Tesla Blunts New Competitors as the Explorer Heads to the Arctic Circle
Explorer stocks were steady or slightly down this week but don’t get discouraged. It is likely that Fed interest rate hikes have ended and, combined with a debt ceiling deal, could ignite a rally. Next week I will give an update on our three Explorer ETF positions.
The unemployment rate for Chinese people ages 16 to 24 rose to a record of 20.4% last month. The rate of youth unemployment in China has consistently been two or three times higher than the general population. Not a good sign.
Meanwhile, factories in China are struggling to find young workers, while many recent graduates are unwilling to take on blue-collar jobs.
My guess is that Tesla is hiring but this would be in the affluent booming city of Shanghai, which has a population greater than the combined population of New York, Miami, Chicago, Houston, Los Angeles, Toronto, and Montreal.
We often forget that Tesla only turned a profit in 2020 after running losses for more than a decade. The company spent years in what Musk called “production hell,” with a lot of hiccups in engineering and manufacturing.
Tesla only survived thanks to the Federal Reserve’s decade of near-zero interest rates, which made it cheap to borrow capital despite Tesla’s junk credit rating.
Fast forward, Tesla sold more electric cars in the United States last year than all its competitors combined but its market share fell a bit as traditional carmakers like GM, VW, and Ford accelerated into the EV marketplace.
But despite generous subsidies, traditional automakers still don’t expect to turn a profit on the cars for several years. Ford recently forecast its electric-vehicle group would lose $3 billion this year and probably won’t be profitable until 2026.
Finally, CarMax, the largest used car retailer in the U.S., is seeing a surge in electric vehicle interest from its customers. When those customers do buy EVs, they are buying Teslas.
New Recommendation:ConocoPhillips (COP)
In my book, Power Rivals: America and China’s Superpower Struggle, I discuss how China, through its partnership with Russia, is seeking influence and resources in the Arctic Circle.
This underscores why investors need to see that the competition between these two rivals is being played out on a complex global chessboard. This includes Asia, Europe, Latin America, the Middle East, Africa, and yes, even the Arctic Circle.
Russia is the keystone of the Arctic region and in the catbird’s seat as it has sharply expanded the number of icebreakers on active duty. The U.S. Navy doesn’t operate icebreakers and the U.S. Coast Guard currently has only two operational icebreakers in its fleet.
Russia is a steady and determined de facto ally of China due to its history, authoritarian government, and its role as a significant geopolitical and energy player as well as a leading cyber and nuclear threat.
Our rivalry with China and Russia extends to the Arctic Circle because melting ice has raised hopes of a commercially viable shipping passage open along the 3,500 miles Northern Sea Route from July through November.
Russia claims these northern waters and has been building up military and commercial operations in the region. Beyond reducing shipping transit times from New York to Shanghai by about seven days, there could be substantial resources in the Arctic from rare earths to oil and natural gas.
China, for its part, has announced plans to tie the Northern Sea Route to China’s Maritime Silk Route.
There are other players in the region including Denmark, Sweden, and Finland.
Finland recently joined the North Atlantic Treaty Organization (NATO) and Sweden will likely follow so Russia will then be the only Arctic power that’s not a member of the alliance.
Who controls the top of the planet, and its many resources, depends on where you draw the boundaries and international law.
There is also a military aspect to this rivalry as you can see by the below map of the region, with Russia being the most aggressive in trying to stake out its turf.
More than a decade ago, Norway proposed expanding its claim to the area by adding 6,000 square miles to its footprint in the high Arctic. Canada’s claim overlaps with Russia’s.
In addition, the Arctic seabed is thought to contain large stores of fossil fuels, metals and critical minerals that will become easier to access as global warming melts the sea ice above.
Twenty years from now, where everything will sit is anyone’s guess. We all hope any developments in the Arctic region will be peaceful and responsible from an environmental point of view.
The American company best positioned to profit from the rivalry is ConocoPhillips (COP), and recent political developments make it even more profitable.
But President Joe Biden, bowing to political pressure, did approve in March ConocoPhillips’ Willow project in northern Alaska and tied it to new restrictions on drilling in the Beaufort Sea off the coast. This project could deliver as much as 20% of Conoco’s total annual revenue so it’s a big deal.
ConocoPhillips 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 and its assets are spread over various locations across the globe, although almost half the company’s production is derived from U.S. sources.
Follow Warren Buffet into big oil and take a stake in the Arctic by purchasing a half position in Conoco which is trading at just eight times trailing earnings. The company also delivers 20% net profit margins, a return on assets of almost 17%, and a return on equity of 32%. BUY A HALF POSITION
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: None
Butterfly Network (BFLY) shares edged just below 2.0 after reporting revenue
of $15.5 MM and a net quarterly loss of $0.17 per share which is better than consensus estimates. Three of the analysts following the stock expect it to outperform while two are neutral. Hold a Half.
BYD (BYDDY) shares slipped by a point to 61 as the Chinese EV giant boosted its autonomous driving initiative by recently hiring between 4,000 and 5,000 software engineers. In 2022, BYD switched to producing only all-electric vehicles and sold more than 1.85 million electric cars in 2022, including hybrids, as it tripled sales. Buy a Half.
ChargePoint (CHPT) shares went from 8.7 to 8.3 this past week on no news as the company will announce its earnings on June 1. The electric vehicle market is growing fast, and ChargePoint, an operator of one of the largest EV charging networks, is right in the mix with a network of electric vehicle charging stations stretching across 14 countries. Buy a Half.
Corteva (CTVA) shares were steady this week after the company recently reported earnings of $1.16 compared to $0.97 a year ago. Institutional investors own about 80% of the stock with the largest investor being Vanguard. Hold a Half.
Kimberly-Clark de México (KCDMY) shares were steady this week. This is the Mexican subsidiary of Kimberly-Clark (KMB), which produces and sells in Mexico and overseas a wide range of consumer paper products. Buy a Half.
Novo Nordisk (NVO) shares, after zooming from 161 to 169 last week, ended this week at 167. The drugmaker, in the first quarter this year, saw sales of its obesity medications Wegovy and Ozempic rise more than three-fold and 59%, respectively. The company expects $40 billion of revenue across its four major franchises in 2024 consisting of diabetes, obesity, rare diseases, and cardiovascular disease but we must be alert as new competitors are emerging. Hold a Half.
Polestar (PSNY) shares had another steady week. Polestar holds an advantage over other EV makers by being able to leverage Volvo and Geely Global’s (Polestar is owned by both) existing manufacturing facilities to scale production more rapidly. It also is able to utilize Volvo and Geely’s manufacturing experience. Hold a Half.
Solid Power (SLDP) last week reported first-quarter 2023 revenue of $3.8 million, up $1.6 million compared to the first quarter of 2022, so its net loss was $19.2 million, or $0.11 per share. The stock is down only slightly since. Solid Power is a developer of solid-state batteries and sulfide-based electrolyte technology. This is a new Explorer recommendation, an aggressive idea that comes with both risk and high upside potential. Buy a Half.
Explorer ETF/Fund Positions
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.
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.
Price on 5/17/23
Butterfly Network (BFLY)
Hold a Half
Buy a Half
Buy a Half
Buy a Half
Hold a Half
JP Morgan Equity Premium Income ETF (JEPI)
Buy a Full
Kimberly-Clark de México (KCDMY)
Buy a Half
Novo Nordisk (NVO)
Hold a Half
Hold a Half
Solid Power (SLDP)
Buy a Half
WisdomTree China ex-State-Owned Enterprises Fund (CXSE)
Buy a Half
WisdomTree Emerging Markets High Dividend Fund (DEM)
Buy a Half
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.
ChargePoint (CHPT) is an industry leader in electric vehicle charging. ChargePoint operates in both North America and Europe, with more than 225,000 charging points on its networks. ChargePoint has more than 5000 fleet and commercial customers worldwide. The company has a 70% market share in the level 2 charging market in North America, giving it a powerful advantage over even its closest competitor.
ChargePoint has posted seven quarters in a row of increasing revenue with full-year revenue for fiscal ’23 showing a year-over-year gain of 94%. We need to accept the company’s heavy investments in growth; profits will appear as the company monetizes and leverages its charging network.
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.
Kimberly-Clark de México (KCDMY) was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB), was founded in as a paper company in Neenah, Wisconsin in 1872. 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 to a competitive edge.
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 for its cars to 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.
Solid Power (SLDP) is a Colorado-based developer of all-solid-state battery and sulfide-based electrolyte technology. Solid Power replaces the flammable liquid electrolyte in a conventional lithium-ion battery with a proprietary sulfide-based solid electrolyte.
Solid Power’s all-solid-state battery cells are expected to be safer and more across a broad temperature range, offer an increase in energy density compared to the best available rechargeable battery cells, and enable less expensive, more energy-dense battery pack designs. In addition, the technology is compatible with traditional lithium-ion manufacturing processes.
The company has partnerships with BMW and Ford and received a $5.6 MM U.S. Department of Energy (DOE) award to continue its development of nickel- and cobalt-free solid-state battery cells.
Explorer ETF/Fund Positions
JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value focused strategy.
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 June 1, 2023.
JUST PUBLISHED — New book from Chief Analyst Carl Delfeld