Cabot Explorer Issue: May 9, 2024

Portfolio Changes:
New Buy Recommendation: Neo Performance (NOPMF)
IperionX (IPX): Move from Buy a Half to Sell
PayPal (PYPL): Move from Buy a Half to Hold a Half

Corporate Profits Up; Super Micro Rebounds

As many analysts focus on inflation and the job market, they miss that earnings per share for companies in the S&P 500 for the first quarter now look to be up 5.2% from a year earlier, according to FactSet.

Since profits and profit growth are the lifeblood of an economy and stock market, it pays to watch them closely.

One potential trend that can both boost and hurt profits is the continued strength of the U.S. dollar and the persistent weakness in the Chinese yuan. China’s exchange rate, adjusted for differences in inflation between China and its major trading partners, is back to where it was a decade ago.

This accounts for China’s ramp-up of exports as its trading partners fear the flooding of their markets with Chinese imports. China’s manufacturing juggernaut is continuing despite weak consumer demand at home and that can only mean more exports and price competition as companies such as Apple (APPL) and Tesla (TSLA) cut prices to try to protect market share. Tesla shipments from its Shanghai factory fell 18% year-on-year in April even as the overall market for new-energy cars grows.

Another trend is that, battered by weak property and stock markets, Chinese consumers have been buying gold hand over fist. China’s central bank has been accumulating gold for 17 months straight. But to put it in perspective: gold still only makes up 4.6% of central bank reserves.

Gold’s bull run since 2020 has been driven by geopolitical instability, and despite two economic trends that normally push gold prices down: higher interest rates and a stronger dollar.

For this week’s new idea, we go to a Canadian-based company focused on a different resource and technology crucial to North America and beyond.

New Recommendation

Neo Performance (NOPMF)

One of the most strategic inputs for a wide array of advanced tech products are permanent magnets – also known as rare earth magnets. They are many times more powerful than regular magnets and allow more fluid movement of motion under great stress and extreme temperatures.

The first rare-earth magnets were discovered in the 1960s by scientists at a U.S. Air Force laboratory. From electric vehicles to wind turbines, advanced electronic-warfare systems of F-35 jet fighters, missile-guidance systems, to nuclear submarines, permanent magnets are essential.

The age of U.S. dominance of rare earths and rare earth magnets ended in the 1990s and now China accounts for about 90% of global production. Neo Performance (NOPMF) manufactures the building blocks of permanent magnets and powers many modern uses of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to permanent magnets.

Based in Toronto with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo Performance Materials has also started construction of a manufacturing facility in Europe to produce rare earth permanent magnets with a manufacturing facility in Narva, near its existing rare earth separation plant in Sillamäe.

Neo stock is down 26% this year as rare earth stocks have pulled back due to weak pricing, but prices are now trending up and interest in industrials is also rising. All this offers us a timely entry point for this aggressive stock that trades at less than 11 times forward earnings and 40% of book value. Neo also has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 7% dividend yield, and incentives are aligned, with about 20% of the outstanding stock held by management.

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.

Cloudflare (NET) shares, despite reporting strong quarterly results on the top and bottom lines, pulled back 16% this week. I’m a bit puzzled as revenue increased 30% year over year, adjusted earnings were up 100%, and cash flow increased more than 150%. Perhaps expectations were higher relative to the stock’s valuation, but I think this is a buying opportunity since Cloudflare handles and protects data from over 30% of Fortune 1000 companies. Buy a Half

Franco-Nevada (FNV) shares reached 126 this week after announcing mixed quarterly earnings. Cash flow and net margins were up for this debt-free company, but revenue and profits were a bit lower on a year-over-year basis. This gold-silver-platinum royalty and streaming company remains a buy because it offers us exposure to precious metals without the high capital costs and operational risks that go with traditional mining companies. Buy a Full

IperionX (IPX) shares slipped to just under 14 this week and this stock’s lack of momentum leads me to believe it is likely dead money for the near term. I suggest we sell it and replace it with today’s recommendation, Neo Performance (NOPMF). Move from Buy a Half to Sell

Novo Nordisk (NVO) shares were unchanged this week after the company announced it was reducing prices for its products in Denmark by roughly a third and announcements from Amgen and Pfizer that they are seeking to enter the anti-obesity market. Goldman Sachs projects the market for obesity medications could grow to $100 billion in the next decade so there is room for more entrants, but Novo needs to maintain its leadership position. New entrants are a key reason we took some profits off the table earlier this year. Hold a Half

PayPal (PYPL) shares dipped from 66 to 64 after the company reported solid earnings of $1.08 per share for first-quarter 2024, which improved 27% on a year-over-year basis. PayPal is best known for its namesake payment platform, but the company also owns the popular Venmo app. I’m moving this stock to a hold pending signs that the company can gain market share as big tech companies such as Apple, Google, and Alphabet move into payment services while fintech companies such as Ayden and Block compete as well. Payments is a big, $1 trillion-plus market but is also quite competitive. Move from Buy a Half to Hold a Half

Sea Limited (SE) shares continued their recent uptrend as we await earnings on May 14. Sea’s founder, Forest Li, in a letter to Sea’s employees, compared AI to the PC and Mobile phone revolution and believes the real AI wave is soon approaching. Sea will have to adapt to AI rather than be at the forefront. Sea operates in the most dynamic markets in the world and generated a record-high $13 billion in total revenue during 2023. Buy a Half

Super Micro Computer (SMCI) shares delivered a nice comeback this week, up 11%. It pulled back the previous week despite a strong quarterly report with revenue of $3.85 billion, up 200% year over year as well as earnings per share (EPS) of $6.65, up 308%. The consensus on Wall Street projects that Super Micro revenue will rise by 122% to $20.6 billion in 2024 so expectations are high. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares advanced from 164 to 170 this week as the company increased its dividend, if only marginally, in keeping with a long tradition. IBM recently announced it has agreed to buy Hashi Corp., which sells software that helps companies manage their cloud-computing operations. This is the biggest transaction since the acquisition of RedHat. Buy a Half

Unilever (UL) shares were steady this week on no significant news. Unilever is a consumer goods giant with hundreds of brands that it sells in over 190 countries. It has 14 brands with sales exceeding $1 billion and 30 “power brands” that account for almost 75% of Unilever’s total sales. The stock is selling at a rare discount – at about two times sales. Buy a Half

Visa (V) shares added 10 points this week to reach 277 in the wake of the company beating recent first-quarter top- and bottom-line expectations. Visa earned $2.51 per share on $8.8 billion in sales. Visa is purely a payments platform and unlike banks, has no credit risks. 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 broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Full

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.

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 this weight-loss drug, 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, 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. Some of you may recall this stock when it 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.

Unilever (UL) is a dominant consumer goods giant with 400 recognizable brands in its diversified portfolio – from Vaseline to Dove – that it sells in over 190 countries. However, 30 “power brands” account for almost 75% of Unilever’s total sales. It is a steady, stable stock for an uncertain environment and for a change, its stock is selling at a rare discount – down about 25% from all-time highs and at roughly two times sales. Two other reasons I like Unilever is that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

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. This leaves it much better poised to outperform the latter going forward.

The next Cabot Explorer issue will be published on May 23, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.