Cabot Explorer Issue: January 12, 2023

Markets Up and Volatility Declines as Politics Loom

As we move into 2023, Explorer stocks had a good week and are performing well as volatility is muted. I seek a balance between conservative and aggressive ideas so that you can select which are appropriate for your circumstances. I believe at some point in the first half of this year, markets will turn upward as more reasonable valuations will reignite investor interest.

But we need to pay attention to the new Republican majority in the House of Representatives and their brinkmanship over the nation’s statutory debt limit, raising fears that markets could be rattled. Raising the debt limit allows the government to pay the bills it has already incurred. Analysts at Goldman Sachs expect the date to arrive around August.

Looking for some encouragement? Strategist Edward Yardeni believes “the outlook for the world economy is actually improving,” and that U.S. equities, “made a low on Oct. 12. That was the end of the bear market and we’re back in a bull market.”

A weaker dollar will make international and emerging markets outperform and resource stocks will benefit from stubborn inflation and pullback in globalization as countries around the world prefer supply chain security to the lowest cost, more risky supplies.

Today we return to a synthetic graphite idea that was a profitable trade about a year and a half ago.

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: None

Butterfly Network (BFLY) shares were steady this week as this recent recommendation continues its growth as it seeks profitability and to greatly reduce the cost of imaging diagnostics. Buy a Half.

Centrus Energy (LEU) shares increased 13% this past week as interest in nuclear stocks continues to be firm and its stock trades at low multiples to future earnings. Buy a Half.

Corteva (CTVA) shares gained two points as the company will report earnings on Wednesday, February 1. This conservative stock is a bit expensive but still a buy and is a favorite among institutional investors, who hold 82% of outstanding shares. Buy a Half.

Ford (F) shares were up 8% this week. In 2022, Ford followed Tesla as the #2 EV maker in America and its sales more than doubled. Ford won the best-selling truck title in America with its F-Series and its all-electric F-150 Lightning was named the 2023 North American Truck of the Year. Buy a Half.

Kraken Robotics (KRKNF) shares have more than doubled over the past six months as new CEO Greg Reid continues to seek new marine undersea robotics contracts from private and government partners. Aggressive - Buy a Half.

MP Materials (MP) shares jumped 16% this week on no news to around 29. It looks like we made the right decision a couple of weeks ago to keep America’s only rare earths mine as an Explorer recommendation. Hold a Half.

Novo Nordisk (NVO) shares gave back a few points this week. The company specializes in treatments for diabetes and supplies half of the world’s insulin. Analysts from Morgan Stanley project the potential market for obesity drugs to reach $50 billion by 2030 – more than 20 times greater than it is today. Hold a Half.

Rolls-Royce PLC (RYCEY) shares were up again this past week as this aerospace company attracts attention for its recently announced successful test of an aircraft engine that runs on hydrogen. Aggressive - Buy a Half.

Toyota Motors (TM) shares were up three points this week and while I like its strategy it seems to be falling a bit behind the EV revolution. Toyota has pledged to invest $35 billion in electric vehicles by 2030 and to make 3.5 million of them by the end of the decade. Buy a Half.

New Explorer Recommendation: Novonix (NVX)

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. China’s annual growth rate alone for electric vehicles is expected to be 24%, according to Bloomberg NEP. China and Europe are leading the EV revolution with America lagging behind.

Novonix estimates the global market for its products will grow from about $10 billion today to a range of $50 billion to $100 billion in the next five to 10 years.

The company is ramping up production capacity of synthetic graphite in the United States to 2,000 tons per annum. The increased production capacity will enable the company to advance its goal of becoming a meaningful supplier and gain market share. Currently, manufacturers in China control a roughly 80% share of the market for artificial graphite, according to Avicenne Energy, a consulting firm.

Synthetic graphite generally is costlier than natural graphite but the greater stability of synthetic graphite makes it the preferred material. Novonix is the only manufacturer of synthetic graphite in North America.

Wood Mackenzie forecasts rapid growth for graphite in the battery sector. Demand is expected to grow from 165,000 tons in 2018 to almost one million tons by 2030 – and the higher purity of synthetic graphite “makes it preferable for use in premium batteries.”

Importantly, Novonix and Samsung forged an agreement for Novonix to supply Samsung with synthetic graphite for lithium-ion batteries. Novonix also signed a non-binding agreement with Sanyo to explore a partnership with its Tennessee production facility. Sanyo is a subsidiary of Panasonic Corporation. Sanyo is a leading battery producer and supplier to Tesla. Together, Samsung and Sanyo account for a combined estimated 30% of the global lithium-ion market.

In addition, on October 19, 2022, Novonix was selected for a US$150 million grant from the U.S. Department of Energy (DOE) to expand its production of synthetic graphite anode materials.

Since the company is not yet profitable and is still in a developmental stage of growth, this is an aggressive idea. The stock has shown some recent momentum and in 2022 moved from an OTC market to a listing on the NYSE.

This is a great play on an important clean tech material technology. Let’s begin with a half position. 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. BUY A HALF

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

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. BUY A HALF

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. BUY A HALF

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. BUY A HALF

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. HOLD A HALF

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. BUY A HALF

Rolls-Royce PLC (RYCEY)
Today’s Rolls-Royce operates as an industrial technology company in the United Kingdom and internationally. The company operates in four segments: Civil Aerospace, Power Systems, Defense, and New Markets. The Civil Aerospace segment develops, manufactures, and sells aero engines for large commercial aircraft, regional jet, and business aviation markets, as well as provides aftermarket services. Rolls-Royce stock has been hard hit by the impact of Covid on air travel and thus the miles flown by Rolls-powered commercial jets, which is how it derives much of its revenue. The result is the company has taken on quite a bit of debt. However, downside risk is offset by how important the company is to the U.K. government because of its strategically important aerospace and defense business. RYCEY is an aggressive idea. BUY A HALF

Toyota Motors (TM) pioneered hybrid cars in the late 1990s with the Prius. Today, hybrids, including plug-in cars, account for around 20% of Toyota’s U.S. sales (as of September 2022). Toyota remains the No. 1 hybrid seller in America, led by a gas-electric version of the RAV4 sport-utility vehicle, the nation’s top-selling hybrid. The new Prius will join eight other hybrid models, plus the all-new Toyota Crown, and two plug-in hybrid models. BUY A HALF

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 January 26, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld