Cabot Explorer Issue: December 7, 2023
Led by the Magnificent Seven, the S&P 500 is a bit overcooked at the moment. Small and mid-caps, on the other hand, are cheap - and appear poised for outperformance in the New Year. So today, we add a mid-cap life sciences company with high upside potential in an emerging area of biology.
Don’t Go Overboard with the Magnificent Seven
Stocks caught a bit of a lift this week as a softer job market indicates lower inflation and a lower probability of Fed interest rate hikes in 2024.
My caution on China has been more than justified. The MSCI China Index has lost 10% so far this year and is on track for its third consecutive year of declines.
Lithium prices rebounded marginally which is good for a couple of Explorer ideas and as the EV markets work through changing consumer tastes, price competition, and China’s growing dominance of the sector.
Chinese consumers had their choice of 235 different EVs in the first half of this year and paid on average $35,000 for a battery-powered vehicle. Americans, by contrast, had only 51 EVs to choose from and ended up paying an average price of more than $70,000.
Hybrids in America are on a roll, led by Toyota and Honda, but Ford is also putting a bigger emphasis on hybrids and plug-in hybrids. Ford’s hybrid sales rose 75% in November, led by hybrid versions of the Maverick and F-150 pickups.
Toyota and its Lexus luxury brand now offer 26 “electrified” models including the new Toyota Grand Highlander hybrid, the Toyota Corolla Cross hybrid, and the Lexus RX plug-in hybrid.
The U.S. is behind but catching up somewhat to Asia and Europe. “Electrified” vehicles, meaning hybrids, plug-in hybrids, and battery-electric vehicles, combined to hit a record 17.7% of U.S. car sales during the third quarter of this year, according to Wards Intelligence.
Finally, just a heads up that if you are invested in or hold an S&P 500 ETF right now, about 30% of your money would be in just seven tech stocks. You know the names – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta.
Historically, the so-called Magnificent Seven have accounted for 21% of the benchmark, taking the end-of-year average of the past decade. The seven stocks have posted strong profits lately, but they are still trading at a premium with an average of 32 times forward earnings, compared with 19 times for the broader index.
Meanwhile, mid-cap and small-cap stocks are trading at dirt-cheap price-to-earnings ratios of 14 and 13, respectively. This is one reason the Explorer looks across the spectrum for ideas from multinationals to small-cap aggressive ideas.
You should have an allocation to both and can pick and choose based on your personal situation.
This week we expand on a key theme of the Explorer, life sciences, and a more aggressive idea that offers us high upside potential as it is in a cutting-edge and emerging area of biology.
10x Genomics (TXG)
10x is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease.
Founded in 2012 and based in Pleasanton, California, 10x builds tools for scientific research to advance human health. Its instruments, reagents and software allow researchers to examine cells and molecules at a resolution and scale never imagined or experienced before.
10x helps researchers look at the roots of biology through three separate platforms. Two of them – Visium and Xenium – allow researchers to see with high resolution and enable the mapping out where cells and molecules stand in relation to one another much more clearly.
Each cell is enveloped in its own droplet, where an individual reaction occurs to detect the profile of that cell.
The company’s products, protected by more than 1,750 patents, are used by all the top 100 global research institutions and by all the top 20 global pharmaceutical companies.
They have also been cited in more than 5,000 research papers. Another good sign is that Harvard University’s endowment has an equity stake in 10x.
A quantum leap in computing power and better resolution, data, and miniaturization of technology has converged with the outbreak of artificial intelligence (AI) to make life sciences a major interest of both the medical field and venture capitalists.
Biology is the front line of research and development because each of us is made up of an average of 40 trillion individual cells. This makes us both complex and fragile.
Until recently, when cells went off course and diseases emerged, the only option was to treat the disease. Now, we increasingly have the ability to cure major diseases.
This is where 10x comes in, by building the tools and machines the life sciences community needs to obtain the right resolution and scale to see and understand complex organisms.
Scientists use its machines to research treatments for Alzheimer’s disease, cystic fibrosis, several cancers and many more diseases.
Beyond the hardware, 10x also sells consulting services and the cartridges that allow all them to run properly.
This is an aggressive idea and sector but somewhat mitigating the risks is that 10x has $390 MM of cash and only about $100 MM of debt. In the third quarter revenue increased 17% and the stock is in an uptrend.
This is an exciting and promising field and 10x Genomics is a leader with an opportunity to stay at the forefront.
BUY A HALF
Explorer Stock Update
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 rose modestly this week but this EV leader is right on the edge of being removed as an Explorer position despite the company’s solid sales and revenue numbers. BYD has about a 35% market share of Chinese EV sales with $4.2 billion in expected net earnings this year, according to consensus analyst estimates on FactSet. Buy a Half.
Exscientia (EXAI) shares were up 5% in the last week as the company works to create a patient-first artificial intelligence (AI) model to yield medicines with both lower costs of development and improved probability of success. Exscientia has the first AI platform aimed at improving treatment outcomes for cancer patients and the world’s first AI-designed drugs to enter clinical trials. This is an aggressive idea so some may wish to purchase shares incrementally. Buy a Half.
Lithium Americas (LAC) shares were steady this week as lithium prices flattened out and indications from China are that the pullback that began earlier this year in lithium prices may be over. The company focuses on the Thacker Pass lithium site in Nevada that has tremendous potential, with 16.1 million tons of battery-grade lithium carbonate equivalent available for extraction. Buy a Half.
Novo Nordisk (NVO) shares are up over 40% since March and closed just under 100 yesterday as rival Pfizer announced a setback with disappointing data on its obesity pill, opening opportunities for others to develop their own oral weight-loss drugs. Pfizer expects the market for new obesity pills to be $90 billion per year and this will be shared with Lilly, Novo, and other biotechs. Novo is working on a high-dose version of its current weight-loss pill which is popular and in high demand. Hold a Half.
Sociedad Química y Minera de Chile S.A. (SQM) shares rose to 54 last Friday but ended the week at 50. While shares are unchanged over the last month, the 10% dividend yield helps total return. Lithium prices have been relatively weak though the market seems to be stabilizing and prices are expected to rise as lithium is essential for a variety of EV battery technologies. Hold a Half.
Explorer Dominator Blue-Chip Recommendations – More Buy and Hold
ConocoPhillips (COP) shares fell from 115 to 110 this week as energy prices pulled back and impacted energy stocks. Considering production and reserves, ConocoPhillips is among the leading upstream energy players in the world and is strongly focused on returning capital to shareholders. Conoco is also among the lowest-cost oil producers, so this is great core holding. Buy a Half.
International Business Machines (IBM) shares broke above 160 this week as IBM and Meta Platforms (META) have come together to launch AI Alliance with the goal of a more open model of AI. IBM is a conservative way to gain exposure to AI, the cloud, and cybersecurity. It also provides a high and safe yield. Buy a Half.
Visa (V) shares were steady this week and the company continues to build its network which is a powerful moat. Visa inked new deals and signed commercial partnerships with 500 new fintech companies in the fourth quarter, a 25% increase over last year. Merchant count also increased 17% year over year and Visa’s network spans more than 200 countries. Its dominant, entrenched global base is a key advantage over Mastercard. Buy a Half.
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%, some of its top holdings include Albemarle (ALB), Tesla (TSLA), BYD (BYDDY), Panasonic Holdings (PCRFY), and Livent (LTHM) to name a few of the fund’s 46 holdings. Buy a Half.
JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Current yield is about 10%. 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.
|Price on 12/7/23
|Buy a Half
|Buy a Half
|Buy a Half
|Global X Lithium & Battery Tech ETF (LIT)
|Buy a Half
|International Business Machines (IBM)
|Buy a Half
|JP Morgan Equity Premium Income ETF (JEPI)
|Buy a Full
|Lithium Americas (LAC)
|Buy a Half
|Novo Nordisk (NVO)
|Hold a Half
|Sociedad Química y Minera de Chile S.A. (SQM)
|Hold a Half
|Buy a Half
|WisdomTree China ex-State-Owned Enterprises Fund (CXSE)
|Buy a Half
|WisdomTree Emerging Markets High Dividend Fund (DEM)
|Buy a Half
|10x Genomics (TXG)
|Buy a Half
Explorer Stocks Summary
Brief company summaries that will not change week to week.
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.
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.
Exscientia (EXAI) was founded in 2012 and based in Oxford, England. Exscientia is using AI to develop new medicines and is attracting high quality partners. Exscientia (EXAI) stock is trading way off its high in an uptrend at 6.33. It went public at 22 a share so the company has about $500 million in cash on the books - a big number for a company with a market capitalization of just $725 million. Finally, keep in mind that this is an attractive speculative stock which may have a bumpy ride. It is a young company that is not and will not be profitable next year.
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.
Lithium Americas (LAC) focuses on the Thacker Pass lithium site in Nevada that has tremendous potential, with 16.1 million tons of battery-grade lithium carbonate equivalent available for extraction. The Thacker project has received a $650 million investment from General Motors, highlighting the project’s future role in supplying battery materials to power electric vehicles. Though Lithium Americas is still pre-revenue and permitting is challenging, the company predicts the Thacker Pass project will generate $1.2 billion in annual cash flow when fully operational.
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.
Sociedad Química y Minera de Chile S.A. (SQM) produces specialty plant nutrients, iodine, lithium, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers which together account for about 30% of SQM’s annual revenue. SQM is generally considered the world’s second-largest lithium producer, behind U.S.-based Albemarle (ALB), and in recent years, demand for the “white gold” has been strong. Demand for lithium is strong due to electric vehicle growth and lithium contributes about 40% of the company’s gross profits. Fertilizer ingredients supply another 40%, and iodine contributes the rest.
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 $14.5 trillion of 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 December 21, 2023.
PUBLISHED — New book from Chief Analyst Carl Delfeld