Cabot Explorer Issue: February 29, 2024

Super Micro Computer Stock Triples in 2024; New Bitcoin ETF Surges

Portfolio Changes: Buy WisdomTree Japan Hedged Equity ETF (DXJ)

You may have noticed that last week when Nvidia (NDVA) announced its earnings, its stock rose 16% while Explorer recommendation Super Micro Computer (SMCI) went up 32%.

This is consistent with my view that Super Micro is a leveraged bet on artificial intelligence (AI), and I expect this will also be the case when Nvidia’s stock price moves the other way. Nvidia is now priced at an incredible 32 times trailing annual sales and has a larger market cap than Germany’s entire blue-chip DAX index. Super Micro has already tripled in 2024 so consider taking partial profits. Remember, J.P. Morgan allegedly stated that he made his greatest profits by selling too soon.

Moving to the other side of the globe…

In 2023 alone, overseas buyers poured $43 billion into Japanese shares. Adjusted for inflation, the Nikkei still is nearly 18% below the bubble’s 1989 peak. And with Japanese households sitting on $8 trillion of cash which could move into the market, I’m adding WisdomTree’s Japan Hedged Equity ETF (DXJ) as a Cabot Explorer ETF recommendation today.

Bitcoin surged beyond $60,000 for first time in more than two years as demand and the market widens. That said, please be careful with our Grayscale Bitcoin Trust (GBTC) ETF recommendation, which is up 45% this month. Unlike fiat currencies which can be printed like paper, only 21 million bitcoins can ever exist.

Meanwhile, the dramatic changes in America’s and China’s economy continue apace and have implications for investors. At its peak, more than 100,000 people streamed in and out of the massive Rouge Ford Motor factory in Dearborn, Michigan. Now that is the total number of auto-related workers in all the Detroit metro area.

Apple (APPL) announced this week it is ending its effort to launch an electric vehicle (EV) after spending $10 billion over the last 10 years. Unbelievable.

A decade ago, Chinese used to flock to Hong Kong to shop for items not available on the mainland. Now Hong Kong residents increasingly jump across the border to the city of Shenzhen, where they stock up on cheaper frozen food, clothes, and furniture at stores such as Costco and Sam’s Club. One reason is that Chinese consumer price levels are declining while the Hong Kong dollar is strong.

Now we go to Southeast Asia to revisit a previous 10X pick that has come back to earth, giving us an excellent price entry point to capture growth in the region.

New Recommendation

Sea Limited (SE)

Sea has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively.

Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.

Some of you may recall this stock, which was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high. During its rise, I suggested several times for members to take partial profits, so if they followed this advice their profits were less than 10X – but who’s complaining?

The stock eventually came back to earth primarily because its explosive revenue growth slowed a bit and expenses also kept rising so losses were persistent and large. Since its high, the stock has retreated nearly 90% from that peak even though Sea’s management finally got control of its expenses. And though revenue has continued to grow, albeit slower than before, management made good on its promise to show some profits through cost-cutting and efficiency measures.

A key challenge now is Sea’s gaming arm, Garena. Its big hit game Free Fire led this segment to prominence and fueled the company’s stock surge, but now needs a sequel. However, offsetting this decline is profits in both its Shopee e-commerce segment and its SeaMoney fintech segment. If the gaming group can return to growth and profits, Sea’s stock has the potential to regain its momentum.

Now that the company has achieved profitability and has a strong balance sheet and sizable cash balances, it can also spend to accelerate growth across all three segments. Sea was profitable in the first and second quarters of 2023 but last quarter, on revenue growth of 5%, it reported a loss of $144 million.

Recall that part of the reason for my initial recommendation was because I viewed Sea as a proxy for Southeast Asian economic growth – particularly in its fast-growing digital economy.

Sea’s e-commerce arm, Shopee, is the most visited online marketplace in Southeast Asia, and was the third-most downloaded market app in the world in 2023, after Temu and Amazon. Online sales represent just 8% of total retail sales in Southeast Asia, much less than 22% in nearby China, so there is plenty of room for catch-up growth.

SeaMoney’s fintech services revenue increased 36% year over year in the third quarter. The missing piece is getting Sea’s gaming arm, Garena, back to the high-growth days by leveraging its sizable gaming user bases.

Sea stock represents high growth potential and trades at an attractive value at about two times sales and 15 times forward earnings growth projections. One important thing to note before you buy: Sea’s next earnings report is expected next Monday, on March 4.

Buy a Half

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) was up a little this week as it was reported that ARK Invest’s Cathie Wood added to her position in the stock. About 80% of 10x’s revenue comes from government and academic researchers and its products are used by almost all the top global research institutions and pharmaceutical companies in the world. These products are protected by 1,750 patents. In 2023, it sold nearly 6,000 instruments around the world, a 29% increase. Buy a Half

Cloudflare (NET) shares closed at 97 as Argus raised its 2024 price target to 123. This $1.3 billion revenue company estimates its target market at $146 billion, growing to $204 billion by 2026. Cloudflare is a quadruple-play on cloud computing, AI, cybersecurity, and edge computing. Buy a Half

Exscientia (EXAI) shares were firm this week as this biotech company and potential takeover candidate continues to expand partnerships with mega drug companies to develop new products. Buy a Half

Novo Nordisk (NVO) shares were up three points to 127 and are up 18% so far this year. In 2023, its Wegovy product sales soared by 407%, while Ozempic’s sales surged by 60% year over year. Hold a Half

PayPal (PYPL) shares broke 60 this past week as the stock trades at a forward price-to-earnings ratio of just over 11. The company generated $4.2 billion of free cash flow and bought back $5 billion of shares during the past 12 months. PayPal earnings for the fourth quarter were up 19% on 9% revenue growth to $8 billion. Buy a Half

Super Micro Computer’s (SMCI) share price has more than tripled so far in 2024 so, if you have not already done so, I suggest you take some partial profits. I see Super Micro as a leveraged play on Nvidia and other advanced chips for artificial intelligence (AI). Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares were firm this week as energy markets were quiet. This is a company with $96 billion of assets that last year generated $10 billion in free cash flow supporting a modest but dependable dividend. Hold a Half

International Business Machines’ (IBM) share price climbed to 185 and has the tailwinds of rising demand of its hybrid cloud and artificial intelligence solutions as well as WatsonX’s AI and scientific cloud data platform. Buy a Half

Visa (V) shares advanced from 278 to 285 this week. Its latest reported quarter continued its steady growth with revenue growing 9% and earnings per share increasing 20% year over year. This payments company handles more than 60% of all card payment volume in the U.S. 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

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

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) offers exposure to a basket of the largest Chinese-listed stocks. 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’s Japan Hedged Equity ETF (DXJ) offers exposure to a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Half

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 6.71. 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 $840 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 March 14, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.