Cabot Explorer Issue: December 1, 2022

Weekly Stock Roundup

Portfolio Changes:
Sociedad Química y Minera de Chile S.A. (SQM) - MOVE FROM HOLD A HALF TO SELL

Centrus Energy (LEU) shares were largely unchanged as the company is well positioned to benefit from growth in next-generation nuclear technology, helping provide reliable and carbon-free electricity. This is still a buy for aggressive investors.

Corteva (CTVA) shares were steady as the company agreed to buy biologicals firm Stoller Group for $1.2 billion, adding operations and sales in more than 60 countries and $400 million in forecast revenues from the deal.

Ford (F) is branding itself as the No. 2 electric-vehicle company in America but still has a way to go to catch Tesla. Ford announced it has built 150,000 Mustang Mach-E vehicles since the model launched in late 2020.

Infineon Technologies (IFNNY) shares are up about 40% over the past month and the company reported fourth-quarter revenue growth of 38% with a gross profit margin of 46%.

Kraken Robotics (KRKNF) shares were up 14% over the last two weeks as Kraken reported quarterly revenue of $12.3 million compared to $5.1 million in the prior year driven by continued delivery to the Royal Danish Navy on multiple mine hunting systems. Year-to-date revenue is $32.1 million compared to $10.6 million in the first nine months of 2021. Net loss in the quarter totaled $0.5 million compared to a net loss of $2.6 million.

Marvell Technology Group (MRVL) shares have been steady at 45 as the company expects to report earnings today. On the last quarterly conference call, Marvell stated that it anticipates approximately 29% year-over-year revenue growth for the third quarter.

MP Materials (MP) shares pulled back a couple of points over the last two weeks but the company is on track to meet its goal of filling in its rare earth supply chain and eventually manufacturing permanent magnets. My call with management went well and my price target over the next six months is 45.

Sociedad Química y Minera de Chile S.A. (SQM) shares have been relatively flat over the past month, facing some resistance around 105. This strikes me as signaling that despite its recently reported third-quarter earnings, with revenues up 347% compared to the third quarter of 2021, downside risk is high as is the probability of pullback in lithium prices. I’m moving this stock to a sell.

Toyota Motors (TM) shares gained 5 points the past two weeks as the company reported a 23% rise in October global vehicle output, beating its own target for a third month in a row. Toyota projects that about half of its spending from 2022 through 2030 will be focused on battery electric vehicles, including plans to build a new $3.8 billion battery plant in North Carolina, opening in 2025.

Market Brief

Across China, people are protesting the country’s strict “zero COVID” policy in a remarkable show of resistance to President Xi Jinping’s regime and the Chinese Communist Party (CCP). It has been clear for some time that Xi’s commitment to zero COVID is a risky move in its effort to avoid any outbreaks that might embarrass the government. Economic activity in China contracted further in November, as manufacturing output was weak.

Pretty grim situation, but it is amazing how a few well-chosen words can turn the tide.

As Chinese authorities indicated a willingness to loosen the lockdown, Chinese auto stocks jumped.

The same happened in U.S. markets yesterday afternoon after a few encouraging words by Fed Chairman Jerome Powell, who announced a lighter touch in raising interest rates.

As Tesla stock struggles, Nissan (NSANY), whose entry-level Leaf dominated the U.S. electric vehicle (EV) landscape more than a decade ago, way before Tesla took a commanding lead with 65% of the U.S. market, is aiming to climb back into the game with new, relatively affordable models. Its planned renaissance starts with the Ariya crossover utility, on sale in December at a starting price of $43,190. Nissan is also working on a proprietary low-cost, solid-state battery and expects 40% of its U.S. sales to be fully electric by 2030.

More than 73 years after Chiang Kai-shek retreated across the Taiwan Strait to Taipei, the former dictator’s great-grandson was elected as mayor of the Taiwanese capital. This was the biggest in a series of local election wins for the Kuomintang (KMT), which was the only legal party in Chiang Kai-shek’s day. China’s Democratic Progressive Party (DPP), which is in control of the current China-skeptic government, is under pressure and President Tsai Ing-wen stepped down as DPP chair after Saturday’s setbacks

New Explorer Recommendation: Novo Nordisk (NVO)

With Thanksgiving leftovers hopefully history and Christmas coming, I’m back in the gym and trying to cut back. Many of you may be trying to do the same, not to mention the other 8 billion people in the world.

It’s quite clear that obesity shortens lives. It is linked to more than 60 chronic diseases, including diabetes, heart disease, stroke, and some forms of cancer. These represent the leading causes of preventable, premature deaths.

Scientific studies show that the obesity epidemic threatens the lives of 100 million Americans and half a billion more people overseas. The proportion of American adults who are considered obese has nearly doubled over the last 60 years, to 40%. Aside from the premature loss of life, obesity costs Americans about $150 billion each year and people with obesity pay $1,429 more in medical costs each year compared with those of average weight.

Even those that eat healthy and exercise regularly can struggle with weight issues and Danish pharmaceutical multinational Novo Nordisk (NVO) is trying to help.

Obesity is a complex chronic disease, and losing weight is not just a question of eating less and exercising more. In fact, obesity can be influenced by genetics, physiology, brain activity and the environment. Better understanding these factors is critical, because obesity is associated with other diseases, including type 2 diabetes, heart disease and certain types of cancer.

Novo 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. By 2025, it estimated the potential market for obesity-related ailments equal to 1.2 trillion people.

The company also has developed a new drug that lets people lose as much as 20% of their body weight. This drug is based on decades-old research that a hormone called glucagon-like peptide-1 – or GLP-1 – is released after food intake. This hormone boosts insulin levels and reduces appetite. In its natural form, it lasts only a few minutes in the blood, but Novo has developed injectable products for diabetes that imitate the effects of GLP-1 and last longer.

After clinical trials showed that this treatment is both safe and effective, the U.S. Food and Drug Administration (FDA) in 2014 approved Novo’s treatment in 2014.

In 2017, Novo introduced the follow-on Ozempic, a once-a-week injectable treatment for diabetes that is even better at reaching brain receptors that limit food cravings. Novo got FDA approval to market this product in June 2021 and branded it Wegovy (pronounced wee-GOH-vee). Prescriptions started at 10,000 a week and soon doubled to 20,000 a week.

Today, Wegovy is one of the fastest-growing drugs in the nation. Fortunately, the use of Wegovy is also associated with lower blood pressure, better cholesterol readings and less inflammation likely leading to less hypertension, heart disease, stroke, cancer and perhaps even dementia. Studies to clinically prove all of this are underway.

Novo’s total sales already exceed $167 billion a year and for the quarter ending in September, earnings were up 19% on a 28% increase in revenue. Novo is also executing a $3 billion share repurchase plan. In summary, based on its sizable and growing demand for this weight-loss drug, this well-managed, highly profitable company with an excellent growth profile has limited risk and potential to develop new products. Its stock is outperforming the market, indicating relative strength. BUY A HALF POSITION

Model Portfolio

Explorer Stocks in Brief

Centrus Energy (LEU) surprised investors as it came out with a quarterly loss of $0.42 per share versus the Zacks consensus estimate of $0.78. This compares to earnings of $2.95 per share a year ago. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins that are above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million.

Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. BUY A HALF

Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. While the market is down sharply over the past year, Corteva is up more than 40%. Although the down market does lead to quality companies that grow revenue and net profits trading at bargain prices, a strong case can be made for stocks like Corteva that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%. BUY A HALF

Ford (F) is making a transition to a leader in both conventional and electric vehicles (EVs). Ford has a forward price-to-earnings ratio of just over 7 with a dividend yield of 4.4%. It continues to see rising demand for its electric vehicles and Ford stock will benefit from $7,500 EV subsidies. Ford remains my favorite conservative stock despite a challenging market and supply chain issues. BUY A HALF

Infineon Technologies (IFNNY) has an advantage on many other semiconductor stocks in that it is focused on auto and industrial markets where shortages and high demand persist, allowing it to raise prices. This stock seems undervalued to me with a price-to-earnings ratio of 14 and the company’s earnings per share is expected to grow 38% this year and cash flow growth is strong. This is still a buy on dips in the market. BUY A HALF

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. BUY A HALF

Marvell Technology Group (MRVL) designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks, processors and devices as they partner with and transition to 5G. The company’s embedded processors and products are cutting-edge and already generate $3 billion in annual sales. Marvell has a long runway of growth as the company expects double-digit growth in both sales and net profit for its current (FY23) fiscal year and is also growing through acquisitions. Looking ahead, I expect earnings at Marvell could reach more than $3 per share next year. The company is one of the world’s fastest-growing chipmakers and I expect its share price to recover its momentum. BUY A HALF

MP Materials (MP) is an effective way to play clean tech, defense, semiconductors, and other advanced and emerging technologies. Based on its valuation, MP is moving closer to being rated a buy and is America’s only active rare earth mining and processing site, producing approximately 15% of the rare earth content consumed in the global market in 2021. HOLD A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares have been relatively flat over the past month, facing some resistance around 105. This strikes me as signaling that despite its recently reported third-quarter earnings with revenues up 347% compared to the third quarter of 2021, there’s downside risk due to the probability of a pullback in lithium prices after a big jump. I’m moving this stock to a sell. MOVE FROM HOLD A HALF TO SELL

Toyota Motors’ (TM) hybrid EV sales jumped 73% last year, according to research firm Motor Intelligence. Toyota pioneered hybrid cars in the late 1990s with the Prius, and hybrids, including plug-in cars, accounted for around 20% of Toyota’s U.S. sales in September. Toyota remains the No. 1 hybrid seller in America, led by a gas-electric version of the RAV4 sport-utility vehicle, the nation’s top-selling hybrid. Toyota leader Akio Toyoda recently told reporters the company could make eight plug-in hybrids with the same number of batteries in a single 320-mile-range EV.

High quality Toyota trades at just 10 times forward earnings. BUY A HALF

Explorer ETF/Fund Positions

WisdomTree Emerging Markets High Dividend Fund (DEM) is up 16% during the last month and offers a high dividend yield and some of the highest quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure to large caps, mid-caps and small caps with an emphasis on income and value. BUY A HALF

The next Cabot Explorer issue will be published on December 15, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld