Nio (NIO) was up 22% this week though markets face headwinds of inflation and increasingly loose talk of recession by many including Fed Chairman Jerome Powell. With regret, we let go of Sea (SE) but add another favorite selling at a sharp discount to its high—and in the middle of the unstoppable trend of cybersecurity.

Cabot Explorer Issue: June 23, 2022

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Nio (NIO) was up 22% this week though markets face headwinds of inflation and increasingly loose talk of recession by many including Fed Chairman Jerome Powell. With regret, we let go of Sea Limited (SE) but add another favorite selling at a sharp discount to its high—and in the middle of the unstoppable trend of cybersecurity.

Fed Chairman Powell Talks Too Much
Sometimes you just want people to stop talking. An economic downturn is “certainly a possibility,” Jerome Powell said Wednesday during his congressional hearing. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to curb inflation.

This is the market’s headwind. I think we are all better served by letting companies report earnings and letting investors react. Instead, this pessimistic narrative is leading the market.

How soon people forget that U.S. stocks, even after this year’s pullback, have still gained nearly 13% annually over the past decade. This is almost double the average real 7% return over the last century.

What is the worst-case scenario? On Feb. 9, 1966, the S&P 500 closed at a then-record 94. More than 16 years later, on Aug. 12, 1982, it stood at 102. Corporate earnings, after inflation, shrank 15%, according to data from Yale University economist Robert Shiller.

Younger and longer-term investors should be much, much more excited to buy stocks after this year’s 22% decline than they were during the 114% post-pandemic rise that preceded it.

I’m not trying to minimize the pain of a market pullback or the myriad issues impacting markets, just trying to offer some perspective and encouragement to stick with your plan.

New Explorer Recommendation
Cloudflare (NET)
Cloudflare provides content delivery and security services to over 19% of websites on the internet; the next best is at 2%. This off-the radar company and potential takeover target provides cloud-based services to secure websites. It offers various products for performance and reliability, video streaming and delivery, and advanced security.

In its Q1 earnings report, Cloudflare revenue was up 54% year-over-year and recorded net client retention of 127%. The company also set a quarterly record for signing up new customers. The 14,000 paying customers it added in the quarter brought its total to 154,109. On top of all this, Cloudflare’s worldwide presence allows 95% of internet users to be within 50 milliseconds of their data centers. That’s impressive coverage and saves clients a lot in bandwidth costs. Being near the location where data is processed also offers high performance and faster traffic.

Does that sound like a company that’s struggling in the post-pandemic world and a stock that should be down from 211 in November 2021 to its present price of 44?

Since more companies are adopting permanent hybrid work arrangements, remote workers continue to pose a security risk. And Cloudflare helps minimize that risk.

Furthermore, demand for security solutions is expected to drive continued growth with global cybersecurity spending projected by Fortune to go from $140 billion in 2021 to $375 billion annually by 2029.

As the world becomes digitized, protecting valuable and sensitive data is not just a good idea – it is essential. As more valuable data is created, cybercriminals become increasingly motivated to steal the data and sell the data. A single cybersecurity company can block over 100 million threats per day. That’s equivalent to more than one thousand threats blocked every second. But all it takes is one breach to cause severe damage for companies and users.

Here are just a few examples. In 2013-14, Yahoo had all 3 billion of its accounts hacked in two separate attacks, arguably the worst data breaches of the 21^st century.

In 2017, Equifax, one of the largest credit bureaus in America, announced a data breach that affected 143 million consumers, including social security numbers, birth dates, and driver’s license numbers.

In late 2018, Marriott International announced a data breach that compromised 500 million accounts, including personal information like passport numbers. Hackers sponsored by foreign governments such as China or Russia account for about 23% of global breaches while organized crime accounts for another 39% of data thefts.

This is an excellent stock with strong fundamentals trading way off its high and should deliver solid medium-term appreciation. BUY A HALF POSITION

Model Portfolio

Updates
CVS Health Corporation (CVS) shares were steady at 91 this past week.
This is an attractive value stock for this sort of market because its first-quarter revenue was up more than 11% year over year and CVS Health’s earnings per share has grown 26% each year, compounded, over the past three years.

CVS Health is one of the nation’s leading healthcare companies with 300,000 employees including more than 40,000 physicians, pharmacists, nurses, and nurse practitioners. It has almost 10,000 stores and its core markets grow each year even in a weak economy. Nearly 70% of Americans live within three miles of a CVS. CVS stock is still a buy representing value since it is trading at just under 11 times forward earnings. BUY A HALF

Fanuc (FANUY) shares were up marginally this week and sales and earnings growth should have decent upside as a record weak yen drives exports that represent about 90% of sales. Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. CSLA estimates U.S. market share at 50% and in China’s at about 20%.

Fanuc’s stock offers us a great balance sheet with no debt and $7 billion in cash. Fanuc is a high-quality, high-margin play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25. BUY A HALF

Ford (F) shares were off a bit as the company looks forward to growth in electric vehicle sales driven by high gas prices and new products. In particular, the Mustang Mach-E electric SUV is fixing some software-related battery issues and the much anticipated F-150 Lightening EV truck should be hitting markets later this summer. Ford stock stands out for its value as it trades at just under six times trailing earnings. I encourage you to buy if you have not already done so. BUY A FULL

Nio (NIO) shares were up 22% this past week as investors seem to be focusing on Chinese electric vehicle stocks as growth ramps up and the Covid slowdown recedes. Nio recently announced an upgrade to existing models with an advanced in-vehicle intelligence digital system with a digital cockpit controller and better sensing capabilities and hardware.

Nio is also launching the ES7, a five-seater electric SUV based on an updated, highly autonomous driving platform. Nio expects to start deliveries in late August. Nio’s ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S. In addition, Nio offers consumers its unique battery-as-a-subscription service whereby owners can swap batteries rather than wait for recharging. Nio is one of the top premium EV makers with significant growth potential and my target is for this stock to go from current 22 to 40 over the next year. BUY A HALF

Oracle Corporation (ORCL) shares were off about 5 points this week. As the world’s leading database management software company, Oracle is a conservative company and has historically been one of the safest stocks in software. Oracle is a solid tech stock for an uncertain market but also has limited upside given its size and the competition in its markets. The company is expanding its cloud business for higher growth and margins. In addition, it has upgraded its own cloud infrastructure platform to widen its moat against cloud giants such as Amazon and Microsoft. I’m moving this stock to a hold until it develops an uptrend. MOVE FROM BUY A HALF TO HOLD

Rio Tinto (RIO) shares fell back to 62 from 69 this week as commodity prices react to increased speculation of an economic slowdown. Rio should have some downside protection given that it is trading at about four times trailing earnings and now offers a dividend yield of 12%.

Based in London, Rio has a cash position of $15.3 billion and operates across 35 countries on six continents, delivering gold, diamonds, aluminum, copper, titanium, iron ore and other industrial metals. One of the largest mines is the Oyu Tolgoi gold and copper mining project in Mongolia. Rio should continue to benefit from the booming EV market – it takes four or five times as much copper to make an electric vehicle as a regular car. Goldman Sachs still projects that this stock could go up 5X by 2030. BUY A HALF

Sea Limited (SE) shares could have significant upside but the stock momentum and the underlying growth story seem to have broken down so I’m moving this from a hold to a sell. It needs to regain momentum and reverse the decline in its valuation relative to its growth rates.

Fortunately, Sea raised $6 billion in equity and convertible debt a little over a year ago, when the stock was in the 300s. With nearly $9 billion in cash now on its balance sheet, it appears Sea can make it through the next few years so I will continue to keep an eye on this stock. With so many other growth stocks out there trading at discounts to highs and forward potential, however, we just have to let this long-time profitable holding go. MOVE FROM HOLD TO SELL

Sociedad Química y Minera de Chile S.A. (SQM) shares were relatively steady this past week, dipping from 93 to 90 with a current dividend yield of 12.3%. The company reported first-quarter revenues more than four times the comparison with the previous year. Revenue from the lithium segment surged more than tenfold. SQM’s lithium output is almost 20% of global lithium output and lithium demand, sales, and prices have been going in the right direction.

SQM says sales volumes should reach 140,000 metric tons of lithium carbonate and lithium hydroxide in 2022, up from 101,000 in 2021. Importantly, this isn’t just a lithium play. It’s also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine so SQM was seen as a joint fertilizer and lithium play.

This stock remains a buy. BUY A HALF

The next Cabot Explorer issue will be published on July 7, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld

Analyst Bio

Carl Delfeld

Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.

He received his Masters in Law and Diplomacy at the Tufts Fletcher School; worked for the First National Bank of Boston (now Bank of America) in London, serving as director of the Japan and South Korea Group; served as vice president at the investment bank Robert W. Baird & Company, developing new business in Tokyo, Hong Kong and Sydney; was Asia advisor to the U.S. Congressional Joint Economic Committee, the U.S. Finance Committee and the U.S. Department of the Treasury; wrote for Forbes Asia and the Far Eastern Economic Review; served as a member on the U.S. National Committee on Pacific Economic Cooperation and the Japan-U.S. Friendship Commission; was chairman of the Asian Pension Forum and wrote a book, titled, Red, White & Bold; the New American Century.