Cabot Explorer Issue: March 28, 2024

Portfolio Changes: 10x Genomics (TXG) – From Hold to Sell

Apple Goes to Court; China Catches Intel, Apple, and Tesla

Apple (AAPL) has a dominant position in smartphones with about a 60% market share in America and a 20% share globally. Its moat-protected ecosystem is being challenged by a Department of Justice suit that alleges it is using anti-competitive practices.

It doesn’t end there, as the European Union is also targeting U.S. giants. Alphabet has a semi-monopoly in search. Microsoft in computer operating systems. Amazon has the same in e-commerce. Nvidia in AI chips. Meta in social networks. Between them the six monopolies are worth more than $13 trillion, or more than $100,000 per U.S. household.

Just imagine if we had these stocks in the Social Security Trust Fund over the last decade or more. We could be cutting FICA taxes.

Once dominant Intel (INTC) was also in the headlines this week. Washington awarded the U.S. chipmaker up to $8.5 billion in grants and $11 billion in loans to spur domestic semiconductor output under the 2022 CHIPS and Science Act.

The goal is to support Intel’s plan for new, expanded, chip foundries (fabs) across Arizona, Ohio, New Mexico, and Oregon. Intel was once the world’s largest chipmaker before it started missing opportunities while losing its technology edge.

In 2006, Intel was the first to make 45 nanometer (nm) chips, but it can do only 10nm today. Meanwhile, China has been in a big “catch-up” mode and last year surprised many with a 7nm chip, though not yet at scale. Taiwan Semiconductor (TSM) is the leader and can produce high-performance 3nm chips. It has a new fab plant in Japan that is up and running, has struggled to build a new chip fab in Arizona due to high costs and lack of local talent and suppliers.

Lastly, the China effect is working in reverse for companies such as Tesla (TSLA) and Apple. Both have deep financial and technological exposure to China. About 20% of Apple’s sales are in China and most of its products are sourced there as well. Tesla’s flagship Shanghai factory accounts for over half of its total production and the bulk of its profits.

In 2024, Apple shipments to China are down 33% as Huawei gains market share and Tesla slows production in China due to weaker demand and the rise of China’s EV makers such as BYD (BYDDY).

China’s vaunted consumer markets are sputtering. In 2022 and 2023, a slowdown in China’s domestic demand resulted in the country’s exports exceeding its imports by about $1.7 trillion.

New Recommendation: IperionX Limited (IPX)

Steel had been around for 3,000 years, but it was very labor and energy intensive and therefore too expensive to use for anything more than swords and shields. Then, in 1854, Henry Bessemer discovered that blowing air into molten iron rapidly converted it into steel. This led to a seven-fold increase in productivity, dramatically lowering the cost of steel.

But it was in America that a railroad building boom after the end of the Civil War caused soaring demand for steel. A score and more of Bessemer process factories were built and American steel production expanded 87-fold as the price fell and profits soared.

Over the last century, military power can be measured in terms of producing ships, automobiles, and airplanes, a broad array of technologies and the fuel to keep them moving. This means mineral production and processing.

First there was steel. Then there came aluminum. Then titanium joined the list of essential metals, and the lack of domestic production is now threatening the national security of the United States.

One of the most common uses for titanium is in the aerospace industry. Its combination of high strength and relatively light weight (45% lighter than steel but stronger) make it a desirable metal for use in planes and rockets because of fuel efficiency mandates.

The marine industry is another area that frequently relies on titanium because of its corrosion resistance, especially in saltwater environments where corrosion is a concern. Many medical devices also use titanium because of its strength and corrosion resistance.

The problem right now is that two of America’s rivals, China and Russia, account for 65% of titanium supply.

This leads us to today’s recommendation – IperionX (IPX) – which aims to become a leading American titanium metal and critical materials company. It is using patented metal technologies to produce high-performance titanium alloys, from titanium minerals or scrap titanium. And it is trying to do it at lower energy costs and lower carbon emissions.

Under a regulation known as the Specialty Metals Amendment, the Defense Department is required to source titanium and titanium alloys from American sources or other qualified countries – usually NATO members or other U.S. allies.

IperionX’s HAMR titanium furnace has passed thresholds to produce low-cost titanium, having successfully met tough factory acceptance technical tests over 18+ months of industrialized pilot scale production in Utah. The company also has backward integration to titanium minerals via control of the largest U.S. titanium resource in Tennessee.

Installation and commissioning of the HAMR titanium furnace is expected during the second quarter, before producing its first titanium metal in mid-2024.

A further sign of the strategic value and credibility for IperionX is that the company has received the first $2.4 million payment from a $12.7 million Department of Defense DPA Title III grant to fund the ramp-up of its Virginia Titanium Production Facility.

IperionX’s stock is in a nice uptrend and, given its strategic mission and the upcoming 2024 milestones that will raise the profile of the company, I recommend the stock for aggressive investors. 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) shares went sideways this week, performance has been weak, and revenue guidance for 2024 is mediocre, so I’m moving this stock to a sell. Move from Hold a Half to Sell

Exscientia (EXAI) shares drifted a bit lower this week as this biotech confirmed that based on its current operating plans, its existing cash, and anticipated milestones, the company should have enough to fund its operations and capital expenditure requirements well into 2026. We await a new CEO and positive news to maintain the recent momentum. Buy a Half

Cloudflare (NET) shares are unchanged over the last month despite its channel revenue increasing 174% over the last two years. McKinsey projects that cybersecurity could be a 10X growth opportunity over the next decade and that the market could grow to $2 trillion. Take this opportunity to buy more shares. Buy a Half

Franco-Nevada (FNV) shares were steady this week as this gold-focused royalty and streaming company offers us exposure to precious metals without the operational risks associated with traditional mining. In addition to gold, it offers exposure to platinum, silver, and oil and gas. Franco-Nevada focuses on royalties as its mining partners finance and complete exploration projects. This allows it to invest in new deals and operate debt free. Buy a Half

Novo Nordisk (NVO) shares inched up this week even as Viking Therapeutics (VKTX) emerged as a competitor. There are an estimated 800 million people with obesity worldwide and only 2% of these patients are being treated. Hold a Half

PayPal (PYPL) shares added a point this week and, while the company has new competitors, I still like the stock because its sales growth is stabilizing, margins are improving, and the stock looks historically cheap. Its 423 million users in 200 countries leads to PayPal wallets being accepted by 80% of retailers in North America and Europe. Buy a Half

Sea Limited (SE) shares backed off three points to 53 but the company is investing more in logistics in its home turf of Southeast Asia, where it has an edge. Its gaming group, Garena, has partnered with an India-based hosting and storage company so it may be close to gaining approval to bring Free Fire back to India. Buy a Half

Super Micro Computer’s (SMCI) share price was firm this week as hardware firms that provide the infrastructure for artificial intelligence computing are showing relative strength. The stock is up 18% since it was recently added to the S&P 500 Index. The company reports its next earnings on May 2 and I’m going to keep this aggressive AI momentum stock a hold even as JPMorgan initiated coverage of the stock with an overweight rating. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares finished this past week almost exactly where they started, but the company is on track with its plan to transition toward cloud, AI, and quantum computing. The company recently announced an 8% year-over-year increase in its consulting backlog and the stock remains a long-term buy. Buy a Half

Visa (V) shares dipped from 288 to 279 this week as the company and rival Mastercard (MA) reached a settlement that will lower merchant swipe fees for card transactions. This settles antitrust claims that businesses were paying unfairly high fees to when consumers swiped their cards. Visa has more than 4.3 billion cards in circulation and more than 130 merchants in its network. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)

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.

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. The company 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 5.80. 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 $729 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 yet profitable.

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 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 its weight-loss drugs, Ozempic and Wegovy, 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 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 April 11, 2024.

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