Cabot Explorer Issue: March 23, 2023

The Fed Threads the Needle as Banks Seem to Stabilize

I think the 0.25% raise by the Fed yesterday will be followed by a pause. Won’t it be nice when stocks fluctuate primarily around company performance rather than actions by the Fed? Elsewhere, Xi and Putin meet in Moscow in a sign of solidarity and challenge to the U.S. and the West. Novo Nordisk (NVO) is up 10 points this week while today we have a new emerging market recommendation from a country with one of the strongest currencies of 2023.

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: Centrus Energy (LEU) – Move from Buy a Half to Sell

Butterfly Network (BFLY) shares were steady this week and down a bit over the last month. While not profitable, the company has reached gross margins of 50% and expects revenue growth of about 20% this year so we will give this idea a bit more time to develop. Management is actively getting the Butterfly story out at institutional investor conferences. Hold a Half.

BYD (BYDDY) shares were largely unchanged this week after the company announced some reductions in production as EV automakers in China cut prices. In 2022, BYD vehicle sales raced far past Tesla’s but among all-battery electric vehicles, or BEVs, Tesla still leads. BYD accounted for four of the country’s top eight models sold last month. Buy a Half.

Centrus Energy (LEU) shares are right at where they started the year but after peaking in late February, they have pulled back, so we need to sell no matter how much we like the Centrus story. Move from Buy a Half to Sell.

Corteva (CTVA) shares added a point this week after last week’s announcement that it is collaborating with Chevron Corp. and Bunge Ltd. to produce renewable fuels from canola crops. Corteva was created out of the DowDuPont merger and subsequent breakup. Hold a Half.

Kraken Robotics (KRKNF) shares were unchanged this week and I hope that new management will be able to unlock the value of this small maritime and defense stock. It remains a buy for aggressive investors. Buy a Half.

Novo Nordisk (NVO) shares added 10 points this week to reach 146. Novo Nordisk’s revenue in 2022 jumped by 26% year over year and it plans to increase production of the weight loss drug Wegovy to meet high demand. One of its most promising products is a potential once-weekly insulin that has produced excellent results in clinical trials. Hold a Half.

Polestar (PSNY) shares were down 14% this week and are on the edge of being downgraded as an Explorer recommendation. Certainly, this is a challenging EV environment, as a price war is underway which will lead to a market shakeup. This Volvo-backed EV maker expects sales volume to increase by 60% this year to 80,000 units. For 2022, total revenue increased 84% year on year. Buy a Half.

Explorer ETF/Fund Positions

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 smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.

China’s Loss Could Be Mexico’s and America’s Gain

Manufacturing wages have been increasing in China alongside the intensity of the U.S.-China rivalry.

This leads to a question: Could the Mexican manufacturing wage advantage, highlighted by the below Statista graph, help both America’s and Mexico’s economies and stock markets?

This could also solve some of the immigration pressures by creating better jobs in Mexico while also expanding U.S. exports to Mexico. In addition, it would strengthen America’s supply chain resiliency.

It is also good news for American manufacturers and, in an odd twist, American workers. The reason is that about 40% of the content of goods assembled in Mexico and shipped out as exports are made in America.

For stuff assembled in China, only 4% of the content is made in America. Thus, when you think about it, U.S. imports of Mexican products are 10 times better for American workers compared with Chinese imports.

Mexico has also launched more free-trade agreements that involve more than 40 countries – more than any other country and enough to cover more than 90% of the country’s foreign trade. And Mexican goods can be exported duty-free to the United States, Canada, the European Union, most of Central and Latin America, as well as Japan.

If Mexico can improve safety and security as well as its railways, roadways, and ports, we could see a manufacturing boom that lifts both Americans and Mexicans.

Let’s now take a deeper look at the shifting triangle of trade and investment between Mexico, America, and China and the smartest way to play current trends.

New Explorer Recommendation: Kimberly-Clark de México (KCDMY)

According to consultant Alix Partners, Mexico has surpassed China as the lowest-cost country in the world for companies looking to manufacture products for North American markets. Mexico’s wages are now about 25% lower than in China and, coupled with lower taxes and tariffs, this all adds up.

In addition, the Alix Partners report showed that across many industries, China’s cost advantage in producing goods and delivering them to Long Beach, California versus an American manufacturer has evaporated.

And higher transportation costs give North America a decisive advantage. Moving goods by sea from America to Asia takes 3-5 weeks. America to Mexico transit time is 1-4 days.

In addition to the cost factor, flexibility, speed of response, and ease of oversight, it all points to North America over China. No wonder American bilateral trade with Mexico has been trending up sharply.

Ironically, these trends have led to even some Chinese companies moving production to Mexico to avoid trade restrictions and capitalize on the trade advantages that come from geographic proximity. We need higher U.S. and Mexican content requirements to stop this manipulation of the system.

U.S. companies are finally realizing that Mexico is a better option than China to manufacture some of the goods for U.S. and Latin American consumer markets.

Analysts are calling it “nearshoring,” “in shoring” or “reverse globalization.” The U.S. is already the biggest foreign direct investor in Mexico, accounting for about half of all foreign investment according to State Department sources.

How will all this shake out, and what will American congress members (and U.S. labor groups) think of U.S. multinationals shifting manufacturing from China to Mexico? American firms still export three times as much to Mexico as they do to China. And, Mexico, in turn, sends 79% of its exports back across U.S. borders.

After considering several Mexican ADRs, I have decided that the best way to gain exposure to Mexican economic growth is via Kimberly-Clark de México (KCDMY) which, together with its subsidiaries, manufactures and commercializes disposable products for daily use by consumers in Mexico.

The company also exports its products. Kimberly-Clark de México was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB), was founded as a paper company in Neenah, Wisconsin in 1872.

Now headquartered in Dallas, Texas, Kimberly Clark has operations in 34 countries, and its brands, including five billion-dollar brands, are sold in more than 175 countries.

Its portfolio of brands, including Huggies, Kleenex, Scott, Kotex, Cottonelle, Poise, Depend, Andrex, Pull-Ups, GoodNites, Intimus, Neve, Plenitud, Sweety, Softex, Viva and WypAll, holds #1 or #2 market share positions in about 80 countries.

The Mexican market offers most of Kimberly’s U.S. products, and more:

• Napkins: Kleenex, Petalo, Suavel, Delsey, Lys.
• Toilet paper: Kleenex, Petalo, Suavel, Delsey, Vogue, Lys.
• Diapers: KleenBebe, a brand similar to Huggies. The name is a combination of “kleen” (Kleenex) and “bebe” (Spanish for “baby”).
• Professional and medical markets.

Kimberly-Clark de México (KCDMY) stock is in a strong uptrend alongside strong financials, with the latest report showing a return of equity of 91% and earnings growth that surged 80%. This Mexican subsidiary naturally represents more risk than the parent company – but also more potential. 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 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.

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, a year ago 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.

Kraken Robotics (KRKNF) is probably the most speculative of Explorer stocks, but it is a well-run company and a prime takeover candidate in the growth defense sector, coupled with a strong management team. Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software-centric sensors, and underwater robotic systems.

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 that its cars will 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 for two reasons. 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.

Explorer ETF/Fund Positions

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 April 6, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld