December 14, 2023

Portfolio Changes:
BYD (BYDDY) – Move from Buy a Half to Watch List
ConocoPhillips (COP) – Move from Buy a Half to Hold a Half

Exploring the World of Medicine and Life Sciences

Welcome news: The Fed holds interest rates steady in a sign tightening has peaked and that rates cuts may be coming in 2024. Big positive for stocks.

One of the Explorer’s themes is the exciting and potentially profitable sector of medicine and life sciences. A success story is Novo Nordisk (NVO), which is up about 45% this year. The Denmark-based company has been the talk of the pharma and medical world and even Hollywood with stars trying the firm’s diabetes and weight-loss medicines, Ozempic and Wegovy.

For a century, insulin has been the company’s primary business and accounted for 79% of its $25 billion in sales in 2022. But its recent sales boom is due to a new class of drugs known as GLP-1s that signal to the body to produce more insulin, which slows digestion.

It is now the most valuable company in Europe with a market cap of some $445 billion, leapfrogging luxury fashion giant LVMH. The company reported nearly $12 billion in sales from Wegovy and Ozempic in the first nine months of the year.

Last week, the Food and Drug Administration (FDA) took a big step toward ending the most common inherited blood disorder by approving twin gene therapies for sickle cell disease. This is a sickness that affects an estimated 100,000 Americans and it’s the first FDA-approved therapy using a sort of genetic scissors called a CRISPR gene-editing process.

This edits genes directly in a patient’s body and expand the kinds of diseases and conditions researchers can target to other blood disorders, certain cancers, and infectious diseases. We will be expanding our life science recommendations in 2024.

You may recall that I warned Cabot Explorer members in August not to get caught up with the VinFast (VFS) hype. This Vietnam-based EV maker’s stock was briefly worth more than Ford and GM combined, before its shares dived more than 90% from their peak. In other words, VinFast stock went from 68.8 to the current price of 6.8.

VinFast, just six years old, has licensed technology from BMW, hired former General Motors and Ford Motor executives, and worked with Italian designers.

Last year’s decision for VinFast to break ground on a new factory in North Carolina is being touted as the largest economic development in that state’s history. However, there VinFast will be far from its Asian supply chains, and manufacturing wages in the U.S. can be more than 10 times higher than in Vietnam.

The company sold around 10,000 EVs globally through the first six months of the year, a fraction of Tesla or China’s BYD. In addition, most of its sales were to a taxi company owned by its parent. And the automaker’s first 999 vehicles shipped to the U.S. were recalled because of a software malfunction

VinFast lost more than $5.8 billion from 2020 through the end of September this year. It will need to sell far more cars than it currently does to break even.

I remain skeptical but given the much more reasonable price, I will track the company and the stock.

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.

Explorer Trading Recommendations – need to watch more closely

BYD (BYDDY) shares had another down week and the weak Chinese market and EV price war forces me to move this to the watch list. Most should sell to limit losses and to maintain sell discipline, but more aggressive investors may wish to hold or buy more shares. But officially, I will be removing BYDDY from the Explorer portfolio. BYD has about a 35% market share of Chinese EV sales with $4.2 billion in expected net earnings this year, according to consensus analyst estimates on FactSet. But the stock has yet to fully catch up to the company’s impressive growth and ever-expanding business footprint. Move from Buy a Half to Watch List

Exscientia (EXAI) shares were up another 5% this week as the company works to create a patient-first artificial intelligence (AI) model to yield medicines with both lower costs of development and improved probability of success. Exscientia has the first AI platform aimed at improving treatment outcomes for cancer patients and has ongoing agreements to co-develop drugs with Bristol-Myers Squibb and Sanofi. This is an aggressive idea so some may wish to purchase shares incrementally. Buy a Half.

10x Genomics (TXG) shares were up about 10% in their first week as an Explorer recommendation. 10x is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease. 10x helps researchers look at the roots of biology. In the third quarter revenue increased 17% and the stock is in an uptrend. Buy a Half.

Lithium Americas (LAC) shares were up 10% yesterday to claw back a positive week. Lithium prices seem to be flattening out and indications from China are that the pullback that began earlier this year in lithium prices may be over. The company is focused on developing a promising lithium site in Nevada that could produce 16 million tons of battery-grade lithium carbonate. Buy a Half.

Novo Nordisk (NVO) shares rose to 99, are up over 40% since March and the Denmark-based company has been the talk of the pharma and medical world this year. New competitor and past Explorer stock Pfizer (PFE) expects the market for new obesity pills to be $90 billion per year and this will be shared with Eli Lilly (LLY), Novo, and other biotechs. Novo is also working on a high-dose version of its current weight-loss pill which is popular and in high demand. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares were up 6% this past week and, in the third quarter, despite a slight decline in revenues from the lithium business due to lower lithium prices, the company had record sales, surpassing 43,000 metric tons. SQM’s 9% dividend yield helps total return. Hold a Half.

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares were steady this week at 112 and have lost some momentum over the past month as energy prices have fluctuated. Based on production and reserves, ConocoPhillips is among the leading upstream energy players in the world and is strongly focused on returning capital to shareholders. Conoco is also among the lowest-cost oil producers, so this is a great core holding but I’m moving this to a hold pending a clearer trend line. Move from Buy a Half to Hold a Half.

International Business Machines (IBM) shares reached 162 this week as IBM benefits from not only its own cloud computing platform but since its consulting business has always been agnostic when it comes to developing solutions for clients, IBM sells a variety of software, hardware, and services for other platforms as well and in the cloud and AI era, this is really paying dividends. IBM is a conservative way to gain exposure to AI and cybersecurity and delivers a solid 4% dividend yield. Buy a Half.

Visa (V) shares gained 10 points this week to exceed 262 as the company continues to ink deals that build its network and moat. Visa signed commercial partnerships with 500 new fintech companies in the fourth quarter, a 25% increase over last year. Buy a Half.

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%, 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.

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 9%. 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.

Explorer Stocks Summary

Brief company summaries that will not change week to week.

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 at 5.70. 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 $725 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 and will not be profitable next year.

10x Genomics (TXG) is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease. Founded in 2012 and based in Pleasanton, California, 10x builds tools for scientific research to advance human health. Its instruments, reagents and software allow researchers to examine cells and molecules at a resolution and scale never imagined or experienced before. 10x helps researchers look at the roots of biology.

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.

Lithium Americas (LAC) focuses on the Thacker Pass lithium site in Nevada 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.

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 its Ozempic and Wegovy weight-loss drugs, 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 twelve 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.

Portfolio