Cabot Explorer Issue: June 15, 2023

Inflation and Interest Rates Pause

Yesterday’s Federal Reserve meeting and Tuesday’s consumer price index data showed inflation and interest rate hikes are pausing but remains well above what markets would like.

Overall inflation is cooling in large part because energy prices have fallen sharply — a huge relief for consumers. But the core gauge, which excludes energy and food prices, shows inflation is still too high.

Nevertheless, investors welcomed the news as it spurred markets and confidence that the market performance might advance beyond big tech and the artificial intelligence (AI) story.

The stocks of the very biggest companies have led the market this year in a big way. The Russell Top 50 Mega Cap index has beaten the Russell 2000 index of smaller companies by more than 20 percentage points this year.

Meanwhile, China’s central bank cut a key interest rate after more downbeat data showed the economy slowed in May and youth unemployment rose again.

Takero Kato, head of Toyota’s newly created EV battery factory, stated the company is targeting battery-powered vehicles with a range of 1,000 kilometers, which is about 620 miles. Most current EVs can cover about 250–350 miles on a single charge, though a few can go more than 400.

Toyota has perhaps made significant advancements in solid-state batteries, which are viewed as a next-generation improvement on today’s liquid-based lithium-ion batteries.

In China news, the global venture capital giant Sequoia Capital announced that it is separating its Chinese and U.S. businesses and carving out its Indian and Southeast Asian businesses into a third entity.

This is just another sign that ties to China increasingly create risks for U.S. financial and technology companies. A key question is whether this move will allow the new Sequoia China entity to invest without U.S. oversight or regulation.

New Recommendation: Geely Automobile Holdings Limited (GELYF)

Headquartered in Wan Chai, Hong Kong, Geely is a nice complement to Explorer recommendation BYD (BYDDY), China’s electric vehicle (EV) leader.

As you can see from the below table, Geely ranks fairly high in sales after the big multinational brands.

Even better, Geely is profitable with last quarter’s sales up 59% and net profit up 50%. Plus, its stock is trading at only about 60% of sales. In addition to Volvo, Geely also owns Lotus in the U.K. and half of Mercedes’ Smart brand. It also owns the London Electric Vehicle Company, which produces electric black cabs.

Then there is the Volvo car connection. Volvo, which is majority-owned by China’s Geely, has stated that sales in China were up 46%. Volvo sales of fully electric cars nearly doubled to account for 17% of total sales.

Geely launched its new Zeekr luxury brand in March 2021 and plans to launch a new sports utility vehicle Zeekr X, ready for delivery later this month, Electrek reported. The Zeekr X will have three models priced from $26,700 to $29,500, with its first deliveries in China, then Europe before reaching Asian markets outside of China. The vehicles are expected to feature 5G artificial intelligence, facial recognition, and an optional in-vehicle refrigerator.

Geely is also a leader on the technology front. Zeekr is the latest to join a growing list of automakers that have turned to the “gigapress” die casting technique pioneered by Tesla to slash the cost of electric cars.

This technique has helped Zeekr eliminate almost 800 welding points, cut defects, made the car lighter, and boosted its structural stiffness and made for a more comfortable ride. Geely is also busy developing international markets and in the early stages of planning an entry to Thailand’s EV market, including considering local manufacturing.

Our BYD and Geely combo seems to be a logical way to gain some exposure to a market that those companies will surely dominate, but we will of course continue to recommend new ideas from America as we play catch-up and will also follow Tesla closely. BUY A HALF

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: Corteva (CTVA) from Hold to Sell

Butterfly Network (BFLY) shares reached 2.4 on Tuesday but then pulled back and were unchanged for the week. The company recently reported better quarterly revenue and a smaller loss than expected. Hold a Half.

BYD (BYDDY) shares jumped from 64 to 67 this week. BYD sold a record 240,220 vehicles in May, up 109% vs. a year earlier. Among personal vehicles, Battery Electric Vehicle (BEV) sales hit 119,603, slightly exceeding plug-in hybrids at 119,489. In 2022, total sales including hybrids tripled. Buy a Half.

ChargePoint (CHPT) shares pulled back from 10 to 9 this week despite the company announcing on Monday that they will offer chargers with Tesla’s connector. General Motors said it would join Ford in adopting Tesla’s previously proprietary North American Charging Standard (NACS) port, which is set to dominate 60% of the U.S. EV market together with the partnerships. Buy a Half.

ConocoPhillips (COP) shares held firm this week despite generally lower oil and energy prices. 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 lost a point this week and this stock is largely treading water at high multiples to earnings. While it was an ideal conservative pick for a turbulent market, the improving market climate leads me to move this to a sell and it will be replaced by a higher growth stock in the coming weeks. Move from Hold a Half to Sell.

Novo Nordisk (NVO) shares were up just a point this week as new competitors such as Merck take aim at its fast-growing market. Novo sells injectable semaglutide as Wegovy for obesity treatment and as Ozempic for diabetes. It also has an oral version and is testing a lower 2.4-milligram oral dose. Novo’s obesity drugs are seen as more effective than new competitors, but Novo will have to continue to innovate to keep its lead. Hold a Half.

Pfizer (PFE) added another point this week and while near-term earnings comparisons will not be impressive as the company comes off a pandemic growth spurt, the stock is trading at a discount to the market at just 11 times forward earnings with a dividend yield of 4.1%. In addition, it delivers a profit margin over 30%, an 11.6% return on assets, and a 31% return on equity. If you have not already done so, Buy a Full Position.

Polestar (PSNY) shares advanced from 3.4 to 3.7 this week. This is a quiet period in between sales and earnings reports but Polestar still projects 2023 global volumes of 60,000 - 70,000 vehicles following record deliveries last year. Hold a Half.

Solid Power (SLDP) shares were up marginally as the Toyota announcement regarding expected breakthroughs in solid-state batteries is good news. Solid-state batteries are designed to be safer, offer higher energy, and cost less than lithium-ion batteries. This is an aggressive 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.

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 proven 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.

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%.

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.

Pfizer (PFE) served more than a quarter of a billion patients that were treated with its medicines and vaccines in the first quarter of this year. Pfizer has 10 products with sales greater than $1 billion a year. Annual revenue tops $92 billion as the company closes in on $100 billion. 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.

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 across a broader 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. 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 29, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld