Weaker U.S. Dollar Points to International Markets
Explorer stocks were steady this week despite some turmoil in banking circles.
The Federal Reserve yesterday raised the target for its benchmark interest rate by 0.25% to a new range of 5%-5.25%, the highest since September 2007. This will impact the value and stability of the U.S. dollar and stock markets in several ways.
During the only stable dollar eras of the last century, annual GDP growth averaged 4.9% from 1922-29, 4% from 1948-71, and 3.7% from 1983-2000.
In comparison, over the last two decades, a more volatile dollar saw average growth of only 1.9%. Had the dollar remained stable since 2000, with a steady 3.7% growth, the economy would be nearly 50% greater than it is today, and we probably would have avoided all these financial crises along the way.
The U.S. dollar has fallen about 8.3% from a peak in September, as tracked by the WSJ Dollar Index. Many are betting the U.S. currency has further to fall as the Federal Reserve probably nears the end of interest rate hikes and concern grows about a recession.
Lately, international stocks have shown some relative strength. The Vanguard Total International Stock ETF (VXUS) earned a 14.4% return in Q4 of 2022 and 8.8% through April 21, 2023. By comparison, the Vanguard Total US Stock ETF (VTI) has earned 7.05% and 7.65%, respectively.
Looking forward, both Vanguard and JPMorgan project that international stocks will outperform the U.S. market.
“The U.S. is coming out of a period of extraordinary outperformance. Other countries are starting to catch up,” said Nick Wall, head of global foreign-exchange strategy at JPMorgan Asset Management.
A weaker dollar increases U.S. exports, lowers the cost of U.S. dollar debt for foreign companies and governments , and supercharges the value of overseas earnings by U.S. multinationals.
Among high profile investors betting against the dollar is Stanley Druckenmiller, who said last week that shorting the dollar is his only high-conviction trade.
“The one area I feel reasonably comfortable in is, I’m short the U.S. dollar,” Mr. Druckenmiller said at an investment conference hosted by Norway’s sovereign-wealth fund.
That brings me to my new recommendation …
New Recommendation: JPMorgan Equity Premium Income ETF (JEPI)
This is a good week to further explore the world of ETFs seeking areas of strength and clear uptrends.
One is that investors are favoring actively managed exchange-traded funds (ETFs) over passive index investing through ETFs.
While actively managed funds still make up a small amount of the roughly $7 trillion ETF market (less than 6% of total assets), they have garnered about 30% of the total flows to ETFs so far this year, according to Bloomberg Intelligence.
This is double the percentage for active ETFs in 2022, when they gathered about 14% of total flows.
The JPMorgan Equity Premium Income ETF (JEPI), which invests in defensive stocks and uses options strategies to generate income, has been the most popular active ETF by a wide margin in 2023, bringing in $7.1 billion of new cash, according to FactSet.
This ETF also delivered a 12-month rolling dividend yield of 11.7% over the past year. It was launched in 2020 and has risen in popularity, roughly quadrupling its assets under management from $5.8 billion at the start of 2022 to $24.6 billion today.
This ETF’s double-digit yield comes from both option premiums and dividends.
The fund invests in equity-linked notes (ELNs), a type of debt that provides returns linked to underlying instruments within the ELNs.
In JEPI’s case, these ELNs mimic the returns of an S&P 500 covered call strategy. The ELNs that JEPI owns convert the options premiums received into coupons that are distributed monthly. JEPI invests up to 20% of its net assets in these ELNs, though their weighting in the fund is usually around 15%.
The great majority of the ETF is invested in stocks using what may be called a low-volatility value strategy.
Undervalued stocks are selected from the S&P 500 universe and then put together in a way that creates a portfolio that has lower volatility than the index.
The result of this one-two approach is a low-volatility, large-cap portfolio, but one that is much more actively managed.
In addition, it offers great diversification with every stock in the fund capped at 2%, while sectors are capped at 17.5%.
Even better, it accomplishes this feat with only a 0.35% expense ratio, below the average 0.7% ratio an active fund charges in the U.S., according to ETF.com data.
Adding this ETF to your portfolio is a good way to generate welcome income and provide diversification to reduce volatility. BUY A FULL 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 were steady just above 2 as the company expects to report earnings on May 11 and announced the appointment of Joseph DeVivo as its new CEO. DeVivo is the former CEO and Director at InTouch Health. Hold a Half.
BYD (BYDDY) shares were off a point at 59 even after the Chinese EV maker posted a five-fold jump in its first-quarter profit as the company consolidated its leadership in the domestic market. BYD sold 552,076 electric vehicles in the first quarter, a surge of 92.8% year-on-year as it launched an $11,300 electric car called the Seagull. Buy a Half.
ChargePoint (CHPT) shares were largely unchanged with a current price about a quarter of where the stock peaked about two years ago. It has a network of electric vehicle charging stations stretching across 14 countries and has strong revenue growth. I rate this an aggressive stock. Buy a Half.
Corteva (CTVA) shares closed at 60 on the button yesterday as we await results from the company’s latest quarterly report, out today (May 4). The global agri-tech market is estimated to be worth about $20 billion, according to research consulting firm Spherical Insights. This market is expected to grow to $46.4 billion by 2030, a compound annual growth rate of 17.3%. Hold a Half.
Kimberly-Clark de México (KCDMY) shares were up slightly this week on no news. The company is the Mexican subsidiary of Kimberly-Clark (KMB), and produces and sells in Mexico and overseas a wide range of consumer paper products. Buy a Half.
Novo Nordisk (NVO) shares were up to 167 this week ahead of earnings today (May 4). The company recently announced a share repurchase program and its obesity care segment grew by 84% in 2022. Its popular diabetes drug Ozempic is also being used for losing weight because of its effectiveness. Ozempic sales soared 77% last year. Hold a Half.
Polestar (PSNY) shares gained some ground to go from 3.4 to 3.7 this week as I moved this idea to a hold last week. We will watch this closely and see if the stock will start to reflect the company’s ambitious sales targets. Hold a Half.
Solid Power (SLDP) shares dipped from 2.2 to 2.0 in their second week as an Explorer recommendation and set May 8 for its next earnings report. Solid Power is a developer of solid-state batteries and sulfide-based electrolyte technology. This is an aggressive idea that comes with both risk and high upside potential. 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.
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 5,000 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.
The company has posted seven quarters in a row of increasing revenue with full-year revenue for fiscal ’23 posting 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 the 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 because 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 across a broader 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
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 May 18, 2023.
JUST PUBLISHED — New book from Chief Analyst Carl Delfeld