A difficult stretch causes us to sell two underperformers this week but we move forward today with a high-quality Japanese company at the heart of an unstoppable trend and a high-quality stock on sale.

Cabot Explorer Issue: May 12, 2022

An Oasis of Stability in the Shadow of Mt. Fuji
The highest inflation in 40 years, rising interest rates, the China shutdown, ongoing supply chain problems, and the war in Ukraine have all impacted market sentiment.

But the sharp drop in share prices during three straight days this week seemed an overreaction to say the least. In the emerging world of cryptocurrency, bitcoin is now trading more than 50% off of its all-time highs from last year.

The Ukraine-Russia situation has spawned considerable uncertainty and the valuation reset, which combined with interest rates/inflation has left few sectors untouched. Alphabet, Amazon, Microsoft and Tesla have all lost 20%+ of their value this year. Netflix has lost more than 70%. Facebook is down 40% this year.

The market is clearly now “risk-off,” but we should all avoid becoming overly pessimistic and think ahead with an optimistic view that this pullback is a buying opportunity. Focus on buying – and adding high-quality, well-managed companies that have a competitive advantage and are selling for a lot less than what they’re worth.

In 1994, Jeremy Siegel penned his classic, Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. The gist of his argument is that you can expect long-term returns around 7% after inflation. Looking ahead, I’m even more optimistic than Siegel. Thanks to widespread innovation in technology, plus enduring growth themes such as green energy and fintech, investment returns could be considerably higher going forward.

The greatest danger is being too pessimistic and staying out of the market altogether. In the end, the optimists usually have the edge.

New Explorer Recommendation
Robots Making Robots
Fanuc (FANUY)

While you have seen a multitude of stories about the rise of robots in manufacturing as well as in everyday life, you may not be aware of FANUC (FANUY), a Japanese blue chip with zero debt, a sterling reputation, and a storied past.

Based in Oshino, a village at the foot of Mount Fuji, 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. Fanuc claims to be the only company that uses robots to make robots.

Fanuc, whose name is an acronym for Fuji Automatic Numerical Control, has been a world leader in robotics since the early 1970s. It was founded as a wholly owned subsidiary of Fujitsu in 1955 after that electronics giant decided to enter the factory automation business.

Today Fanuc is as global as it gets with more than 240 joint ventures and offices in over 46 countries with a commanding 65% share of the its world market. For example, industrial robot manufacturer Shanghai-Fanuc Robotics Co. Ltd. has a plant in Shanghai.

The company can churn out 10,000 industrial robots per month, double that of its closest competitor. But while it stays on the edge of new technology, it’s a conservative company. Watching costs carefully leads to exceptional operating margins of 25% while their competition hovers around 10%.

Over time, Fanuc has become a key supplier to some of the world’s most important industries, selling some 500,000 robots overall. Major car manufacturers, including Tesla, are often assembled and welded by Fanuc’s six-axis yellow robots.

The frames of iPhones are made in Fanuc’s Robodrill machines and its robots also help with the production of aeronautical components and even apply the varnish on Fender guitars. CSLA estimates U.S. market share at 50% and in China about 20%. Exports account for 90% of Fanuc’s sales.

Fanuc should benefit from robust demand from developed markets as well as China as manufacturing wages continue to increase and manufacturers look to robots to increase productivity. You can find Fanuc robots at Amazon warehouses as well as on the shop floor of General Motors.

Use of industrial robots has allowed companies like Panasonic to run factories that produce 2 million plasma television sets a month with just 25 people.

Much of the company’s sales are channeled through GE Fanuc, a 50-50 automated machinery joint venture with General Electric Company. Fanuc does most of its manufacturing in Japan. Fanuc is building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts for smartphones.

Fanuc’s stock offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive and Fanuc also bought back 72 million shares last month. In short, Fanuc is a high-quality play on what seems to be an unstoppable trend.

Down 33% from its 52-week high at just under 15 per share, my six-month target is 25, or about 70% upside to its current share price. BUY A HALF POSITION

Model Portfolio

Portfolio Changes
StoneCo (STNE) (5.10.22) – Moved to Sell
Fisker (FSR) (5.10.22) – Moved to Sell

Updates
CVS Health Corporation (CVS) shares were off a point, demonstrating relative strength. It recently reported first-quarter sales were up 11% and the company raised its 2022 earnings outlook slightly, now expecting per-share earnings between $8.20 a share and $8.40 a share. CVS reported that it expects demand for Covid testing and vaccines to continue to lift sales throughout 2023.

CVS is one of the nation’s leading healthcare companies with almost 10,000 stores and is expanding its digital footprint. For example, 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. CVS stock remains a conservative buy as it sells for less than 12 times forward earnings. BUY A HALF

Fisker (FSR) shares are under considerable pressure so regrettably I moved this to a sell this past Tuesday, May 10. We may be back. MOVE FROM BUY TO SELL

Ford (F) shares were off half a point on Wednesday to close at 12.8 as the company disclosed that it sold 8 million of its shares in electric vehicle (EV) maker Rivian in the open market on May 9, at a price of $26.80, to raise $214.4 million. Ford’s sale represented 7.85% of its total stake in Rivian, and Ford still owns 93.95 million Class A shares, or about 10.5% of the Class A shares outstanding. Rivian still has plenty of cash so for the near term my guess is that they will trade in some sort of symbiotic relationship.

Ford already sells 900,000 F-Series trucks per year, bringing in more than $40 billion in annual revenue, which is more than companies like McDonald’s, Nike and Coca-Cola. The Ford Lightning starting price is half of the Rivian and far less than the six-figure Hummer, putting it at a sweet spot for pickups.

Production is underway of the F-150 Lightening EV at the Rouge Electric Vehicle Center. Trading at about 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. This is my #1 pick. BUY A FULL

Novonix (NVNXF, NVX) shares really took it on the chin this week, losing almost a point, but we will give it a week or two to recover its momentum. We have already taken some healthy profits on this idea and its future still looks promising. 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, which dominates the production of natural graphite. The Novonix story rests on its innovative technology and the company benefits from a 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. Novonix remains a buy recommendation for aggressive investors. BUY A HALF

Oracle Corporation (ORCL) shares were off 4% this past week as this quality, conservative software company moves forward into becoming more of a cloud services company. 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 company will likely resume its upward trend when tech markets are back in favor. BUY A HALF

Sea Limited (SE) shares have been hammered recently, no question about it. If you had any reasonable stop-loss on this stock, you are probably out of it. For those that still hold the stock and have sold some shares several times over the past two years to take profits off the table as I have recommended, you have a tough choice.

In the past six months, this stock has plummeted from 357 to 57. Still, I can’t deem this stock a sell given its growth and markets. A Goldman Sachs analyst recently picked up the company for the first time with a buy recommendation and a 196 price target – almost quadruple the current price.

All three of Sea’s revenue drivers are still delivering growth. E-commerce sales are expected to increase 76% to $9 billion, and digital finance SeaMoney revenue is expected to increase 155% in 2022. I will keep this a buy for aggressive investors. BUY A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares were down in line with the market this week despite news that lithium demand is expected to outstrip supply by 40X by 2040. SQM has lithium plants in Chile and its output is almost 20% of global lithium output. Lithium demand, sales, and prices have been going in the right direction as Russia’s fertilizer exports, that normally account for about 25% of world exports, are down sharply.

SQM is also the world leader with a 46% market share of potassium nitrate 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 this year calls for earnings-per-share growth of 127% with the long-term growth estimated to be around 40%. BUY A HALF

StoneCo Ltd. (STNE) shares were weak this week and given market conditions, I moved this to a sell on Tuesday. 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 has invested $340 million in this fintech company. MOVE FROM BUY TO SELL

The next Cabot Explorer issue will be published on May 26, 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.