Cabot Explorer Issue: February 9, 2023

Strong U.S. Dollar Weighing on Tech Earnings

Explorer stocks were firm this past week as the market is uncertain where inflation and interest rates are headed. Our WisdomTree Emerging Markets High Dividend Fund (DEM) is up about 8% in 2023 and with an 8% dividend yield.

Menwhile, foreign-exchange fluctuations are hurting the tech sector. Companies in the tech S&P 500 segment derive 60% of their sales internationally, the most of the index’s 11 groups. And those companies had a rough fourth quarter: Companies in the S&P 500 that get more than half their revenue from outside the U.S. are on pace to post an 8.7% pullback in Q4 earnings due to the strong dollar, according to FactSet data.

To wit: Last week Apple posted its first quarterly revenue decline in almost four years as unfavorable foreign-exchange rates posed a challenge. IBM posted flat sales in the fourth quarter after the strong U.S. dollar hurt its reported revenue by more than $1 billion.

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: Ford (F) Moves from Buy a Half to Hold

Butterfly Network (BFLY) shares dipped from 3.1 to 2.8 and are still can be accumulated as we wait for the next earnings, expected on March 23. Buy a Half.

Centrus Energy (LEU) shares settled at 40 this week as this nuclear energy fuel play treads water. This stock is attractive due to a higher profile for the nuclear sector and trades at relatively low multiples to future earnings. No other commodity has the energy density of nuclear fuel, with one uranium fuel pellet equal to almost 150 gallons of crude oil. Buy a Half.

Corteva (CTVA) shares were steady this week as this seed provider add crop chemical company sees a positive outlook for 2023. There is a clear need to grow crops more efficiently so farmers need to apply agricultural chemicals to fertilizers to improve crop yield. Hold a Half.

Ford (F) shares had another lackluster week as investors digest the mixed results highlighted in its latest earnings. Its EV portfolio, led by the Mustang Mach E and F-150 Lightning, is growing 2X the EV industry but international, and particularly Chinese, markets are weak. Ford also has had a significant markdown of its Rivian investment. I need to assess how the announced price cuts on its EVs will impact forward earnings. Move from Buy a Half to Hold.

Kraken Robotics (KRKNF) is well positioned as both a maritime/undersea and defense stock. The company is bordering on breakeven as Germany and Norway want to start a NATO-led alliance to protect critical underwater infrastructure. Aggressive - Buy a Half.

MP Materials (MP) shares gave back last week’s gains, dipping back to 32. But the company’s cash position of $587 million, rare earth prices stabilizing, and a project underway to get up and running a rare earth processing facility and end shipping product to China for refining are all positive. Hold a Half.

Novo Nordisk (NVO) shares picked up six points this past week as the company recently reported fourth-quarter 2022 earnings of 83 cents against earnings of 73 cents in the year-ago quarter. Hold a Half.

Novonix (NVX) shares were again steady as this Australian firm’s anode materials production capacity located in Tennessee supports its goal of becoming a leading global supplier of key battery material. By comparison, manufacturers in China currently control a roughly 80% share of the market for synthetic graphite. Buy a Half.

Polestar (PSNY) shares began last week strong but ended yesterday just where they started. Polestar vehicles will feature Google’s Android software its in-car operating system, and the company has about $2 billion in cash and dependable financing and manufacturing support from Volvo. Buy a Half.

New Explorer Recommendation: Exscientia (EXAI): A Biotech/Artificial Intelligence Stock in an Uptrend

Founded in 2012 and based in Oxford, England, Exscientia is using artificial Intelligence (AI) to develop new medicines as fast as possible. It is attracting high quality partners and the company is turning this into explosive growth.

You have probably heard more than you want about the incredible potential of artificial intelligence. AI enables computers, robots, and other devices to think like humans but far faster and more powerfully.

Therefore, it is sometimes referred to as machine learning. The potential of AI can be applied to many industries but perhaps the most exciting is the field of medicine.

Exscientia has the first AI platform clinically validated to improve treatment outcomes for cancer patients and boasts the world’s first AI-designed drugs to enter clinical trials. It has a rapidly growing pipeline of more than 30 projects in motion with the goal of drug discovery in ovarian and hematological (blood) cancer.

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 a French drug giant, Germany’s Bayer, and Japan’s Sumitomo Dainippon.

Exscientia is the world’s recognized leader in the field and when it announced its third-quarter results last November, it reported solid progress. (The company will report Q4 results on March 23.)

Exscientia announced a partnership with The University of Texas MD Anderson Cancer Center, a premier cancer research and treatment center, to develop small-molecule therapies in oncology. It also produced accurate protein modeling up to 35,000 times faster than AlphaFold 2, an AI program developed by DeepMind, a subsidiary of Alphabet.

It should be noted that Exscientia is not currently profitable, nor will it be this year. However, the company has an ample cash position exceeding $600 million and has an annual net cash burn rate of only about $15 million.

With a market cap of $1.3 billion, the company is selling for just over two times its cash on hand. The stock is also in a nice uptrend. This is an aggressive company and sector but EXAI offers exceptional upside potential. BUY A HALF POSITION

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.

Ford (F) is making the transition to a leader in both conventional and electric vehicles (EVs). It continues to see rising demand for its electric vehicles and Ford stock will benefit from the big $7,500 EV subsidies. Ford remains my favorite conservative stock despite a challenging market and supply chain issues. Ford wants to produce EVs at annual rates of 600,000 cars by late 2023 and more than 2 million by 2026.

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 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.

Novonix (NVX)
Novonix 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)
Polestar Automotive 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 be 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. It has a firm foothold in China – the fastest-growing EV market in the world. And it has a growing reputation for elegant and arresting design. 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 February 23, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld