Cabot Explorer Issue: November 22, 2023

Portfolio Changes: Alibaba (BABA) – Hold to Sell

Stock Sentiment Improves

The S&P 500 and Explorer stocks are in an uptrend in November as investors bet that the Federal Reserve’s interest rate hikes are done for now and that inflation will moderate without a recession. In addition, with most S&P 500 companies having reported third-quarter results, more than 80% have beaten analyst expectations.

It was fortunate we sold Tesla (TSLA) stock just before the recent controversy surrounding Elon Musk’s comments. This just shows the risk of a CEO active on social media and perhaps stretched too thin without careful guardrails.

Sales of all-electric models globally are strong but, in the U.S., they have plateaued around the 100,000-a-month mark for the past half year. The average new EV sold for about $52,000 in October, down from around $65,000 a year ago, according to Cox Automotive.

One reason for the pause is that Washington’s $7,500 EV tax credit will kick in starting next year. Even better, it will be available as a rebate at the point of sale rather than months later when filing tax returns.

Some of you may recall Luckin Coffee (LKNCY) which, after a nice run, fell apart due to an accounting scandal. Luckin has weathered the storm, regrouped, and is now a 30-dollar stock as it recently surpassed Starbucks as China’s biggest coffee chain by sales and units, company reports show.

It now operates about 13,300 stores, with all but a handful located in China. That is roughly double Starbucks’ 6,800 much larger, prime locations in the country. Luckin has tapped into local tastes, mobile payment options and need for rapid delivery. Starbucks is also launching new beverages in China, launching 28 there this summer.

As I outlined in our last issue, I spoke with several experts regarding Graphene Manufacturing Group (CMG.V) at the Benchmark conference in Los Angeles last week. I still find it very interesting and will monitor but I think a recommendation would be premature at this point. Instead, today I offer two ways to capture the importance of lithium.

New Recommendation

Lithium Americas (LAC)

Global X Lithium & Battery Tech ETF (LIT)

As you know, the Explorer looks at the full spectrum of the electric vehicle (EV) and clean energy supply chain – from mining to processing to the final product.

Last week at the Benchmark conference, a key theme was the changing chemistry behind EV batteries. Batteries are important because they account for 20%-30% of the total price of an EV. And a key part of the cost of an EV battery are the minerals inputs that make up the battery.

The battery chemistry is fluid and China plays an outsized role, but the one element that seems at the core is lithium. Lithium is used in electric car batteries because it is lightweight, can store lots of energy and can be effectively recharged.

Most lithium-ion batteries also need nickel and cobalt. One emerging trend is lithium iron phosphate batteries, which are cheaper. Another possibility that is in the R&D phase are solid state batteries, which need even more lithium. The other is sodium-based batteries, which are probably 5-10 years out.

Even “Big Oil” is getting on the lithium bandwagon. Exxon is going ahead with the drilling rights it bought in lithium-rich Arkansas, drilling to extract the battery mineral from underground brines. First production is expected by 2027.

The consensus is that lithium is the new oil and that global lithium carbonate demand is projected to grow 5X between now and 2030. Given that the price of lithium has come back sharply this year and seems to be turning, we are adding two new ideas using our “shotgun and rifle” strategy.

Lithium Americas (LAC) has been a developer of two large-scale lithium projects, Cauchari-Olaroz in Argentina, and Thacker Pass in Nevada. In July, Lithium Americas announced a spin-off of the Argentine assets Cauchari-Olaroz, leading to a new entity, Lithium Americas (Argentina) (LAAC), that will own Lithium Americas’ interests in Argentina. (We are investing in the original LAC ticker symbol.)

This will allow the company to focus on the Thacker Pass lithium site that has tremendous potential, with 16.1 million tons of battery-grade lithium carbonate equivalent available for extraction. The Thacker project has received a $650 million investment from General Motors, highlighting the project’s future role in supplying battery materials to power electric vehicles.

Though Lithium Americas is still pre-revenue and permitting is challenging, the company predicts the Thacker Pass project will generate $1.2 billion in annual cash flow when fully operational.

A less aggressive way to buy into recent lithium weakness is with an exchange-traded fund (ETF) like the Global X Lithium & Battery Tech ETF (LIT). Not only is it excessively oversold, it also offers solid exposure to other beaten-down lithium names at a low cost. With an expense ratio of 0.75%, some of its top holdings include Albemarle (ALB), Tesla (TSLA), BYD (BYDDY), Panasonic Holdings (PCRFY), and Livent (LTHM), to name a few of the fund’s 46 holdings.

BUY A HALF of LAC and LIT

Explorer Stock Update

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.

Explorer Trading Recommendations – need to watch more closely

Alibaba (BABA) shares have continued to struggle since we downgraded to a hold two weeks ago so today, I’m moving this to a sell. Alibaba has many strengths and is still the largest e-commerce and cloud company in China, but its stock continues to underperform its peers. Move from Hold a Half to Sell.

BYD (BYDDY) shares have been treading water, but the company is on the move. This week at the Guangzhou International Automobile show BYD released its Supercar Platform and unveiled its new electric SUV—the BYD Sea Lion 07. Founded in 1995 as a rechargeable battery maker, BYD now has stakes in EVs, rail transit, new energy, and electronics, with over 30 industrial parks in China, the United States, Canada, Japan, Brazil, Hungary, and India. BYD is also now the second largest producer of EV batteries in the world. Buy a Half.

Exscientia (EXAI) shares started strong as a new Explorer recommendation, breaking above 6, but has come back a bit over the last week. In the third quarter the company beat sales and earnings expectations. Exscientia has the first AI platform clinically validated to improve treatment outcomes for cancer patients and the world’s first AI-designed drugs to enter clinical trials. Buy a Half.

Novo Nordisk (NVO) shares are holding at just over the 100 level as the company announced it will ration starter kits of Ozempic in Europe and reduce supplies of another diabetes drug, Victoza, to prioritize producing Ozempic, which has seen a surge in demand from people using it to lose weight. The Food and Drug Administration (FDA) has approved Eli Lilly’s competitor drug under the name Zepbound. Demand remands very strong. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares are up more than 10% over the last two weeks as lithium prices have shown some strength. The world’s largest lithium producer, SQM has a 14.6% forward dividend yield and is looking for a turnaround in lithium prices. Hold a Half.

Explorer Multinational Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares have come back to life in the last week despite weaker oil prices as the company received a favorable ruling from a U.S. District Court judge approving its massive $7.5 billion, 600-million-barrel Willow oil project on Alaska’s North Slope. I’m keeping a buy rating on this stock which is among the lowest-cost oil producers. Buy a Half.

International Business Machines (IBM) shares were up five points in the last two weeks as the company doubles down on a “skills first” hiring plan that prioritizes skill level ahead of college education or job experience. This follows the announcement of a $500 million venture fund to invest in a range of AI companies – from early-stage to hyper-growth startups. Almost 75% of IBM’s revenue comes from software and consulting. Buy a Half.

Visa (V) shares added 10 points over the last two weeks to climb over 250. In its latest quarter ended September 30, Visa processed $3.2 trillion of payments, up 9% year over year and delivering 8.6 billion in quarterly revenue. In addition, the company’s board of directors recently approved a new $25 billion share repurchase plan, after buying back more than $4 billion worth of common stock last quarter. 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. Current yield is about 10%. 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 way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.

Model Portfolio

Explorer Stocks Summary

Brief company summaries that will not change week to week.

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.

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.

Exscientia (EXAI) was founded in 2012 and based in Oxford, England, Exscientia is using AI to develop new medicines and is attracting high quality partners. Exscientia (EXAI) stock is trading way off its high in an uptrend. It went public at 22 a share so the company has about $500 million in cash on the books – a big number for a company with a market capitalization of just $675 million. Finally, keep in mind that this is an attractive speculative stock which may have a bumpy ride. It is a young company that is not be profitable and won’t be next year either.

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.

Sociedad Química y Minera de Chile S.A. (SQM) produces specialty plant nutrients, iodine, lithium, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers which together account for about 30% of SQM’s annual revenue. SQM is generally considered the world’s second-largest lithium producer, behind U.S.-based Albemarle (ALB), and in recent years, demand for the “white gold” has been strong. Demand for lithium is strong due to electric vehicle growth and lithium contributes about 40% of the company’s gross profits. Fertilizer ingredients supply another 40%, and iodine contributes the rest.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa has the largest card network in the U.S., processing $14.5 trillion of payment volume in the last 12 months. 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 December 7, 2023.

PUBLISHED — New book from Chief Analyst Carl Delfeld