Cabot Explorer Issue: March 13, 2025

Portfolio Changes:
American Superconductor (AMSC) – Move from Buy a Half to Sell
Cloudflare (NET) – Move from Hold a Half to Buy a Half

The Great Rebalancing Has Commenced

The great rebalancing is unfolding as we expected with the S&P 500 struggling while other global markets are gaining traction. The performance gap between U.S. and international equities so far this year is the largest since 2017.

U.S. Treasury Secretary Scott Bessent is trying to move America toward smaller government, less consumption, and more production. But big macro changes like this take time and his tactics are causing uncertainty and volatility.

At the top of the risk list is U.S. debt and deficits. Secretary Bessent has a goal of getting the U.S. annual budget deficit to 3% of GDP from the current 7.2%. This is a tall order but it needs to be done.

It is an uncertain, murky environment out there but no need for sudden changes in strategy. Stay the course and keep calm. Continue to make incremental changes, rebalancing to international and real assets while taking some partial profits to raise some cash. Have a ready list of buys on hand so you can act when the time comes.

I was in bustling Hanoi, Vietnam this week visiting the Hanoi Stock Exchange (photo below!), VietBao Securities, Petrolimex, and Saigon Tel. Checked out the EV maker Vinfast (VFS), which is trading at 3 a share, down from 69 in August 2023.

Vietnam has momentum but I need to do more research on it before investing.

China is facing headwinds but is a manufacturing and export superpower. Data from the World Trade Organization puts Chinese manufacturing exports at more than $2 trillion for 2024, up 30 times since 2002, while America’s global trade deficit was over $1.2 trillion.

The key rivalry will be in science and technology – the commanding heights of the world economy.

China’s annual budget projects that government spending on science and technology will rise by 8.3% this year, on education by 6.1% and on the military by 7.2%, with increases of around 5% in spending on health care and social welfare. What could right the economy and China’s stock market would be boosting consumer demand to ensure China doesn’t need to rely on just exports to power its lethargic economy.

For India, while almost all inputs are imported, mobile phones have become the country’s biggest product export.

About 15% of the 232 million iPhones shipped worldwide in 2024 were made in India and this is expected to increase to 25% by 2027, according to JPMorgan and Bank of America analysts.

Elsewhere, the Amazon (AMZN) vs. Walmart (WMT) competition is fascinating to follow.

Amazon just beat Walmart in total sales for the first time last quarter selling goods, cloud services, ads, and subscriptions. Walmart sells a lot of stuff and groceries at thin profit margins.

Walmart is sharply improving delivery times and delivered five billion items on the same day they were ordered last year. Walmart has 4,700 stores which serve as fast-delivery hubs. About 41% of all U.S. e-commerce sales go through Amazon versus just 9% for Walmart though they account for 18% of Walmart’s profit.

One other consideration is that Walmart is being hurt by the China tariff issue as Reuters reported that about 60% of Walmart’s shipments came from China in 2023. Walmart is pressuring Chinese suppliers to reduce prices to absorb the costs of higher tariffs. Officials from China’s Ministry of Commerce met with Walmart executives Tuesday to push back hard.

New Recommendation

Subaru (FUJHY)

Quality, Value, and Growth

I’m jumping ahead to Japan for this week’s recommendation to an interesting auto stock that gets very little attention in our financial media.

Based in Tokyo, Subaru (FUJHY) holds a 10% market share in Japan, making it the third-largest automaker in the country.

Overall, it has a much smaller footprint in the global market – about 1% by revenue.

But in America, the Subaru brand has a cult-like following especially in places like Colorado and Vermont where the mountains and the snow make a dependable four-wheel drive indispensable.

Two-thirds of its annual sales are in the U.S., led by its Forester, Outback, and Crosstrek models.

The company is insulated from the current tariff wars since most Subaru cars sold in the U.S. are produced in Indiana.

The company produces about a million vehicles annually with a long history of profitability.

Subaru is consistently profitable and in fiscal 2024 results were especially impressive with revenue increasing 25% and operating profit soaring 75%.

Nevertheless, Subaru trades at about half of what it did a decade ago.

Subaru’s stock sells for only five times trailing earnings and about 70% of book value.

It also sports a 3.9% dividend yield, has a market value of $13.4 billion and has a strong balance sheet with a net cash position of $7 billion.

Therefore, we are essentially paying a little over $6 billion for an automaker that is expected to earn about $2 billion in the fiscal year ending in March. Subaru is also buying back its stock.

Subaru’s CEO Atsushi Osaki is also open to increasing U.S. production and it would be great if it could export to other nations as well.

In addition, since Subaru has not made the transition to electric vehicles (EVs) yet, it is a nice hedge on EV stocks and is rather a play on a slower-than-expected transition.

Finally, given its size and strengths, Subaru could be an acquisition target by a larger automaker such as Toyota (TM).

Given Subaru’s strong brand, customer base, and balance sheet, as well as cheap valuation and takeover potential, this stock is an ideal pick for our great rebalancing.

BUY A HALF

Explorer Weekly Stock Commentary

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 Disrupter Recommendations – need to watch more closely and have a 20% trailing stop-loss in place.

Agnico Eagle Mines (AEM) shares were up marginally and may be fully priced on a relative basis and are up nicely this year. Agnico has mines in Canada, Australia, Finland, and Mexico, with exploration and development activities focused on Canada, Australia, Europe, Latin America, and the U.S. Buy a Half

American Superconductor (AMSC) shares stabilized this week but this stock has lost momentum. To protect profits, I’m moving this to a sell. The company produces advanced grid interconnection systems, high-temperature superconductor cables and wind turbine design in important growth markets such as maritime, Maglev technology, and AI data centers. Move from Buy a Half to Sell

Banco Santander (SAN) shares are up 43% in 2025 after a strong quarter and institutional rotation into European bank stocks. Santander is a diversified European-based global quality bank with significant exposure in emerging markets trading at a value price. Buy a Half

BYD (BYDDY) shares were steady this week after recently raising $5.6 billion through a Hong Kong stock offering. Tesla sales in China fell 49% during February as it loses market share and leverage over regulators. BYD has plans to invest about $14 billion in AI technology. Buy a Half

Centrus Energy (LEU) shares have pulled back over the last several weeks as uranium prices have retreated, but the stock is still doing well so far this year. Centrus is a key processor and producer of enriched uranium. Buy a Half

Cloudflare (NET) shares have pulled back about 33% since their high in mid-February on no significant news. Cloudflare works to speed up and provide security for web applications routed through its intelligent global network. I like this company, which has ties to generative artificial intelligence OpenAI and provides secure links to cloud services when consumers sign up to use ChatGPT. Let’s move it back to Buy. Move from Hold a Half to Buy a Half

Dutch Bros (BROS) shares were down again this week so our taking some profits based on the stock’s rich valuation paid off. The stock is still up 19% in 2025 and 85% over the last year. No change in rating. Still concentrated on the West Coast, it now boasts outlets in 18 U.S. states and counting. Hold a Half

Luckin Coffee (LKNCY) shares were up 7.7% for the week and 26% so far in 2025 as Chinese stocks outperform. Luckin opened an incredible 1,382 new stores, bringing total stores to 21,300 and have also planted a beached in Singapore, opening over 50 outlets in less than two years. Buy a Half

Sea Limited (SE) shares gave back much of last week’s 15.7% gain this past week. Fundamental trends looked good for this company in its latest quarter. Sea’s e-commerce group, Shopee, became profitable in Asia and Brazil. SeaMoney maintained steady profitability and increased revenue by 55%. Meanwhile, Sea’s digital entertainment group grew quarterly active users and gross bookings by 17% and 19%, respectively. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

DBS Bank (DBSDY) shares were down 2% as the company announced it was trimming staff by 10% by leveraging AI capabilities. DBS is one of the largest banks in Southeast Asia with a presence in 19 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index. Buy a Half

International Business Machines (IBM) was steady this week highlighting its strength and utility as a quality, conservative tech stock. Buy a Half

Visa (V) shares pulled back 5.6% this week and I think that it makes sense for long-term investors to buy some more shares at current prices. Additional growth will come from commercial services, consulting services, fraud prevention options and cross-border payments worldwide. Visa is a great company with an impressive and industry-leading operating margin of 66%. Buy a Half

Watch List – Stocks we like but do not follow day-to-day

ConocoPhillips (COP), Franco-Nevada (FNV), Moog Inc. (MOG-A)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a close ended fixed income mutual fund launched and managed by Aberdeen Standard Investments (Asia) Limited in Singapore. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

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

Morgan Stanley China A Share Fund (CAF) offers exposure to a basket of top Chinese-listed stocks. Buy a Half

Oberweis Micro-Cap Fund (OBMCX) fund stands out for several reasons. The fund’s sound investment process and strong management team earns it a rare Morningstar Medalist Rating of Gold. Over the past five years it has posted an impressive average annual return of 21.1%. Buy a Half

Sprott Platinum and Palladium ETF (SPPP) offers direct exposure to both platinum and palladium which are selling at a sizable discount to gold offering potential upside appreciation. Buy a Half

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. Buy a Half

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Agnico Eagle Mines (AEM) follows a conservative strategy and with a history spanning more than 60 years, and now operates a sizable portfolio of 11 assets located in four countries. Management forecasted gold production of approximately 3.45 million ounces in 2024. The company estimates it has about 54 million gold ounces of proven and probable reserves. Furthermore, Agnico Eagle has paid a dividend for 41 consecutive years with a dividend compounded growth rate of 23% per year since 2005 and paid a dividend of $1.60 per share in 2024.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. About 55% of deposits and loans are in Europe with the balance in Latin America. In its most recent quarter, Santander’s revenue was up 8% while net profits increased 16%.

BYD (BYDDY), in both 2021 and 2022, more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., Europe, and Asian markets. BYD is the world’s largest EV battery maker and with CATL and others, is working on sodium-ion batteries. Much less energy dense than lithium batteries, sodium batteries should be much cheaper. BYD will also launch a next-generation Blade battery in 2025, with longer range and faster charging. That, along with various other models, could help rev up BEV sales growth next year. BYD expects solid-state batteries for high-end models by 2027, but not fully reaching lower-end models until 2030-2032.

Centrus Energy (LEU), based in Bethesda, Maryland, supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. Centrus Energy is building an enrichment facility in Ohio and would be very likely to benefit especially if federal funding moves forward to support this and other nuclear projects. I believe Centrus stock will benefit from increasing demand for its services, and that downside risk is low while upside potential is significant.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields, though cloud computing is its bread and butter. Its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data – from where it is located to where it is needed (edge computing) – is a massive business opportunity in which Cloudflare already excels.

Watch List: 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.

DBS Bank (DBSDY) is one of the largest banks in Southeast Asia with a presence in 19 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index. The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore. DBS has assets of roughly $750 billion and a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India. It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.

Dutch Bros (BROS) is an operator and franchisor of drive-through coffee stores, with 950 stores as of the end of the third quarter, including 38 that it opened in the quarter. It’s expanding at a steady pace, expecting up to 165 new stores in 2024, and it envisions up to 4,000 stores over the next 10 to 15 years.

Watch List: Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

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 29 consecutive years of dividend increases.

Luckin Coffee (LKNCY) is a leading purveyor of coffee and specialty drinks in China. The price of a cup of Starbucks coffee is more than double that of Luckin coffee. In addition, Luckin is adept at adapting to local tastes and launching new products that broaden the market. For instance, it brings to market about 60 new products each year, offering a new drink every week. Its new coconut latte sells nearly $140 million worth annually. All this shows in the numbers as Luckin’s latest quarter revealed strong sales and store count growth.

Watch List: Moog Inc. (MOG-A) supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350, Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer (ERJ) and Gulfstream, owned by General Dynamics (GD).

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. 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.

The next Cabot Explorer issue will be published on March 27, 2025.

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