Cabot Explorer Issue: September 21, 2023

Portfolio Changes:
None

The VinFast Fiasco and a Return to Core & Explore

As I cautioned a few weeks ago, Vietnam’s electric vehicle leader VinFast is a textbook case of hype that can lead to large losses.

First, VinFast’s valuation hit stratospheric levels despite barely producing any vehicles. Its valuation briefly was twice the combined worth of Detroit stalwarts Ford and GM. Like GameStop, VinFast’s stock collapse was inevitable.

Second, VinFast exploited the weaknesses of the SPAC structure as shares swung violently as investors went in and out despite the tiny float.

Finally, VinFast relied more on exaggerated projections rather than tangible results. VinFast’s soaring $190 billion value vastly outpaced business prospects. As clear from the above graph, its meteoric rise and subsequent fall was textbook hype over common sense.

Moving on from Vietnam, the German government is leaning on Germany’s largest companies such as its automakers to reduce their exposure to China. The companies are not listening and instead doubling down on China.

As government pressure intensifies, German companies with sizable Chinese operations in recent months have been scrambling. The goal is to insulate their businesses from possible American and Western sanctions.

They are seeking to boost production in China to rely less on imports from Germany, and striking deals with Chinese suppliers to make their supply chains resilient.

Thanks to their local China production for local Chinese consumers strategy, German automakers exported just 254,607 vehicles to China in 2022, a fraction of the volume of vehicles sold in previous years, according to the German Association of the Automotive Industry. VW alone produced more vehicles in China than it made in Europe.

3 Core ETFs to Tuck into Our Core Portfolio

This seems to be a good week to again highlight Cabot Explorer’s “Core & Explore” approach that I believe is best for most investors.

The Cabot Explorer’s below three ETF suggestions, while they will not technically be part of our portfolio going forward, are part of an approach to weather the ups and downs of the market. They are designed to remain both in the market and keep flexible to take advantage of new growth opportunities without going overboard.

First, build a core portfolio of ETFs tilted to the conservative and income side. Second, develop a portfolio of stocks which can range from blue chips to small caps based on our personal goals and financial position.

The challenge is to decide what proportion of our assets goes to each. In addition, one should have a sizable cash position to take advantage of opportunities when stocks sell off and great companies sell at a discount. On October 12, I’m planning on conducting a webinar on our “Core & Explore” approach.

Here are a troika of ETF ideas to consider right now.

iShares Preferred and Income Securities ETF (PFF)

Preferred shares are safer than common shares because they are senior securities and pay a fixed dividend. This fund invests in nearly 500 preferred stocks. Approximately 60% are in the financial sector; another 22% are in the industrial sector and most of the rest are issued by utilities.

SPDR Bloomberg Convertible Securities ETF (CWB)

This fund offers investors exposure to a relatively obscure sector of the market: convertible bonds. These securities allow investors to “convert” their bonds for equity in the underlying company, therefore benefiting from increases in their share prices. They offer more safety than stocks in a down market and more upside than bonds in an up market.

Legg Mason Low Volatility High Dividend ETF (LVHD)

This ETF is an ideal mixture of the low-volatility factor and high dividend yield.

Essentially, it’s a 1-2 punch of portfolio protection. Low volatility swings both ways. Sometimes, being more volatile than the market can mean you’re generating more upside, so reducing volatility can limit gains. But if you can reduce volatility via stocks that deliver substantial income, you can make up some of the price difference.

LVHD accomplishes this by scanning a universe of 3,000 stocks that screens for companies that pay “relatively high sustainable dividend yields,” then scores them based on price and earnings volatility. Every time the fund rebalances, a stock can account for a maximum of 2.5% of assets, and no sector can be larger than 25% (except REITs, which can’t exceed 15%).

These three ETFs are long-term core holdings so feel free to use all three or pick a favorite to help build a stable base to protect and grow a portfolio.

Weekly Explorer Stock Updates

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 dipped from 88 to 86 this week as the platform giant works to leverage its colossal user base, which exceeds 1 billion customers. Alibaba’s Digital Media Entertainment business group has achieved impressive revenue growth of 36% year over year and just recorded its first-ever profitable quarter. This is a contrarian recommendation in a high-quality company selling way off its high. Buy a Half.

BYD (BYDDY) shares gave back a point to finish the week at 62 while the company set competitive prices for its low-cost Dolphin EV in both Europe and Japan. BYD remains confident of selling 3 million EVs in 2023, which is about the total number of EVs sold in America over the last decade. Buy a Half.

Neo Performance (NOPMF) shares went from 6.4 to 6.3 this week as recent insider acquisition of shares is a sign that those close to Neo see value. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys. Buy a Half.

Novo Nordisk (NVO) shares - after a 2-for-1 stock split yesterday - dropped from 97 to 92 but are still up 80% over the last 12 months. Wall Street analysts are expecting Novo Nordisk to bring in nearly $44 billion in total sales for its fiscal 2025, whereas its annual sales in 2022 were just over $25 billion. This pharmaceutical giant reported last month that profits surged 43% in the first half of 2023. Hold a Half.

Tesla (TSLA) shares retraced this week from 273 to 262 after last week’s 10% surge as Europe reported that about 20% of new auto registrations are for electric vehicles. Tesla looms over the UAW (United Auto Workers) strike as it currently makes vehicles at an estimated labor cost of $45 to $50 per hour, whereas the Detroit Big Three make vehicles for about $64 to $67 per hour. Morgan Stanley raised their price target to 400 a share. Buy a Half.

Explorer Multinational Blue-Chip Recommendations - More Buy-and-Hold

ConocoPhillips (COP) shares are up about 20% over the last six months but fell from 124 to 121 this week. Although oil prices have jumped 15% in the past month, most oil stocks are flat over the same period. The company is among the lowest-cost producers and delivers a relatively strong cash flow. Buy a Half.

International Business Machines (IBM) shares advanced from 147 to just short of 150 this past week. IBM’s target cloud markets are expected to reach $262 billion by 2027. Last week, IBM unveiled Watsonx, a cutting-edge enterprise-focused AI and data platform designed to harness the power of advanced AI capabilities. Buy a Half.

Pfizer (PFE) shares were flattish this past week as the FDA just approved its updated Covid shot. This is a value idea, so we need to be patient. Pfizer is active in acquisition markets and is spending $43 billion to acquire cancer treatment specialist Seagen (SGEN). Hold a Half.

Visa (V) shares were stead this week as Visa and Swift today announced a collaboration to streamline international business-to-business (B2B) payments by strengthening connectivity between their networks that move trillions in value globally. The Boston Consulting Group predicts the industry will reach $3.3 trillion in annual revenue by 2031. 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 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.

Neo Performance (NOPMF) manufactures the building blocks of many modern technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to the performance of many important products and emerging technologies. 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.

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.

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

The next Cabot Explorer issue will be published on October 5, 2023.

PUBLISHED — New book from Chief Analyst Carl Delfeld