Cabot Explorer Issue: May 8, 2025

Portfolio Changes: None

Warren Buffett’s Japan Play

“Capital will always go where it’s welcome and stay where it’s well treated. Capital is not just money. It’s also talent and ideas. They, too, will go where they’re welcome and stay where they are well treated.”

– Walter Wriston, American banker and stateman

The Federal Reserve held rates steady yesterday as it leans into keeping inflation at bay. Explorer stocks had a good week with almost all stocks recording modest gains.

After 60 years, Warren Buffett announced at Berkshire’s annual meeting last weekend that he will step down as CEO of Berkshire Hathaway at the end of 2025. Since 1965, Warren Buffett has led Berkshire through 11 presidencies as its stock has gone from $18 to $809,000.

He capped his annual salary at $100,000 and never took a stock option

Berkshire Hathaway has never split its Class A shares.

Warren Buffett always sought a long-term perspective and prized steady, high profit margins and excellent management of the companies he invested in. He believed in America and over time developed an international perspective.

Buffett believed a country’s success is built upon attracting talent. The countries that capture capital and brains will win the future. This means attracting risk capital and avoiding capital flight – the ultimate vote of no confidence in the future of a country’s economy and government.

Japan is back as a place to invest some capital for a number of reasons.

Having just returned from a three-week tour of Japan, it was clear to me that tourism to the country is booming.

Despite some complaints, the Japanese remain as courteous and helpful as always and on the plus side, the tourism sector has brought a welcome boost to the economy. Some analysts estimate that tourism accounts for about 7.5% of Japan’s GDP and about 6 million jobs. This is meaningful.

My impression of Japan was very positive. The people seem more confident, at peace, and one can’t help being impressed by their quiet competence. From fast food to fast trains, the level of service is quite extraordinary.

Of course, I saw much of this more than four decades ago when I studied for a year in Tokyo and then as a stockbroker covering Japanese banks, but it seems they have somehow taken it to a higher level. It is not just Tokyo. Osaka, Kyoto, Nara, Kobe are all great places to visit or, for that matter, live.

The lost decade is behind them and the Japanese seem ready to move on.

Japanese retail investors have cash positions above 50% versus about 15% for Americans.

Japanese corporates have long been criticized for hoarding cash on their balance sheets and low capital expenditures due to cross-shareholdings with sister companies. But over the past 12 months, share buybacks are on track to increase 96% year-over-year, and the reduction in cross-shareholdings has increased by 75% in the last fiscal year.

All this leads us to consider today a second Japanese stock as an Explorer recommendation.

New Recommendation

Mitsui & Co. (MITSF)

Warren Buffett’s Berkshire Hathaway started buying five of the largest Japanese “Sogo Shoshas” in August 2020, accumulating about a 5% stake in each of them, and then investing a little more in each stock in November 2022.

Here are the five companies with their stock tickers:

Itochu (ITOCF)

Sumitomo (SSUMF)

Marubeni (MARUF)

Mitsubishi (MSBHF)

Mitsui (MITSY).

The trading business (import/export) used to be the core business of these giants. Through the 1980s, over 50% of Japan’s exports and 75% of the country’s imports went through one of the major Shoshas.

Since then, they have evolved to became more like investment holding companies while overseeing operating companies.

In short, they do some trading, some investing both in Japan and globally, and some managing the different businesses they have invested in when they have acquired a controlling stake.

These conglomerates are now a blend of miners, salesmen, consultants, brokers, shippers, dealmakers, and bankers.

One thing has not changed: They still attract the cream of the crop of graduates of Japanese universities.

Today, I recommend what I believe is the best one.

The name Mitsui means “three wells,” and three wells are still represented in the Mitsui trademark.

The Mitsui story began in 1673 when Takatoshi Mitsui (1622–94), the son of a sake brewer and soy sauce maker, opened textile shops in Kyoto and Edo (now Tokyo). Hachirobei Mitsui then diversified and over time, the Mitsui group made everything from silk kimonos to skyscrapers, while investing and spinning off brands like Toshiba, Toyota, and Sapporo Beer.

Mitsui now stands out among the big five by leaning into mining and materials.

Mitsui has entered joint ventures around the world, taking project stakes in iron ore, metallurgical coal, copper, nickel, and LNG with 50%-60% of profit coming metals and energy. Mitsui & Co. has recently signed agreements to acquire a 40% interest in the Rio Tinto-operated Rhodes Ridge iron ore project in Western Australia for $5.3 billion.

Mitsui also plans to re-enter global precious metals trading to hedge client risk after a nine-year absence, according to Reuters.

But Mitsui’s chairman emphasizes that Mitsui is not a resource company. Rather, he describes the company as a place where smart people identify new trends and pursue big profits through small experiments. For example, Mitsui owns a 33% stake in IHH Healthcare, the largest hospital group in Asia, and a 17% stake in Penske Automotive in North America.

Other sectors of activity include energy, infrastructure, agriculture and food, and consumer retail.

Mitsui boasts assets of $112 billion, $6 billion of profits and $7 billion of operating cash flow. It has 475 affiliated companies and operations in 62 countries.

Despite all these strengths, Mitsui stock is down 20% over the last year and trades at just a bit above book value and 10 times forward earnings. 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 a 20% trailing stop-loss in place.

Airbus (EADSF) shares were up 6% this week and 10% over the last two weeks even though the company announced yesterday that deliveries were down 8% in April year over year. Cost of tariffs for Airbus aircraft sold to U.S. airlines is a challenge. Airbus has been developing a line of fuel-efficient, mid-sized aircraft that are cheaper for airlines to fly. Buy a Half

Agnico Eagle Mines (AEM) shares were steady this week and are up 50% so far in 2025 as the price of gold has skyrocketed. Buy a Half

Banco Santander (SAN) shares were up 2.4% after the bank announced this week it was closing 18 branches in U.S. as it builds up its digital footprint. Last week it reported that first-quarter profits increased 19%. The bank is also projected to return 10 billion euros to shareholders over the next two years via buybacks. The bank is still trading below book value. Buy a Half

BYD (BYDDY) shares were up 3.3% this week as BYD outsold Tesla in Germany and the U.K. in April, according to Electrek. BYD also has a footprint in Morocco and Mexico, two countries with free trade agreements with the U.S. and the EU. Buy a Half

Dutch Bros (BROS) shares were off slightly despite reporting first-quarter net income of $15.4 million. In the quarter, it posted 29% revenue growth and sam- shop sales growth of 4.7%. Company-operated same-shop sales grew 6.9%. Hold a Half

Luckin Coffee (LKNCY) shares were up this week after announcing of a solid quarter last week. First-quarter same-store sales improved by 8.1%, operating margins expanded 8%, and the company opened 1,750 new stores. Buy a Half

Sea Limited (SE) shares followed last week’s 11.3% gain with a 6.6% increase as the company announced it will report earnings on May 13. The stock is up 115% over the past 12 months. The Singapore-based Sea operates the largest e-commerce platform in Southeast Asia. Digital payments provider SeaMoney, and Garena, a global online games developer, are the next two largest groups. Hold a Half

Subaru (FUJHY) shares gave back last week’s gains this week. This stock is not gaining traction despite the company making most of its vehicles it sells in America, thus avoiding tariffs. The stock is trading at about five times trailing earnings and about 70% of book value. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

DBS Bank (DBSDY) shares were up this week for the third straight week of gains. As Southeast Asia’s biggest bank by assets, it is a good proxy for this region’s dynamic growth. Buy a Half

International Business Machines (IBM) shares were up 4.8% this week as its CEO urged more federal funding for basic AI research and highlighted that the company has used artificial intelligence to replace the work of a couple hundred human resources workers but has redeployed resources to hire more programmers and salespeople. IBM also plans to spend $150 billion over the next five years in the United States to accelerate its quantum computing initiative. Buy a Half

Visa (V) shares were up a bit this week after the company recently beat second-quarter earnings estimates and announced a $30 billion share buyback program. Visa’s products are accepted by over 150 million merchants. Buy a Half

Watch List – Stocks we like but do not follow day-to-day

ConocoPhillips (COP), Franco-Nevada (FNV), MOOG (MOG-A)

Explorer ETF/Fund Positions

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 top Chinese-listed stocks. Buy a Half

Oberweis Micro-Cap Fund (OBMCX) fund stands out for several reasons. The fund’s sound investment process and strong management team earns it a rare Morningstar Medalist Rating of Gold. Over the past five years it has posted an impressive average annual return of 24%. Buy a Half

Sprott Platinum and Palladium ETF (SPPP) offers direct exposure to both platinum and palladium which are selling at a sizable discount to gold offering potential upside appreciation. Buy a Half

Stoxx Europe Total Market Aerospace & Defense (EUAD) tracks an index of top defense contractors including Leonardo, Rheinmetall, and BAE Systems. Buy a Half

VanEck Junior Gold Miners ETF (GDXJ) is a basket of junior miners that has 84 positions with the top 10 accounting for 44% of total assets. Half of the stocks are Canadian, 21% Australia, and 7% are from South Africa. 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

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Airbus (EADSF) has gained market share by beating Boeing to develop a line of fuel-efficient, mid-sized aircraft that are cheaper for airlines to fly. Boeing is one of only two manufacturers, along with rival Airbus (EADSF), that make the full-size commercial jets needed by the world’s airline industry. China’s COMAC is making gains but is probably a decade away from being a competitive rival. Boeing’s troubles and the U.S.-China trade battle are Airbus’s opportunity.

Agnico Eagle Mines (AEM) follows a conservative strategy and with a history spanning more than 60 years, and now operates a sizable portfolio of 11 assets located in four countries. Management forecasted gold production of approximately 3.45 million ounces in 2024. The company estimates it has about 54 million gold ounces of proven and probable reserves. Furthermore, Agnico Eagle has paid a dividend for 41 consecutive years with a dividend compounded growth rate of 23% per year since 2005 and paid a dividend of $1.60 per share in 2024.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. About 55% of deposits and loans are in Europe with the balance in Latin America. In its most recent quarter, Santander’s revenue was up 8% while net profits increased 16%.

BYD (BYDDY), in both 2021 and 2022, more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., Europe, and Asian markets. BYD is the world’s largest EV battery maker and with CATL and others, is working on sodium-ion batteries. Much less energy dense than lithium batteries, sodium batteries should be much cheaper. BYD will also launch a next-generation Blade battery in 2025, with longer range and faster charging. That, along with various other models, could help rev up BEV sales growth next year. BYD expects solid-state batteries for high-end models by 2027, but not fully reaching lower-end models until 2030-2032.

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.

DBS Bank (DBSDY) is one of the largest banks in Southeast Asia with a presence in 19 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index. The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore. DBS has assets of roughly $750 billion and a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India. It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.

Dutch Bros (BROS) is an operator and franchisor of drive-through coffee stores, with 1,012 stores as of the end of the first quarter of 2025, including 30 that it opened in the quarter. It’s expanding at a steady pace, expecting more than 150 new stores in 2025, and it envisions up to 7,000 stores over the next 10 to 15 years.

Watch List: 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 29 consecutive years of dividend increases.

Luckin Coffee (LKNCY) is a leading purveyor of coffee and specialty drinks in China. The price of a cup of Starbucks coffee is more than double that of Luckin coffee. In addition, Luckin is adept at adapting to local tastes and launching new products that broaden the market. For instance, it brings to market about 60 new products each year, offering a new drink every week. Its new coconut latte sells nearly $140 million worth annually. All this shows in the numbers as Luckin’s latest quarter revealed strong sales and store count growth.

Watch List: Moog, Inc. (MOG-A) supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350, Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer (ERJ) and Gulfstream, owned by General Dynamics (GD).

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 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.

Subaru (FUJHY), based in Tokyo, Subaru holds a 10% market share in Japan, making it the third-largest automaker in the country. In America, the Subaru brand has a cult-like following and Subaru’s stock sells for only five times trailing earnings and about 70% of book value. It also sports a 3.8% dividend yield, has a market value of $13.1 billion and has a strong balance sheet with a net cash position of $7 billion.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. 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.

The next Cabot Explorer issue will be published on May 22, 2025.

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