Cabot Explorer Issue: March 9, 2023

Powell Again Warns of Interest Rate Hikes

Market struggles resumed as Fed Chairman Jerome Powell continues to warn of interest rate hikes as inflation concerns linger. MP Materials (MP) was downgraded to sell last week as Elon Musk’s Investor Day comments raised questions about future demand for MP’s rare earths. Most Explorer stocks were steady as Polestar (PSNY) posted strong revenue growth and an ambitious sales target for 2023. This week’s recommendation is a smart way to play China’s emerging market rebound.

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:
MP Materials (MP) Moved from Buy to Sell (3.3.23 Alert)
Butterfly (BFLY) Moves from Buy to Hold

Butterfly Network (BFLY) shares dipped from 2.3 to 2.1 this week as the company presented at the 43rd Annual Cowen Health Care Conference in Boston. Last week, Butterfly came out with a quarterly loss about 20% less than consensus estimates, and 2022 revenue was $73.4 million, which was 17.3% better than 2021. This stock lacks traction and momentum so I am downgrading it to Hold a Half.

BYD (BYDDY) shares ended their second week as an Explorer recommendation off a point, to 55. While China’s passenger car retail sales fell almost 20% in the first two months of this year, plug-in hybrid and battery electric car sales were up 23% from the same period a year ago. BYD accounted for four of the country’s top eight models sold last month. Buy a Half.

Centrus Energy (LEU) shares were relatively steady this week as the nuclear energy company’s last reported quarterly revenue was up 42%. Centrus reported net income of $52 million for 2022 and the stock is up about 30% since the beginning of the year. Buy a Half.

Corteva (CTVA) shares were flat this week. Corteva is a conservative agriscience stock that plans to improve its earnings and free cash flow while cutting some $400 million in costs by 2025. Corteva was created out of the DowDuPont merger and subsequent breakup. Hold a Half.

Kraken Robotics (KRKNF) was off marginally this week as the company announced a $1.3 million purchase order from an unnamed customer for sonar systems that will be part of NATO’s Autonomous Underwater Vehicles for use in mine hunting, with delivery expected in 2023. This small maritime and defense stock remains a buy for aggressive investors. Buy a Half.

MP Materials (MP) shares were up more than 10% the previous week but were hit hard this week after Elon Musk commented that Tesla was working to make electric vehicle motors without the rare earths that MP Materials produces. Though it is very unlikely Tesla can accomplish such a feat in the foreseeable future, I moved this stock to a sell through an alert (3.3.23) to be on the safe side in this market. Move from Hold a Half to Sell

Novo Nordisk (NVO) shares were again unchanged this week. This pharmaceutical giant develops and markets therapies for diabetes and obesity. Novo plans to increase production of the weight loss drug Wegovy to meet high demand which should translate into higher revenue growth and profits. Hold a Half.

Novonix (NVX) shares were a bit volatile, but the stock ended the week just where it started. It is still underperforming relative to my expectations and I’m paying close attention to when the company will get the Chattanooga factory in operation. Buy a Half.

Polestar (PSNY) shares have been struggling a bit over the last month amidst price cuts by Tesla. But there is some good news: This Volvo-backed EV maker exceeded its 50,000 sales target in 2022, and now projects its 2023 production will hit 80,000 units. For 2022, total revenue increased of 84% year on year. Cash on hand at the end of the year came to $974 million. 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.

New Explorer Recommendation: WisdomTree China ex-State-Owned Enterprises Fund (CXSE)

The Best Way to Play China

In 2004, I published a book, Think Global, Grow Rich, focused on building a global ETF portfolio using a core and explore approach.

As I mentioned a few weeks ago, I will be weaving in some interesting ETFs as Explorer recommendations to complement stock ideas.

In my recent book, Power Rivals: America and China’s Superpower Struggle, I try to give a fair and balanced overview of this fascinating and turbulent rivalry that will play out all over the world in this decisive decade.

China has come a long way over the past three decades to become a manufacturing and trading superpower, pulling some 600 million people out of poverty. The goal was to make a stronger and more prosperous China.

American companies have taken advantage of lower labor costs and new markets while moving production and jobs into China and Asia. The goal was to maximize profits and stock prices.

Now we face a new era of less cooperation and a more intense rivalry with both countries having strengths and vulnerabilities.

America is in uncharted territory as it competes with a determined rival with a population more than North and South America combined. The American brand of dynamic stability is under pressure while China struggles with slower economic growth. The ever-changing global chessboard will impact your portfolio and though China is 8,000 miles from where I sit in Washington, D.C., I can assure you it is the center of attention among policymakers and politicos alike.

How the U.S.-China rivalry will evolve is difficult to tell but China is certainly not going anywhere, and its economy seems to be coming alive again. Stock picking will of course yield both higher upside and downside but this week I offer you a simple and powerful way to put the odds in your favor.

China is still dominated by state-owned enterprises (SOEs). Its 12 largest companies are SOEs. China has 135 companies on the Fortune Global 500 list of the top firms ranked by global revenue. About 70% of these are SOEs.

But revenue is not profitability, growth, or productivity and to better capture this I suggest an exchange-traded fund (ETF), the WisdomTree China ex-State-Owned Enterprises Fund (CXSE). This ETF provides investors with a way to capitalize on the opportunities of China with less exposure to state-owned enterprises (hence the name “ex-State-Owned Enterprises”).

As you can see from the below graph, state-owned companies tend to underperform, a trend that has been confirmed over time.

Adding this ETF as an Explorer recommendation makes a lot of sense as we couple these ETFs with stock recommendations to capture the best of both worlds. 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.

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.

Centrus Energy (LEU) is a nuclear fuel supplier for utilities in U.S. and abroad has net income margins are above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million. Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy.

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 a 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.

Novonix (NVX) is an Australian technology and advanced materials supplier to the electric vehicle and storage battery industry. Founded by members of a research team at Canada’s Dalhousie University, the company is a supplier of high-performance materials, equipment, and services for the global lithium-ion battery industry with a focus on North America.

Novonix is an unusual blend of both exploring and mining graphite and developing synthetic graphite, a key lithium-ion battery material. The focus is on electric vehicles, which are projected to go from global sales of 3.1 million in 2020 to 15 million in 2025 and then on to about 40 million in 2030.

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.

The next Cabot Explorer issue will be published on March 23, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld