Cabot Explorer Issue: February 23, 2023

Intel Cuts Dividend as Resilient Economy Leads to Higher Interest Rates

After raising interest rates by three-quarters of a percentage point at four straight meetings last year, the Fed followed that with a quarter-point rise in February. Coming into this year, many investors assumed that declining inflation and a slowing economy would allow the Fed to end rate hikes.

America’s economy has been resilient in the face of rising interest rates as the 10-year Treasury bond is once again heading to 4%. Earnings have been pretty good but ironically, the threat of too strong an economy, or a recession, seems to be weighing on markets.

Today, Commerce Secretary Gina Raimondo is set to announce how the Biden administration plans to award chip-manufacturing subsidies. One supplicant for federal funds is Intel Corp (INTC), which slashed its dividend payment yesterday to the lowest level in 16 years in order to preserve cash and focus on its turnaround plan.

The company will reduce its quarterly distribution to investors to 12.5 cents a share, the lowest level in 16 years. Intel’s current quarterly dividend was projected to cost more than $6 billion in cash flow during 2023.

Intel shares, one of the worst performing on the Philadelphia Stock Exchange Semiconductor Index this year, have lost 42% over the past 12 months. Intel is also reducing its budget for spending on new plants and equipment this year – to about 30% of revenue. The Chips Act has already set off the announcement of a spending spree in the industry. According to the Semiconductor Industry Association, more than 40 projects are planned with promises for investments of nearly $200 billion in new manufacturing facilities.

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: Exscientia (EXAI) - Exscientia (EXAI) – Moved from Buy to Sell (2.17.23 alert)

Butterfly Network (BFLY) shares were steady for this maker of the world’s only handheld ultrasound scanners. This is an aggressive idea, but analysts have an average target on this stock that is significantly higher than its recent price. Next earnings are expected on February 28. Buy a Half.

Centrus Energy (LEU) shares were up 14% yesterday after the company’s quarterly earnings of $1.42 per share – ahead of the $1.39 estimates – were released. Revenues, meanwhile, beat estimates by 18%. For full-year 2022, Centrus reported net income of $52.2 million. The stock is up about 47% since the beginning of the year versus the S&P 500’s gain of 4%. Buy a Half.

Corteva (CTVA) shares ended the week where they started. CEO Charles Magro will speak at the Bank of America Securities 2023 Global Agriculture & Materials Conference on March 1, 2023. He recently bought $2.4 million worth of stock, at a price of around $60. Hold a Half.

Exscientia (EXAI) was a dud as this promising biotech was stopped out per an alert sent out on February 17. This is a disappointment and my responsibility. Move from Buy a Half to Sell.

Kraken Robotics (KRKNF) was again unchanged this week on low volume though the Toronto Venture Stock Exchange has recognized the company as it placed first in the technology category of the TSX Venture 50 ranking based on share price appreciation, trading volume, and market capitalization growth. This maritime and defense stock remains a buy for aggressive investors. Buy a Half.

MP Materials (MP) shares gave back the two points they had gained the previous week, but the company announced that, when its separation plant is up and running later this year, it will sell some of its rare earths to trading giant Sumitomo Corp. for distribution in Japan. The next earnings report is expected today, Feburary 23. We’ll see how that impacts the stock. Hold a Half.

Novo Nordisk (NVO) shares were up slightly and are in an uptrend and getting strong support from the 50-day moving average. The stock is just below a fresh all-time high following positive fourth-quarter 2022 earnings. Hold a Half.

Novonix (NVX) shares are still up for the year but down about 20% in the last month so I’m watching closely. Investors are becoming impatient with the company getting the Chattanooga factory up and running, a step that may now slip to 2024. Buy a Half.

Polestar (PSNY) shares were unchanged as we await its next earnings report, expected on March 2. The company has about $2 billion in cash and dependable financing and manufacturing support from Volvo. Buy a Half.

New Explorer Recommendation: BYD (BYDDY)

World electric vehicle (EV) sales will soar to about 73 million units in 2040, up from around two million in 2020, according to forecasts by Goldman Sachs.

The forecast goes on to project that the share of EVs in worldwide car sales is expected to rise to 61% from 2% during that span. And the share of EV sales could be well over 80% in many developed countries.

In my opinion, the above is too optimistic – a best-case scenario.

A more important question for investors is which company and stock will lead the EV revolution going forward?

Tesla (TSLA) is still in the driver’s seat right now but China’s EV leader BYD (BYDDY) can be clearly seen approaching at high speeds in the rear-view mirror.

The market is fragmented and the competition keen with plenty of American, European, Chinese, and other Asian automakers in the hunt.

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. That’s hyper growth and including hybrids, BYD has already surged past Tesla’s sales. Tesla unit sales came in at 1,313,851 for 2022, up 40%.

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 moving up the scale to more premium models and has begun deliveries in Malaysia and India and entered Japan’s market two weeks ago.

The city of Shanghai is reintroducing a 10,000 yuan ($1,500) subsidy for residents who trade in vehicles in exchange for a purely electric vehicle. Shanghai is a big market for EVs, including BYD. For perspective, Shanghai has a population roughly equal to that of America’s four largest cities (New York, Los Angeles, Chicago, and Houston) plus Montreal and Toronto.

BYD is in a strong position to be one of, if not the, leaders of the EV revolution in terms of size, scale and growth. 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.

Centrus Energy (LEU) is a nuclear fuel supplier for utilities in U.S. and abroad has net income margins 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.

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.

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.

MP Materials (MP) is an effective way to play clean tech, defense, semiconductors, and other advanced and emerging technologies. It 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.

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 more than 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.

Novonix (NVX) is an Australian technology and advanced materials supplier to the electric vehicle and storage battery industry. Founded by members of a research team at Canada’s Dalhousie University, the company is a supplier of high-performance materials, equipment, and services for the global lithium-ion battery industry with a focus on North America.

Novonix is an unusual blend of both exploring and mining graphite and developing synthetic graphite, a key lithium-ion battery material. The focus is on electric vehicles, which are projected to go from global sales of 3.1 million in 2020 to 15 million in 2025 and then on to about 40 million in 2030.

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 to have its cars 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. BUY A HALF

The next Cabot Explorer issue will be published on March 9, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld