Cabot Explorer Issue: March 14, 2024

Portfolio Changes:
ConocoPhillips (COP) –Move from Hold a Half to Watch List
10x Genomics (TXG) – Move from Buy a Half to Hold a Half

Exscientia (EXAI) Shows Some Life; BYD (BYDDY) Reconsidered

China is at the center of the world’s electric vehicle (EV) ecosystem and supply chain, from the rare earths and critical minerals that make up an EV battery and motor, to the production of EV batteries, and increasingly to the issue of lower production costs and most advanced design. China processes about 85% of the battery critical minerals, 77% of the world’s battery manufacturing capacity and makes more than 50% of the electric vehicles sold worldwide.

Compared to 16% for the United States, about 35% of China’s domestic auto sales in 2023 were made up of hybrid and full electric vehicles. China produces EVs so efficiently and operates at such scale, they are trying to sell more EVs across the world. In 2023, EV exports increased 64%.

This is not an accident but rather the result of a two-decade plan by the Chinese government to dominate this market.

The world’s biggest electric vehicle maker is not Tesla (TSLA), as many Americans believe, it is China’s BYD (BYDDY), which is on our watch list.

As Tesla’s sales slow and its stock is down over 30% this year, BYD’s Atto 3 is among the most popular SUVs in the world, from Sweden to Thailand.

China’s strategy goes well beyond exports. Seeing countries such as America trying to block Chinese EV imports, it is essentially leveraging its advantage by exporting its entire EV industrial supply chain. According to the Rhodium Group, China’s direct investment in overseas EV manufacturing projects last year exceeded $28 billion. BYD’s first EV plant in Europe will be in Hungary, and Italy may be the second.

Despite all its strengths, investing in BYD (BYDDY) stock is not a no-brainer, for several reasons.

First, strategic Chinese companies such as BYD follow the Japanese strategy of prioritizing market share and scale over profits.

Second, tension and geopolitical risk between the U.S. and China will likely continue to rise and governments around the world may create policies to protect their auto and EV markets.

Third, the Chinese stock market is weak. This could continue as an economic slowdown, property market slump, and high private and government debt cause investors to think twice before investing in Chinese stocks.

Fourth, there are indications that BYD’s global ambitions are beyond both current demand and its international experience and capabilities. Some believe that EV inventories are building in Europe due to logistical and pricing problems.

We will keep BYD on the Explorer watch list.

New Recommendation: Franco-Nevada (FNV)

Bitcoin is sometimes referred to as “digital gold,” but investors should also have some of the real stuff. As J.P. Morgan put it, “Gold is money. Everything else is credit.”

Gold’s price per ounce is still some way off its inflation-adjusted all-time high reached in 1980 but gold was up 15% in 2023 and is up again in 2024. The drivers of gold prices are debatable but here are a few that could be behind the trend.

A challenging geopolitical environment from Ukraine to China is prompting many, including central banks around the world, to add gold to hedge risk.

Chinese investors are buying gold as its property and stock markets slump. Interest rates are expected to soon head down which generally leads to higher gold prices. Trading activity is also quite active and, on the COMEX exchange platform, outstanding gold contracts have spiked 30% since late February.

There are many choices to play this potential gold breakout, but I have selected Franco-Nevada (FNV), a Canada-based streaming and royalty company.

More than half of its revenue comes 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. 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 20% trailing stop loss in place

10x Genomics (TXG) again pulled back three points this week for no apparent reason, prompting me to move this to a hold. Its products are used by almost all the top global research institutions and pharmaceutical companies in the world and are protected by 1,750 patents. Move from Buy a Half to Hold a Half

Exscientia (EXAI) shares were up 12% yesterday and 26% for the week. This biotech company and potential takeover candidate continues to expand partnerships with mega drug companies to develop new products. Buy a Half

Cloudflare (NET) shares were unchanged this week after the company acquired a cloud networking startup enabling clients to easily mix and match the best features from each cloud provider. Cloudflare operates the fastest cloud network on the market, and it handles about 20% of all web traffic while offering exposure to cloud computing, AI, cybersecurity, and edge computing. Buy a Half

Novo Nordisk (NVO) shares were up three points yet again this week after recent results of an Ozempic trial showed that its weight loss drug delayed the progression of chronic kidney disease in patients. Hold a Half

PayPal (PYPL) shares bumped up from 58 to 62 and are trading not far off 2017 levels despite its 423 million users and data from Statista showing PayPal accounts for nearly half of the worldwide web’s payment processing activity. Buy a Half

Sea Limited (SE) shares were up only a point his week after last week’s 22% jump in its first week as an Explorer recommendation. The company posted a profit in 2023 and the key is getting its Garena gaming segment back to growth. Its leading Free Fire game appears to be an “evergreen” brand that could bring in recurring revenue for years to come, but another winning game would be a boost to the stock. Buy a Half

Super Micro Computer (SMCI) share price was up again this week and has increased 300% just this year. The company is best known for its specialty servers used to facilitate AI processing, so it is at the bullseye of this super trend. I’m going to keep this impressive AI momentum stock a hold. Hold a Half

Explorer Dominator Blue-Chip Recommendations - More Buy and Hold

ConocoPhillips (COP) shares showed some life this week, going from 112 to 118. This is a company that offers a balanced and growth-oriented approach to energy production with both natural gas initiatives and is dedicated to oil exploration and production. Feel free to keep this stock as a great core energy holding but given the little change and news week to week, I’m moving this to the watch list to make room for new ideas. Move from Hold a Half to Watch List

International Business Machines (IBM) shares finished the week at 197 after reports that the company aims to trim its headcount in certain divisions. Buy a Half

Visa (V) shares inched up from 280 to 285 this week. Over the past decade, shares have increased 396% and over the last five years, the company has boosted the size of its dividends by an impressive 15.7%, on average, per year. Buy a Half

Watch List – BYD (BYDDY)

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%. 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 the largest Chinese-listed stocks. 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

WisdomTree’s Japan Hedged Equity ETF (DXJ) offers exposure to a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Half

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

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.

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.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields: cloud computing, AI, cybersecurity, and edge computing. 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.

Exscientia (EXAI) was founded in 2012 and based in Oxford, England, Exscientia 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 6.78. 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 $847 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.

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.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, as well as 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. Some of you may recall this stock which was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

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 $14.8 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 March 28, 2024.

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