Cabot Explorer Issue: August 10, 2023

Portfolio Changes: Polestar (PSNY) – Move from Hold to Sell

Novo Surges, Tesla at a Buy Point

Novo Nordisk (NVO) jumped this week on data from a five-year trial from its drug Wegovy showed that users had 20% fewer heart attacks, strokes, and cardiovascular deaths, combined, than those who received a placebo in the study.

Ozempic and Wegovy have become best-selling weight loss drugs, giving Novo Nordisk Hollywood sizzle to become Europe’s second-most valuable company. Novo is struggling to meet demand, raising questions about whether it can fully capitalize on its first-mover advantage and stave off new competitors.

China slid into deflation in July as both consumer and producer price indexes declined for the first time since the Covid outbreak in 2020, according to Bloomberg Economics. The Biden Administration also announced this week increased restrictions on U.S. private investment into China for strategic areas such as quantum computing and artificial intelligence which will raise tensions in the U.S.-China relationship.

Always keep in mind the observation of the great investor Sir John Templeton that fresh bull markets tend to start when Wall Street is still shrouded in the pessimism of the previous bear cycle. Early bull markets are statistically more profitable than late stages.

Why are stocks going up when the world feels like it is struggling? People are buying stocks because only stocks have a reasonable chance at staying ahead of inflation over time.

They can drop sharply in the short term, but they usually move up in the long term at a healthy rate. In an inflationary environment their money needs to work harder simply to maintain its existing purchasing power.

New Recommendation: Tesla (TSLA)

Tesla has always confused investors and Wall Street analysts alike. One reason is that it often has valuations that are many times higher than its auto industry peers.

What many miss is that it is not an auto stock but rather a tech stock and platform stock.

Tesla’s value is really in its ever-expanding platform, AI capabilities, charging infrastructure, battery manufacturing, autonomous driving capability, and other areas ripe for disruption that nobody even knows Tesla is working on.

Tesla has been a beneficiary of government incentives such as a generous loan just before it went public. The passing of the $740 billion Inflation Reduction Act (IRA) last year, with $500 billion earmarked for climate and energy spending, is a super catalyst. This includes a $7,500 tax credit for all new EV purchases and additional credits to cover the installation of rooftop solar and the Tesla Powerwall at residences.

The company should benefit from similar incentives for battery manufacturing, at $35 per kilowatt hour of capacity, giving Tesla a crucial edge against competitors. Tesla’s battery plant in Nevada, which it operates with Panasonic, is set to accrue credits worth over $1.8 billion during the current year.

The entry of new EV competitors has been a concern to many, but I think it is a net gain for Tesla which stands to gain from an increasingly fragmented market. Part of this is due to its extensive Supercharger network. Many major EV brands, such as Ford, GM, Rivian, Volvo, and Polestar, have since announced that they will be adopting Tesla’s North American Charging Standard (NACS) starting in 2025. Tesla’s network of over 45,000 superchargers will possibly generate billions in extra revenue, while creating a competitive moat.

Tesla’s autonomous driving capability project is a work in progress and will have its up and downs, but Tesla will likely be the leader over time.

Tesla is also an AI play, however, ranging from industrial automation to personal robotics as the company announced plans for a humanoid robot named Optimus last year.

In addition, Tesla has announced a new battery factory in Shanghai. Its existing car factory in Shanghai, which Tesla owns outright, produced 710,000 cars last year, or 52% of its worldwide output.

In January, Tesla announced that it is expanding its Nevada Gigafactory assembly plant with a major new investment to boost production of a new, larger type of battery cell and a dedicated factory to make its Semi truck.

Finally, Tesla is getting close to launching its Cybertruck, a distinctive-looking truck that is all angles and unpainted stainless steel. This will be the company’s first new passenger vehicle in more than three years. Tesla expects to make 250,000 or more Cybertrucks a year once output scales up. In total, Tesla sold about 1.3 million vehicles last year and is aiming to sell 20 million annually by 2030.

On the financial side, Tesla achieved its first full year of profitability in 2020, from selling cars and the sale of regulatory credits to other auto companies that fail to meet emission standards. This should continue, owing to the passage of the $500 billion Inflation Reduction Act (IRA) last year.

Profits more than doubled in 2022, to $13 billion, an increase of 120% year over year. Revenues have scaled from $32 billion in 2020 to $54 billion in 2021, to $81 billion in 2022, and are set to move past $100 billion in 2023.

With price cuts, margins are contracting but Tesla is largely maintaining its dominant market share.

Our timing to enter Tesla is attractive as it is down to the 240s from 299 on July 19 and the stock’s all-time high was 414 in November 2021. Valuations are high as always, so we shouldn’t worry too much about them. BUY A HALF

Weekly Explorer Stock Updates

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.

Explorer Trading Recommendations - need to watch more closely

BYD (BYDDY) shares pulled back from 69 to 65 this week probably due to overall negative news about the Chinese economy. BYD, the world’s leading manufacturer of new energy vehicles and power batteries, produced its 5 millionth new energy vehicle (NEV), making it the first automaker in the world to achieve this milestone. BYD expects to sell 3.6 million cars this year, nearly doubling vs. 2022. Buy a Half.

Geely Automobile Holdings Limited (GELYF) shares were off a bit this week with the only news that it is ending its semiconductor chip making unit. This is good news since this is a very capital-intensive project. Last quarter sales were up 59% and net profit was up 50%. Buy a Half.

Neo Performance (NOPMF) shares were unchanged this week as the company announced that its next earnings report will be out tomorrow, August 11. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and critical metals. Buy a Half.

Novo Nordisk (NVO) shares were up 19% this past week because new data from a five-year trial from its drug Wegovy showed that users had 20% fewer heart attacks, strokes, and cardiovascular deaths, combined, than those who received a placebo in the study. We await earnings later today, August 10. There have been some supply issues and there are more competitors coming into the market so I will leave this a hold for now. Hold a Half.

Polestar (PSNY) shares were up in July but are down from a high on July 8 at 4.8, pulling back to 4.1 yesterday. Given that we have other EV plays I like better and that we have Polestar owner Geely as a current recommendation, I’m moving this to a sell. Move from Hold to Sell.

Solid Power (SLDP) shares were up on Wednesday with its earnings report, but the stock ended the week with little change. Second-quarter 2023 revenue was $4.9 million and first-half 2023 revenue was $8.7 million, up $3.9 million from the first half of 2022. As expected, operating expenses were higher due to accelerated investments in product development and the scaling of operations. Second-quarter 2023 operating loss was $22.2 million and net loss was $12.2 million, or $0.07 per share. Solid Power’s liquidity position remained strong, totaling $443 million. Solid Power seeks to develop breakthrough high density solid-state battery technology and is an aggressive Explorer recommendation. Buy a Half.

Umicore SA (UMICY) shares were relatively steady this week consistent with revenue growth in the context of challenging market conditions since the end of 2022. This is quality company and a good value stock that has considerable upside when market conditions improve since it produces very critical metals and resources. Buy a Half

Explorer Multinational Blue-Chip Recommendations - More Buy and Hold

ConocoPhillips (COP) shares were up a few points as revenue for the second quarter declined year over year, but oil prices climbed to the highest level in almost nine months on concern that a possible escalation of the conflict between Russia and Ukraine may choke off more supplies in an already tightening market. The company is among the lowest-cost producers and delivers relatively strong cash flow. Buy a Half.

International Business Machines (IBM) shares are up 8% over the last month as three quarters of IBM’s revenue now comes from software and consulting, and half of all revenue is now recurring in nature. IBM is a play on data, software, cloud computing, and artificial intelligence (AI) while shares trade at just 15 times forward earnings. Buy a Half.

Pfizer (PFE) shares held steady this week despite, as expected, a sharp drop in revenue in the second quarter. Pfizer’s sales of $12.7 billion were down 54% year over year due the end of Covid-related drug revenue. Pfizer still projects that its adjusted earnings per share for the year will be between $3.25 and $3.45. The stock delivers a 4.5% dividend yield and trades roughly 11 times projected earnings. Buy a Full.

Explorer ETF/Fund Positions

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. The current yield is about 11%. Buy a Full.

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 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.

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). 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.

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.

Geely Automobile Holdings Limited (GELYF), headquartered in Wan Chai, Hong Kong, is a nice complement to Explorer recommendation BYD (BYDDY), China’s electric vehicle (EV) leader. It also owns the London Electric Vehicle Company, which produces electric black cabs. Volvo is majority-owned by Geely.

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.

Neo Performance (NOPMF) manufactures the building blocks of many modern technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to the performance of many important products and emerging technologies. Based in Toronto with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals.

Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

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.

Pfizer (PFE) served more than a quarter of a billion patients that were treated with its medicines and vaccines in the first quarter of this year. Pfizer has 10 products with sales greater than $1 billion a year.

Solid Power (SLDP) is a Colorado-based developer of all-solid-state battery and sulfide-based electrolyte technology. Solid Power replaces the flammable liquid electrolyte in a conventional lithium-ion battery with a proprietary sulfide-based solid electrolyte.

Solid Power’s all-solid-state battery cells are expected to be safer, offer an increase in energy density compared to the best available rechargeable battery cells, and enable less expensive, more energy-dense battery pack designs. The company has a partnership with BMW and Ford and received a $5.6 MM U.S. Department of Energy (DOE) award.

Umicore SA (UMICY) is a materials technology company based in Brussels. The venture is set to begin production in 2025 and is slated to process materials for enough batteries to power 2.2 million fully electric cars a year. The company has a long history in mining and has evolved into more of a processing and recycling company.

Umicore’s leading battery materials technology portfolio consists of nickel, manganese, cobalt technologies, manganese rich lithium and solid-state battery technologies. The company delivers a 17% return on equity and is a rather conservative way to play critical metals on the refining rather than mining side.

The next Cabot Explorer issue will be published on August 24, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld