Cabot Explorer Issue: October 19, 2023

I’m in Amish country this week so the Cabot Explorer update will be briefer than usual today.

Markets are facing a 5% dilemma. The benchmark Treasury yield closed just above 4.9%, a fresh 16-year high.

Third-quarter GDP estimated growth may be above 5%, signaling that inflationary expectations are still strong.

The market will likely turn broadly positive when expectations are that interest rate hikes are over – and lower rates may be around the corner.

Explorer stocks did well this week, and I have no change in ratings.

Tesla (TSLA) reported yesterday that profits were down in the third quarter compared to a year earlier, but it was still a good quarter considering the multiple price cuts across the company’s lineup (see graphic below, courtesy of Kelley Blue Book).

Tesla did reveal that Cybertruck deliveries are on track to begin next month.

For the quarter, total revenue was up 13% at $23.4 billion with reported adjusted earnings per share (EPS) of $0.66, nearly 30% lower than a year ago.

Tesla believes it will meet its 2023 production goal of 1.8 million vehicles. Through three quarters of the year, Tesla has delivered around 1.3 million vehicles globally, so the company will need a very strong quarter to hit its annual delivery goal.

The company also said it expects Model Y production to gradually ramp up higher at Giga Austin and Giga Berlin.

Pfizer (PFE), meanwhile, is treading water as it adjusts to post-Covid conditions and waits for revenue and profits to flow from it string of acquisitions and drugs in development. It is also eyeing the obesity treatment landscape. Over 16 weeks, patients who took a high dose of Pfizer’s twice-a-day pill lost roughly 10 pounds. In comparison, people who received a high dose of Novo Nordisk’s (NVO) Ozempic shot lost that much over the course of 30 weeks, according to the company’s Phase 3 study – though some side effects need to be minimized.

BYD (BYDDY) announced better-than-expected preliminary net profits for the third quarter with the next earnings report expected on October 31.

The Biden Administration announced new, tighter restrictions on the export of artificial intelligence chips and manufacturing equipment to China. This impacted semiconductor stocks this week, most notably high-flying Nvidia (NVDA) which is off about 9%, which isn’t much considering it has nearly tripled this year alone. I expect this trend to continue so would advise trimming your position if you own it to lock in some profits.

As for some of our other portfolio holdings…

Visa (V) will announce earnings next week, October 24.

Novo Nordisk (NVO) broke 100 this week and is up nicely this year. My main concern is competitors moving in, though they have a strong lead and brand recognition in their corner.

Alibaba (BABA) was off three points at 83 but the stock is cheap relative to past and projected earnings. It just needs the right catalyst. Overseas growth and higher Chinese consumer spending could be two of them. E-commerce is its breadwinner, however, accounting for more than half of Alibaba’s revenue, and roughly the same proportion of its profits.

With lithium prices down 70% this year, our recent recommendation, Chile’s SQM (SQM) should benefit based on my research that this price pullback is over-shooting on the downside and that prices will normalize. Lithium makes up around 30%-40% of the cost of an EV battery.

That’s it for now. Have a great weekend and see you next week.

Model Portfolio

Explorer Stocks Summary

Brief company overviews that will not change week to week.

Alibaba (BABA) is one of China’s most well-known brands and the country’s largest e-commerce company. The stock got knocked down over the last few years thanks to a heavy political hand by the Chinese government and a sluggish consumer economy. The shares are now selling at a cheap valuation that barely prices in any future growth, which seems to me unrealistic given all the opportunities for this tech giant to grow beyond its massive consumer platform. Cloud computing and artificial intelligence (AI) are just two examples. This is a contrarian recommendation in a high-quality company.

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.

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.

Pfizer (PFE) served more than a quarter of a billion patients that were treated with its medicines and vaccines in the first quarter of this year. Pfizer has 10 products with sales greater than $1 billion a year.

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.

Tesla (TSLA) has always confused investors and Wall Street analysts alike. One reason is that it often has valuations that are, many times higher than its auto industry peers. What many miss is that it is not an auto stock but rather a tech stock and platform stock. Tesla’s value is really in its ever-expanding platform, AI capabilities, charging infrastructure, battery manufacturing, autonomous driving capability, and other areas ripe for disruption that nobody even knows Tesla is working on. Revenues have scaled from $32 billion in 2020 to $54 billion in 2021, to $81 billion in 2022, and are set to move past $100 billion in 2023.

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

The next Cabot Explorer issue will be published on November 2, 2023.

PUBLISHED — New book from Chief Analyst Carl Delfeld