Cabot Explorer Issue: January 4, 2024

Portfolio Changes: Lithium Americas (LAC) - From Buy to Sell

An Artificial Intelligence Play in South Korea

Although markets have stumbled a bit out of the gate, investors looking to see the S&P 500 build on the 11% advance in the final quarter of 2023 may not have long to wait. U.S. companies are due to start reporting results next week, with the big banks leading the way.

An election year like 2024 with a sitting president running is historically a bullish scenario for U.S. stocks. Since 1949, the S&P 500 is averaging a gain of nearly 13% in those election years, per the Stock Trader’s Almanac.

Elsewhere, it has been almost two years since Moscow was hit by Western sanctions over the Ukraine conflict. Sanctions on Russia have had little impact as it has simply redirected its oil exports from Europe to China and India.

While many markets had a good 2023, the Hang Seng Index finished its last trading day in 2023 14% lower than it started the year. Stocks in mainland China also recorded losses this year, with the CSI 300, an index that tracks companies listed in Shanghai and Shenzhen, declining 11%. 2023 was the fourth consecutive year that the Hang Seng has recorded losses.

Many of the companies in the Hang Seng Index are essentially companies that are leveraged to economic growth in China. Once a major hub for Wall Street banks, Hong Kong had a drought this year with companies raising the least amount of money since 2001. We’ll see if there is a turnaround in 2024.

Global EV sales in 2023 are now expected to reach 14 million cars, with about 63% in China, according to Bloomberg NEF, an energy-focused research service. BYD’s (BYDDY) EV sales exceeded Tesla’s (TSLA) in the fourth quarter of 2023 for the first time. More on this and many other BYD developments soon.

Consistent with the Explorer’s tilt to tech and life sciences, Wedbush analyst Daniel Ives predicts a “new bull market for the tech sector” driven by a 20%-25% increase in cloud and AI spending. This is where we head this week with a new Explorer recommendation.

New Recommendation

SK Telecom (SKM)

In global markets, China is out of favor and Japan has already made a big move. What could be the next play in Asia?

Perhaps it’s South Korea – an economic, industrial and technology powerhouse representing the world’s 13^th-largest economy.

Its economy and stock markets are led by its giant industrial groups – the total sales of the five largest conglomerates have consistently made up more than half of South Korea’s gross domestic product in the past 15 years, sometimes exceeding 70%, according to the book “Republic of Chaebol” by the economist Park Sang-in.

The leading example is Samsung Group, a sprawling empire with an unbelievable number of businesses under its umbrella. Samsung has 80 different businesses that manufacture a wide range of products: semiconductors to televisions, washing machines, medicines, smartphones, heavy machinery, and much more.

In addition to Samsung, other large Korean industrial heavyweights are Hyundai as well as LG group and Kia.

South Korea’s economy remains dominated by a handful of family-run conglomerates (known as chaebols) that hold outsize wealth and influence in the country. The Lee family of Samsung, the Koos of LG, the Cheys of SK Telecom, the Shins of Lotte, and the Chungs of Hyundai, are household names that have tightly held the reins of the country’s largest companies.

SK Telecom Co., Ltd. (SKM) is one of the largest telecommunications companies in South Korea, leading the growth of the mobile industry since 1984.

Now, it is taking customer experience to new heights by extending beyond connectivity. By placing AI at the core of its business, SK Telecom is rapidly transforming into an artificial intelligence (AI) company.

Its affiliate, SK Hynix, is already the world’s second largest memory chipmaker. SK Telecom’s stock was flat for 2023 but, importantly, it is the parent of Sapeon, an AI chip startup.

Backed by South Korea’s telecom-to-chip conglomerate SK Group, it has launched its latest chip for data centers joining the global race to develop AI chips with bigger rivals like Nvidia.

SK Telecom is now launching a next-generation inference AI chip ‘X330' that has approximately twice the computational performance and 1.3 times the power efficiency compared to the latest inference chips on the market.

Sapeon will also cooperate with diverse companies to secure competitiveness in software platforms.

By 2028, SK Telecom will triple the proportion of its AI-related investments and become a global AI company. SK Telecom is trading at below book value and at less than 10 times current and under 7 times forward projected earnings.

It also offers us a 6.6% dividend yield so I recommend the company and stock to begin the new year as a rather conservative way to invest in a leading South Korean conglomerate within a new growth industry.

BUY A HALF

Explorer Stock Update

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 Trading Recommendations – need to watch more closely

10x Genomics (TXG) shares lost a little ground as the new year opened and the company plans on making a presentation at the annual J.P. Morgan Healthcare Conference next Monday. 10x is a leader in the emerging field of “spatial biology” which is a cutting-edge life science for making new discoveries about human health and disease. Consider adding 10x to your portfolio for 2024 realizing that it is an aggressive idea. Buy a Half.

Exscientia (EXAI) shares tumbled from 6.6 to 6 this past week as the company announced that Sanofi is adding a new discovery stage program identified and advanced by Exscientia into their current collaboration. Exscientia has ongoing agreements to co-develop drugs with Bristol-Myers Squibb and Sanofi. This is an aggressive idea in a promising field. Buy a Half.

Lithium Americas (LAC) shares reflect lithium prices which are in recovery mode and essential to EV batteries, but I have decided to sell it and keep Chile’s SQM as the best Explorer lithium play. Move from Buy a Half to Sell.

Novo Nordisk (NVO) shares were up a bit this week as I expect the stock to continue its momentum into 2024. Novo is carving out a huge market for diabetes and obesity that Goldman Sachs estimates will reach $100 billion market by 2030. Novo Nordisk is poised to open a new AI research hub in the heart of London as it seeks to build on its weight-loss drug success. Ozempic and other drugs like it have proven powerful at regulating blood sugar and driving weight loss. Now, scientists are exploring whether they might be just as effective in treating a wide range of other conditions, from addiction and liver disease to a common cause of infertility. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares pulled back a couple of points but this is offset by SQM’s 8.7% dividend yield that helps total return. In terms of production, the company had record sales in the third quarter and lithium prices are likely nearing the bottom because producers are now selling close to or below their cost of production. Hold a Half.

Super Micro Computer (SMCI), the most recent Explorer recommendation, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. The company reported a surge in demand for its Nvidia, AMD, and Intel AI platforms. Being the first to market advanced servers with the latest silicon chips gives the company a solid edge against the competition. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. This is an aggressive pick in a high-growth sector. BUY A HALF

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares were up slightly this week and the company will report its next earnings on February 8. By market cap, this company ranks as the seventh-largest oil and gas company in the world. Conoco is also among the lowest-cost oil producers. This is great core holding. Hold a Half.

International Business Machines (IBM) shares were firm this week as Big Blue continues its transformation centered on cloud computing, data security, analytics, and AI. The company has $11 billion worth of cash and generated $10.3 billion of free cash flow over the last four quarters. Those funds are aimed at the AI opportunity right now. The stock also has upside potential as it only gained 16% in 2023, falling behind the S&P 500’s 25% increase. Buy a Half.

Visa (V) shares had a good 2023 and were steady this week. Remember that Visa is not a credit card company but rather a fintech company that continues to ink deals that build its network and moat. Over the 15 years since the company’s initial public offering (IPO) in 2008, Visa shares have recorded a compound annual growth rate (CAGR) of 21%. That means $10,000 invested in Visa shares at their IPO price would now be worth over $204,000. Buy a Half.

Watch List

BYD (BYDDY)

Global EV sales in 2023 are now expected to reach 14 million, with about 63% in China, according to Bloomberg NEF, an energy-focused research service. BYD’s (BYDDY) EV sales exceeded Tesla’s (TSLA) in the fourth quarter for the first time. That’s why I created a Watch List just for this stock – it’s worth keeping an eye on in case we want to jump back in on momentum.

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%, some of its top holdings include Albemarle (ALB), Tesla (TSLA), BYD (BYDDY), Panasonic Holdings (PCRFY), and Livent (LTHM), to name a few of the fund’s 46 holdings. Buy a Half.

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value focused strategy. Current yield is about 9%. Buy a Full.

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 China ex-State-Owned Enterprises Fund (CXSE) is a way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.

Model Portfolio

Explorer Stocks Summary

Brief company summaries that will not change week to week.

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.

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, and 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 6.00. 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 $754 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.

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.

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.

Sociedad Química y Minera de Chile S.A. (SQM) produces specialty plant nutrients, iodine, lithium, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers which together account for about 30% of SQM’s annual revenue. SQM is generally considered the world’s second-largest lithium producer, behind U.S.-based Albemarle, and in recent years, demand for the “white gold” has been strong. Demand for lithium is strong due to electric vehicle growth and lithium contributes about 40% of the company’s gross profits. Fertilizer ingredients supply another 40%, and iodine contributes the rest.

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 $14.5 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 January 18, 2024.

PUBLISHED — Latest book from Chief Analyst Carl Delfeld