Cabot Explorer Issue: January 26, 2023

China’s Robots and Scandinavian Design

The markets have not quite gained their footing and are unsettled a bit from the media focus on the layoffs of big tech. Meanwhile, many companies are posting good earnings numbers and there are some powerful trends to invest in.

For example, the media is paying a lot of attention to the fact that China’s population is shrinking but are missing perhaps a bigger story – China’s leadership in automating production through industrial robots.

The robot density, defined as the number of robots per 10,000 employees, has now reached 322 in China, overtaking America. The degree of automation in the Chinese industry is now in 5th place globally, just behind South Korea, Singapore, Japan, and Germany. Late last year, Swiss ABB opened a new, fully automated $150 million “mega-robot factory” near Shanghai. The most modern generation of industrial robots is produced there, as is a research and development center for artificial intelligence (AI) in robots.

More than a million industrial robots are now in use in China – the largest army of robots in manufacturing plants in the world. Chinese robots are particularly strong, with industrial robots that do not require the highest degree of precision.

The Chinese dominate low-cost robot suppliers since many simple robots are needed in the production of electric vehicles and lithium batteries. Robotics are still being heavily supported by the Chinese government and are experiencing their own boom.

It’s a fascinating trend we’ll be keeping a close eye on.

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.

Explorer recommendations outperformed this week with most having an up week.

Portfolio Changes: Corteva (CTVA) – Move from Buy to Hold

Butterfly Network (BFLY) shares posted a small gain this week and the company’s digital healthcare products were well received at the annual J.P. Morgan Healthcare Conference. Buy shares if you have not already done so. Buy a Half.

Centrus Energy (LEU) shares have been performing well and the role of nuclear energy in the energy transition is growing with more countries embracing the technology as they look to reduce carbon emissions. Centrus stock trades at relatively low multiples to future earnings. Buy a Half.

Corteva (CTVA) shares moved within a narrow trading range this week as the company is expected to report earnings on February 1. This high-quality stock is expensive and there is a chance that year-over-year revenue growth may be weak so I’m moving this to a hold. Hold a Half.

Ford (F) shares were up 4% this week as it was selected as having the best assisted-driving system, based on the latest road testing by Consumer Reports. Ford announced this week that it is considering selling a plant in Germany to China’s BYD or another automaker. This would be in line with its strategy to increase EV production at other European plants. Ford offers a solid dividend and a relatively low valuation. Buy a Half.

Kraken Robotics (KRKNF) shares were down slightly this week as this marine technology company continues to make progress with developing software-centric sensors, subsea batteries, and underwater robotic systems and services. Last week, the company released that non-audited preliminary results show that the company has met the $40 million revenue guidance for 2022. Aggressive - Buy a Half.

MP Materials (MP) shares have been acting better lately and this past week got back over 30. Last year, the company inked a long-term supply agreement with GM under which MP Materials will provide GM with rare-earth materials, alloys, and finished magnets for electric motors beginning late this year. Hold a Half.

Novo Nordisk (NVO) shares were flat this week after gaining eight points last week. The company is expected to announce earnings on February 1. Hold a Half.

Novonix (NVX) shares are up 20% over the last month. This Australian technology and advanced materials supplier to the electric vehicle and storage battery industry posted revenue up 52% in its latest quarter. Buy a Half.

Rolls-Royce PLC (RYCEY) shares are up 24% over the last month as new CEO Tufan Erginbilgic took the helm at the beginning of the year. Aggressive - Buy a Half

New Explorer Recommendation: Polestar (PSNY)

https://investors.polestar.com/

Bloomberg reported global EV sales for 2022 last week and while overall global auto sales declined to 81 million, EV sales jumped 68% and for the first time account for 10% of all auto sales.

China accounts for an amazing 66% of total world EV sales as 25% of China’s auto sales last year were EVs. About 11% of Europe’s auto sales were EVs and in Germany the proportion reached 25%. America’s EV sales last year surged 40% but they represented only 6% of total new U.S. auto sales in 2022.

While all eyes are on Tesla, I’m recommending this week an EV maker you never hear about in the media. Polestar Automotive (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.

Polestar is headquartered in Gothenburg, Sweden, and its vehicles are on the road in markets across Europe, North America, China, and the Asia-Pacific region. 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. 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.

Polestar has so far produced two electric performance cars. The Polestar 1 was built between 2019 and 2021 as a low-volume electric performance hybrid GT with a carbon fiber body. The Polestar 2 electric performance fastback is the company’s first fully electric, high-volume car.

Polestar plans to launch one new electric vehicle per year, starting with Polestar 3 – the company’s first electric performance SUV, which launched in late 2022. Polestar 4 is expected to follow in 2023, a smaller electric performance SUV coupe. Then, in 2024, the Polestar 5 electric performance 4-door GT is planned for launch. This will showcase the brand’s future vision in terms of design, technology, and sustainability. Polestar aims to produce a truly climate-neutral car by 2030.

In March 2022, Polestar revealed its second concept car, an electric performance roadster. The hard-top convertible presents an evolution of the unique design.

Polestar 3 is a powerful electric SUV that will be the first model to be manufactured for North America and other markets starting in mid-2024 out of Volvo’s plant in Ridgeville, South Carolina.

Polestar delivered approximately 21,000 vehicles in the fourth quarter of 2022, bringing the preliminary estimate for full-year global volumes to 51,500 cars, up 80% year-on-year. For 2023, Polestar anticipates global volumes to increase by nearly 60% to approximately 80,000 cars.

Polestar expects to post its unaudited preliminary financial results for 2022 on Thursday, March 2, 2023. The company has adequate resources to execute its plan with about $2 billion in cash, and to support Polestar’s increasing production volumes, Volvo Cars is providing $800 million in financing with an equity conversion option for Volvo Cars. 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. 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. MOVE FROM BUY A HALF to HOLD 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 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. HOLD A HALF

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. 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. 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. An aggressive idea. 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 February 9, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld