Cabot Explorer Issue: June 1, 2023

Life After Capitalism, by George Gilder

It was another good week for Explorer recommendations led by ChargePoint (CHPT), up 17%, and Butterfly (BFLY), up another 8%.

Some of you will remember when George Gilder’s Wealth and Poverty hit the market in 1981 like a thunderclap. It was intellectual capital and political firepower for both the Reagan Revolution and a big bull market.

Mr. Gilder has been active ever since and has a new book out that I highly recommend, Life After Capitalism.

Here are just a few memorable highlights from the prologue of this book.

Money gains value only when it is invested.

Wealth is knowledge.

You can only profit from what you know.

Information is not about order and equilibrium, but about creativity, measured by disruption, disorder, economic growth, and surprise.

Economic growth is a gauge of learning manifested in learning curves across the economy.

Time is the only money that politicians and their bankers cannot print or distort, counterfeit, or fake.

Gilder’s complementary argument with Adam Smith that “the wealth of nations is advanced by the learning of nations” is on the money.

Today’s new recommendation is right in sync with Gilder’s emphasis on learning, disruption, discovery, and innovation.

New Recommendation: Pfizer (PFE)

Pfizer is a quality name and a dominant player in a growth industry that rewards scale and innovation.

It is undervalued right now, trading about 38% below last December’s post-pandemic high. It was the company’s valuation and admirable performance numbers that clinched my decision to add this name to the Explorer recommendation list this week.

Founded more than 170 years ago and based in New York City, Pfizer has 39 manufacturing sites spread around the world to diversify a supply of critical medicines at competitive prices.

More than a quarter of a billion patients were treated with its medicines and vaccines in the first quarter of this year.

Pfizer has 10 products with sales of greater than $1 billion a year. Annual revenue tops $92 billion as the company closes in on the $100 billion mark.

Pfizer did great things during the pandemic with its top-selling vaccine – Comirnaty (developed with partner BioNTech) – and the leading COVID treatment, Paxlovid. Those days are thankfully over but Pfizer is not sitting still. Over the next 18 months it expects to launch at least 19 new products.

Key launches this year include vaccines for respiratory syncytial virus (RSV) and meningitis, as well as drugs to treat atopic dermatitis and multiple myeloma – a blood cancer. Pfizer is also pushing ahead with a diabetes and weight-loss product that will be taken orally that is now in clinical trials and could generate annual sales of $10 billion.

It is also ever active on the deal front including a $43 billion acquisition of Seagen that will give it rights to the smaller company’s oncology pipeline. Pfizer’s goal is to add $25 billion in incremental revenue over the coming years and in 2022, Pfizer acquired three companies: Arena Pharmaceuticals, Biohaven Pharmaceuticals and Global Blood Therapeutics.

The stock trades at a discount to the market at just seven times trailing earnings and 11 times forward earnings with a dividend yield of 4.5%. The company has also raised that dividend every year now for 14 consecutive years. On top of all that, it delivers a profit margin over 30%, an 11.6% return on assets, a 31% return on equity, and is sitting on $20 billion worth of cash.

For all these reasons, buy a full position. BUY A FULL POSITION

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 up 8% this week and 15% last week after recently reporting better quarterly revenue and a smaller loss than expected. A digital health company transforming care with handheld, whole-body ultrasound remains a hold. Hold a Half.

BYD (BYDDY) shares went from 62 to 60 this week as Tesla’s Elon Musk traveled to Beijing to meet with top China officials and tour the Tesla Shanghai plant. In 2022, China EV and battery giant BYD’s total vehicle sales jumped ahead of Tesla’s. For all-battery electric vehicles (BEVs), Tesla remains No. 1. In 2022, BYD switched to producing only all-electric vehicles and sold more than 1.85 million electric cars in 2022, including hybrids as it tripled sales. Buy a Half.

ChargePoint (CHPT) shares were up 17% this week as Bank of America upgraded the stock ahead of earnings, expected out today, with a price target of 14 (current price: 9.8). JPMorgan analysts predict the company’s revenue will increase to $703.5 million this year and $1.1 billion in 2024, up from $468 million in 2022. Buy a Half.

ConocoPhillips (COP) shares gave back the 5% they had gained last week as the company exercised its rights to acquire the remaining interest in the Alberta Surmont oil facility. It is the fourth-largest oil-sand well site in Canada. The facility produced about 135,000 barrels of oil per day in April and gaining control of Surmont’s low-cost production will help ConocoPhillips reach its goal of returning $11 billion in cash to shareholders this year. Conoco delivers 20% net profit margins, a return on assets of almost 17%, and a return on equity of 32%. If you have not yet done so, Buy a Half.

Corteva (CTVA) shares gave back 2 points this week to close at 53 as the company grew its revenue by 6.2% year-over-year in the first quarter of 2023 with revenue of $4.88 billion. This stock needs to demonstrate some momentum, or we will soon replace it with a new idea. Hold a Half.

Novo Nordisk (NVO) shares were steady this week after the Danish drugmaker announced phase 3 trial results for an oral version of Wegovy to match Pfizer. Shares are up 36% during the last six months and the company expects $40 billion of revenue in 2024 across its drugs for diabetes, obesity, rare diseases, and cardiovascular disease but new competitors are emerging. Hold a Half.

Polestar (PSNY) shares were up from 3.3 to 3.4 this week after the company announced it will cut its workforce to control costs. Polestar projects 2023 global volumes of 60,000 - 70,000 vehicles, representing annual growth of 16% - 36%, following record deliveries last year. Hold a Half.

Solid Power (SLDP) shares were steady following last week’s 10% gain and encouraging first-quarter earnings. This is a developer of solid-state batteries and sulfide-based electrolyte technology. This is an aggressive new Explorer recommendation that comes with both risk and high upside potential. Buy a Half.

Explorer ETF/Fund Positions

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 11%. 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 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.

BYD (BYDDY): In 2022, China auto giant BYD (for Build Your Dreams) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). BYD sold more than 1.85 million electric cars in 2022, including hybrids. In both 2021 and 2022, BYD more than tripled sales from the previous year. Most of BYD’s sales are still in China but it has a big international expansion underway, including the U.S., Europe, and Asia markets.

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.

ChargePoint (CHPT) is an industry leader in electric vehicle charging. ChargePoint operates in both North America and Europe, with more than 225,000 charging points on its networks. ChargePoint has more than 5000 fleet and commercial customers worldwide. The company has a 70% market share in the level 2 charging market in North America, giving it a powerful advantage over even its closest competitor.

ChargePoint has posted seven quarters in a row of increasing revenue with full-year revenue for fiscal ’23 showing a year-over-year gain of 94%. We need to accept the company’s heavy investments in growth; profits will appear as the company monetizes and leverages its charging network.

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 and its assets are spread over various locations across the globe, although almost half the company’s production is derived from U.S. sources.

Follow Warren Buffett into big oil and take a stake in the Arctic by purchasing a half position in Conoco which is trading at just eight times trailing earnings. The company also delivers 20% net profit margins, a return on assets of almost 17%, and a return on equity of 32%.

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. In terms of partnerships, last year 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 the French drug giant, Germany’s Bayer, and Japan’s Sumitomo Dainippon.

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.

Polestar (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. By the end of this year, the company plans for its cars to 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 in large part because it has an “asset light” strategy through access to world class owner/partner Volvo’s factories. For 2023, Polestar anticipates global volumes to increase by nearly 60% to approximately 80,000 cars.

Solid Power (SLDP) is a Colorado-based developer of all-solid-state battery and sulfide-based electrolyte technology. Solid Power replaces the flammable liquid electrolyte in a conventional lithium-ion battery with a proprietary sulfide-based solid electrolyte.

Solid Power’s all-solid-state battery cells are expected to be safer and more across a broad temperature range, offer an increase in energy density compared to the best available rechargeable battery cells, and enable less expensive, more energy-dense battery pack designs. In addition, the technology is compatible with traditional lithium-ion manufacturing processes.

The company has a partnership with BMW and Ford and received a $5.6 MM U.S. Department of Energy (DOE) award to continue its development of nickel- and cobalt-free solid-state battery cells.

Explorer ETF/Fund Positions

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value focused strategy.

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.

WisdomTree China ex-State-Owned Enterprises Fund (CXSE) is a smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs).

The next Cabot Explorer issue will be published on June 15, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld