfly iQ devices.

BYD (BYDDY): In 2022, China auto giant BYD (for Build Your Dreams) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). BYD sold more than 1.85 million electric cars in 2022, including hybrids. In both 2021 and 2022, BYD more than tripled sales from the previous year. Most of BYD’s sales are still in China but it has a big international expansion underway, including the U.S., Europe, and Asia markets.

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.

Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. Stocks like Corteva are recession-resistant and outperforming the market on a relative basis. In terms of partnerships, a year ago it signed a $5.2 billion collaboration with French drug giant Sanofi (SNY). It has expanded a Bristol-Myers Squibb (BMY) collaboration to include drug targets in both immunology and oncology. This is on top of a design partnership with French drug giant, Germany’s Bayer, and Japan’s Sumitomo Dainippon.

Kimberly-Clark de México (KCDMY) was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB) was founded as a paper company in Neenah, Wisconsin in 1872. According to consultant Alix Partners, Mexico has surpassed China as the lowest cost country in the world for companies looking to manufacture products for North American markets. Mexico’s wages are now about 25% lower than in China and coupled with lower taxes and tariffs, this all adds up to a competitive edge.

Kraken Robotics (KRKNF) is probably the most speculative of Explorer stocks, but it is a well-run company and a prime takeover candidate in the growth defense sector, coupled with a strong management team. Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software-centric sensors, and underwater robotic systems.

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.

Polestar (PSNY) is a Swedish premium electric vehicle manufacturer. Founded by Volvo and Zhejiang Geely Holding Group in 2017, Polestar enjoys technological and engineering synergies with Volvo. By the end of this year, the company plans that its cars will be available in 30 markets. Polestar cars are currently manufactured in China, with 2024 manufacturing planned in America. Polestar has an edge on much of the competition for two reasons. It has an “asset light” strategy through access to world class owner/partner Volvo’s factories. For 2023, Polestar anticipates global volumes to increase by nearly 60% to approximately 80,000 cars.

Explorer ETF/Fund Positions

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. This ETF gives broad exposure with an emphasis on income and value.

WisdomTree China ex-State-Owned Enterprises Fund (CXSE) is a smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs).

The next Cabot Explorer issue will be published on April 20, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld