Cabot Explorer Issue: February 15, 2024

Dominating Stocks Steady as Cloudflare (NET) Gains 24%, Super Micro Computer (SMCI) Jumps 20% Following Last Week’s 26% Surge

Portfolio Changes: WisdomTree China ex-State-Owned Enterprises Fund (CXSE) – Move from Buy to Sell

The latest earnings reports were mixed but generally encouraging.

The S&P 500 exceeding the 5,000 mark reminds us that while our dynamic economy leads to disruptions in companies and markets, and Fed interest rate moves can impact the market, it is revenue and earnings growth that really drives stock returns over time. Companies normally become more profitable over time, and that’s what leads to higher stock prices. Staying in the market and leveraging the power of compounding returns is important to successful investing.

But the other part of the equation is finding stocks that can outperform while sidestepping risks when you can. This brings me to China, as MSCI announced it is cutting 66 companies from its benchmark China index after a steady selloff and turbulent markets. Chinese investors are facing myriad headwinds, from weak profits to capital flight, to a housing and property bust, and most recently, a fall in China’s consumer price levels, better known as deflation.

We of course all complain about some inflation, but it is falling prices across the board that investors should really fear as a clear red flag. The reason why is that falling price levels, or deflation, makes it more difficult to pay back loans, discourages consumer spending and business investment, and therefore can lead to a spiral of problems and a prolonged period of lower growth.

This is the main reason that I’m recommending selling the WisdomTree China ex-State-Owned Enterprises Fund (CXSE) from our Explorer ETF portfolio.

For electric vehicles (EVs), however, China is the bull market while Ford announced that the Michigan plant where the F-150 Lightning electric truck is built is being cut in half as sales slump. Consumers seem to be leaning toward hybrids and overseas competition is intensifying.

New Recommendation

Grayscale Bitcoin Trust (GBTC)

While I have been a bit of a skeptic and in and out of bitcoin over the last couple of years, I think it has passed an inflection point and deserves a small position as an asset allocation and diversification play.

In January, the SEC formally approved, for the first time, exchange-traded funds (ETFs) linked directly to bitcoin. So-called “spot” bitcoin ETFs can hold the digital asset without the complications and some of the higher holding costs of previous bitcoin funds. This includes the Grayscale fund that I had previously put forward as a Cabot Explorer recommendation and which provided indirect exposure.

Now, new funds give investors a way to tie their money very closely to the day-to-day or “spot” movement of bitcoin prices, indicating that the market has matured quite a bit. We can surely expect some volatility so only a small investment that you can afford to lose is prudent.

Between 2017 and 2019, bitcoin had an impressive run as prices reached $20,000. In 2021, bitcoin reached an all-time high of $64,899 and became a $1 trillion asset class. In 2023, Bitcoin surged 156%, its best year since 2020, while the S&P 500 posted 25% returns and U.S. bonds delivered about 5% returns.

Bitcoin may provide investors with relatively higher returns because the launch of more than 10 bitcoin ETFs will broaden the crypto investor base, and 2024 marks a halving event that happens every four years. Halving is the process where the reward for mining a bitcoin is halved so miners receive 50% smaller rewards for verifying transactions and this may boost bitcoin prices.

So, if you have done some homework and are an aggressive investor comfortable with volatility, consider a small allocation to this leading bitcoin ETF.

BUY A SMALL ALLOCATION (AGGRESSIVE INVESTORS ONLY)

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

10x Genomics (TXG) shares traded sideways this week as we expect an earnings report out today. Buy a Half

Cloudflare (NET) shares were up 24% in their second week as an Explorer recommendation following a quarterly report showing 32% revenue growth and better margins. Cloudflare is both an aggressive and dominator recommendation offering products for cloud computing, AI, cybersecurity, and edge computing. Buy a Half

Exscientia (EXAI) shares declined from 6.5 to 5.9 after its CEO was terminated due to allegations of an inappropriate relationship with staff. This AI-driven biotech company and potential takeover candidate partners with mega drug companies to launch new products. Buy a Half

Novo Nordisk (NVO) shares have zoomed from 114 to 124 over the last two weeks. The stock is trading at a 52-week high and 45 times trailing earnings. This drugmaker may look expensive but new growth markets may arise. In a recent clinical trial, researchers at Novo Nordisk found that Wegovy could reduce the risk of heart attack or stroke by as much as 20%. Hold a Half

PayPal (PYPL) shares were steady this week following last week’s report that PayPal earnings for the fourth quarter were up 19% on 9% revenue growth, to $8 billion. PayPal also processed over $1.5 trillion of total payment volume (TPV) in 2023, up 13% year over year with its platform handling 25 billion transactions in the last 12 months. Buy a Half

Super Micro Computer (SMCI) shares posted a 20% jump this week following last week’s 26% surge. Super Micro, as a leveraged play on Nvidia and other advanced chips for AI, is doing extremely well since it sells to the servers and systems that incorporate and support premium chips in data centers. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares were flat this week after the company revealed that in the fourth quarter, it generated $2.40 per share in adjusted earnings and produced 1,902,000 barrels of oil equivalent per day, representing 4% growth year-over-year. One reason I like ConocoPhillips is that it generated $10 billion in free cash flow last year, which gives it a margin of error in combating lower oil prices. Hold a Half

International Business Machines’ (IBM) share price was again unchanged this week. IBM’s increasing focus on AI is starting to show progress. In addition, its AI-powered, cloud-based growth strategy is only in its early stages. Buy a Half

Visa (V) was the third dominating stock to finish the week where it started, which is fine with me as it proves its value over time even as the world increasingly goes digital. Visa must keep its platforms at the cutting edge of payments technology through acquisitions and expanding its network. Buy a Half

Watch List – BYD (BYDDY)

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

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) is a contrarian value play on China’s beaten-down market. 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 China ex-State-Owned Enterprises Fund (CXSE) is a way to gain China exposure without any state-owned enterprises (SOEs), but right now it’s too much of a risk. Move From Buy a Half to Sell

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

10x Genomics (TXG) 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.

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.

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 5.90. 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 $737 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.

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.

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 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 February 29, 2024.

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