April 28, 2022

This was a tough week for all of us as growth stocks, particularly tech stocks, were impacted by concerns over higher interest rates and slower economic growth. Events in China with its economic slowdown and European conflict are not helping matters either. This week we head to Chile for a double commodity play on food and electric vehicles.

New Recommendation

This was a tough week for all of us as growth stocks, particularly tech stocks, were impacted by concerns over higher interest rates and slower economic growth. Events in China with its economic slowdown and European conflict are not helping matters either. This week we head to Chile for a double commodity play on food and electric vehicles.

Commodities and Stocks
Explorer stocks struggled this week more than at any time in 2022 as major U.S. stock indexes remain down substantially for the year, with the S&P 500 down 12% and the Nasdaq Composite down 20%.

Google parent company Alphabet reported an 8% drop in quarterly profit as two crown jewels in its business showed signs of slowing growth compared to its pandemic super-charged growth last year. Undoubtedly, some investors will view many stocks as buying opportunities while some will seek to have more balance between cash, growth, tech and commodities.

Some studies show that commodities move in 12-to-16-year super cycles and the 20th century saw three long commodity bull markets (1906-1923, 1933-1953 and 1968-1982), each lasting 14-plus years. The next one (and the most recent) started in early 1999 and ended around 2011. This was also a strong bull market for emerging market stocks.

Two studies from Legg Mason confirmed that for the past 130 years, stocks and commodities have alternated leadership in regular cycles. Recall that in 1982, stocks had been going sideways for 16 years. In contrast, commodities were king: Sugar went up 1,290% between 1969 and 1974; corn increased 295%. Oil went up 15X in the 1970s to $40 a barrel; gold and silver rose more than 20X in a decade, and the price of many other commodities surged.

Markets often confound expectations and do not run like clockwork but having some commodity plays makes sense right now, which brings us to Chile for this week’s recommendation.

The combination of a growing global population, a rising middle class hungry for more protein, fruit and vegetables, and less productive land has many asking how on earth we are going to feed everyone.

For example, 1 pound of chicken requires 3 pounds of corn, 1 pound of pork requires 4 pounds of corn, and 1 pound of beef requires 7 pounds of corn.

In short, a growing global population equals higher demand for fertilizer products to boost crop yields. In addition to lithium, SQM produces specialty plant nutrients, iodine, lithium, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers.

SQM has long been a darling of global investors looking to Chile, a country I used to refer to as the “Star of Latin America” though it has unfortunately taken a sharp political turn. Branded as the face of a new Latin American left, Chile President Gabriel Boric was elected in a landslide after a campaign promising revolutionary change. In reality, Boric wanted to keep Chile a mining power to help his green energy development plans.

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 comes in at 18% of gross profits.

SQM has lithium plants in Chile and through a joint venture in Australia and it accounts for almost 20% of global lithium output. Lithium demand, sales, and prices have been going in the right direction and the Ukraine situation is crimping Russia’s fertilizer exports, which normally account for about 25% of world exports. SQM is also the world leader with a 46% market share of potassium nitrate, which is a chlorine-free premium product for plant nutrition. The company is also the world’s #1 producer of specialty chemicals.

SQM had a stellar year in 2021, with revenue up 57.5% and net profits tripling over 2020. Global lithium demand exploded 55% in 2021 primarily due to it being a key ingredient for lithium ion batteries for electric vehicles.

In fact, the current consensus growth estimate for SQM this year calls for earnings-per-share growth of 127% with the long-term growth estimated to be around 40% if current trends hold. This stock has come back a bit recently, providing a reasonable entry point for aggressive investors. BUY A HALF POSITION

Portfolio Changes and Updates

Model Portfolio

Portfolio Changes
Local Bounti (LOCL) – MOVE FROM BUY A HALF TO HOLD
Marvell Technology Group (MRVL) – MOVE FROM HOLD TO SELL
QuantumScape (QS) – MOVE FROM BUY TO SELL

Updates
CVS Health Corporation (CVS) shares gave back 3% in their second week in as an Explorer recommendation and will report first-quarter earnings on May 4.

CVS is one of the nation’s leading healthcare companies with almost 10,000 stores, and is expanding its digital footprint. Per a February 2022 update, the CVS.com website has gathered more than 2 billion visits over the past year. Nearly 70% of Americans live within three miles of a CVS and it has more than 102 million pharmacy plan members.

In its last quarter, total revenues grew 11% to $73 billion and earnings of $2.42 a share were 17% ahead of consensus estimates. The company also paid down close to $8 billion of debt and paid out $650 million to shareholders through dividends. CVS stock sells for about 17 times forward earnings – versus 22 times for the S&P 500. BUY A HALF

Fisker (FSR) shares were down two points this week as first-quarter results are expected on May 4. The quarter will of course be of little value since Ocean production will not begin until later in 2022. Founder and CEO Henrik Fisker apparently is a bit of a rival to Elon Musk and moved communication from Twitter to Instagram this week. Production of its fully electric Ocean SUV is expected to begin in November and the SUV models range in price from $37,499 to $68,999. This stock will likely be flat for a while until it gets closer to production of what could be a breakout custom EV SUV. BUY A HALF

Ford (F) shares were down a point and change this week despite the company beginning production of the highly anticipated F-150 Lightning, its first all-electric pickup truck. Production is happening at the Rouge Electric Vehicle Center, within the historic Rouge Complex in Michigan, which is where founder Henry Ford perfected the moving assembly line.

Ford CEO Jim Farley was front and center and highlighted that all Ford pickups are produced in America while touting the importance of President Biden’s recent visit. Farley noted, “We’re going to go after pickup trucks, commercial vans, and Mustangs that will have that Detroit swagger.” By 2030, it expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Trading at less than four times trailing earnings, this is perhaps the best value of the leading EV makers so I encourage you to buy if you have not already done so. BUY A FULL

Local Bounti (LOCL) followed up its 7% gain last week with a 12% down week as it approaches its May 9 earnings report. It is getting close to being removed from the Explorer portfolio depending on how it performs next week. That said, I still like the story of using proprietary technology to grow leafy greens as well as cilantro and basil using 90% less land and water than traditional agricultural methods – and without pesticides. Another plus is the involvement of agriculture giant Cargill, which is providing $200 million in debt financing. The company is poised to expand distribution to major food retailers and there is also the potential opportunity to license its technology to major agriculture players since the company has already has more than 50 patents. We’ll downgrade to hold for now. MOVE FROM BUY A HALF TO HOLD

Marvell Technology Group (MRVL) shares disappointed us again with a poor performance, which is a bit puzzling given the signs that its sales are also steady with an annual growth rate of about 30%. The average projection by Wall Street analysts is for Marvell in the current fiscal year to grow overall revenue by 37% and earnings per share by 46%. While I believe that our patience with this stock was deserved, I’m moving this stock to a sell. MOVE FROM HOLD A HALF TO SELL

Novonix (NVNXF, NVX) shares, while up yesterday, were down for the week. This Australian company plays a key role as a strategic provider of U.S. synthetic graphite that is both higher quality and lower priced than Chinese graphite. It has a very strong partner in Phillips 66. This is an aggressive idea and the company is at least a year away from reaching breakeven in terms of profitability but it has more than adequate funds to further its production and technology until it plans to be profitable next year. Novonix remains a buy recommendation. BUY A HALF

Oracle Corporation (ORCL) shares fell from 80 to 75 this week with no news. The stock, while it has lost some ground in the last month, is still a solid tech holding as it grows its cloud business. Oracle’s newly released Java 18 is being well received by the market as it delivers better performance, stability, and security that will further improve developer productivity. This is a solid, well-run company that will likely resume its upward trend when tech markets are back in favor. BUY A HALF

QuantumScape (QS) shares pulled back a couple of points this week and are now down about 20% in the last month so I’m moving this to a sell. Quantum’s technology is a leader in solid-state batteries that would allow electric vehicles that could last for thousands of miles without needing to be recharged. While its technology is promising and on track, QuantumScape still has to demonstrate it can manufacture its new battery on a mass scale. I’m disappointed we need to remove QuantumScape stock since it could be one of the most promising breakthroughs of the EV revolution. MOVE FROM BUY A HALF TO SELL

Sea Limited (SE) shares had a tough week as growth stocks are facing the headwinds of higher interest rates and concern over an economic slowdown. A Goldman Sachs analyst picked up the company last week for the first time with a buy recommendation and a 196 target – more than double the current price. Management has said to expect bookings for its video gaming entertainment segment to be $3 billion in 2022, down from $4.3 billion last year. However, e-commerce sales are expected to increase 76% to $9 billion, and digital finance revenue is expected to increase 155% to $1.2 billion. We have booked significant profits with Sea stock by taking gains off the table several times so for now I will keep this a buy for aggressive investors. BUY A HALF

StoneCo Ltd. (STNE) shares pulled back 10% this week though it is posting pretty good numbers. The Warren Buffett-backed company had a record net addition of 378,000 clients in the fourth quarter of 2021, bringing its active merchant partner count to 1.8 million. Payment volumes increased 55% year over year, hitting $88.7 billion in local currency and $19.2 billion in U.S. dollars. And there is plenty of room for further expansion over the long term, as you can see from the below graph.

Based in Sao Paulo, StoneCo is a digital payments company providing financial technology solutions for merchants to conduct electronic commerce across in-store, online, and mobile channels in Brazil. Warren Buffett’s Berkshire Hathaway invested $340 million in this fintech company. BUY A HALF

The next Cabot Explorer issue will be published on May 12, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld