March 31, 2022

Explorer stocks had another good week as markets adapt to the Russia-Ukraine conflict’s impact on commodity markets. Oil prices pulled back a bit following plans to release reserves. This week we look back in history at a global giant in agriculture and food that is backing our new-age recommendation hailing from Montana.

New Recommendation

Explorer stocks had another good week as markets adapt to the Russia-Ukraine conflict’s impact on commodity markets. Oil prices pulled back a bit following plans to release reserves. This week we look back in history at a global giant in agriculture and food that is backing our new-age recommendation hailing from Montana.

Invest in Timeless Agriculture
When so much divides the world, there is one thing that unites us all – the need for food.

Cargill is the largest private food company in the world. According to Forbes, there are several hundred family members living today that own 90% of the company and each one is worth at least billions. The tycoon that started it all in 1865 was William Wallace Cargill.

The end of the Civil War was a great time to begin a business and Cargill saw that both agriculture and transportation would go through a revolutionary period of rapid growth. The next 50 years represented one of the world’s top growth stories – comparable to China’s economic rise in the last four decades.

Beginning with a grain elevator in Iowa, the company grew with the explosive expansion of railroads while diversifying into flour milling, insurance, coal, farming, timber and finance.

Later the company expanded into soybean processing, feed, seeds and vegetable oil but the post-WWII period is when Cargill really took off by expanding across the globe. From 1965-1990, the number of Cargill employees grew tenfold!

Today, Cargill is the world’s largest agricultural commodity trader and active in more than 60 countries. Roughly 500 vessels are steaming around the world at any time carrying about 200 million tons of Cargill produced and sourced commodities each year while visiting 6,000 ports. More than half of its employees are now based in emerging markets.

When Cargill was founded, 95% of Americans were farmers. Then began the steady mass migration to the cities. Today, only 2% of Americans make a living off the land. Still, the productivity of our large-scale farms is unmatched. We take a steady supply of high quality food at reasonable prices as our birthright, but it is a different story in many parts of the emerging world.

Food represents 14% of our consumer spending but in emerging market countries it ranges between 30% and 70%. Here is the big picture: As the incomes of emerging market nations such as India and China rises, food prices will also increase.

In addition, as incomes rise from low levels, the quality of diet increases as well. Consumption of rice and vegetables may hold steady but the demand for meat, milk and fruit is surging. And eating more beef, pork and chicken drives demand for grain as animal feed.

Yet despite all this, because agricultural products are so common, we often don’t consider them as possible investments.

In fact, agricultural commodities and the fertilizer companies that propel many of them are in the midst of a bull market in part due to the Russia-Ukraine crisis; together those two countries account for about 25% of global wheat exports. In the five years leading up to 2021, Russia accounted for more than 18% of global wheat shipments and Ukraine was the fifth-biggest exporter.

Then there are the soaring prices of fertilizer ingredients, sending big fertilizer companies such as Mosaic (MOS) and Nutrien (NTR) through the roof. With higher fertilizer prices, farmers are already using less and that will further restrict production of wheat, corn and other basics.

These are the supply and demand factors igniting an agricultural commodity bull market. But how should we play it? Fertilizer companies are in vogue right now but a truce in Ukraine could send these stocks tumbling.

Unfortunately, you can’t buy Cargill since it remains a private company but you can invest alongside Cargill in an innovative company leading the charge into sustainable and environmentally-friendly farming – a new trend that is spreading across the world.

New Explorer Recommendation
Local Bounti (LOCL) – A New, Profitable, Cargill-Backed Company
Traditional farming is tied to pesticides, greenhouse gas emissions, land and water grabs, and expensive infrastructure and distribution. Local Bounti meets these challenges through its sustainable production and delivery of fresh produce.

Founded in 2018 by Craig Hurlbert and Travis Joyner, the company uses proprietary technology to grow leafy greens such as romaine and butter lettuce along with herbs like cilantro and basil using 90% less land and water than traditional agricultural methods – and without pesticides.

This is not vertical farming, which can be very costly, or just indoor greenhouses that normally generate lower yields. This Montana-based company uses a combination of vertical farming and greenhouses that it calls Stack & Flow Technology.

Local Bounti is one of the few startups that went public via SPAC last year that exceeded its 2021 revenue projections, with 32% gross margins. The company raised $125 million through a private investment in public equity, or PIPE, from major investors including agriculture giant Cargill, which is providing $200 million in debt financing.

The company is poised to expand distribution to major food retailers such as Walmart, Kroger, Albertsons and Target. Local Bounti will see a roughly 20x increase in its sales footprint overnight due to its acquisition of farming operator Pete’s (gross margin of 45%), based in Carpinteria, California, which already sells at roughly 10,000 retail locations across 35 states and provinces in the U.S. and Canada. Local Bounti’s lettuce and herbs are currently distributed at 500 locations in nine states.

Local Bounti has 12 of its own greenhouses and will gain three more from the Pete’s merger, including one under construction. There is also the potential opportunity to license its technology to major agriculture players since the company already has more than 50 patents. Local Bounti is disrupting the cultivation and delivery of produce and has the potential to scale up its already growing footprint in this emerging market. BUY A HALF POSITION

Portfolio Changes and Updates

Model Portfolio

Portfolio Changes
Harley-Davidson (HOG) - MOVE FROM BUY TO HOLD A HALF

Updates
Fisker (FSR) shares were up this week to over 13 a share, and are up 30% over the last two weeks. While higher material costs such as nickel are impacting costs, the company still expects to begin delivering product later this year. This custom EV maker has a respected CEO and an asset light strategy allowing it a chance to capture the custom mid-priced EV market. Next up after the Ocean SUV is the PEAR – a smaller vehicle than the Ocean, with a pricing starting of less than $30,000. BUY A HALF

Ford (F) shares were up this week, finishing above 17, as the company announced that by 2030 it expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026.

Ford’s splitting the company into two, with Ford Model e in charge of its EV business and Ford Blue handling its legacy combustion engine business. But that was eclipsed this week by Volkswagen’s announcement of $7.1 billion investment in EV manufacturing in America. Ford said it would introduce three new electric passenger vehicles and four new electric commercial vehicles in Europe as it plans to sell more than 600,000 EVs in the region by 2026. BUY A FULL

Harley-Davidson (HOG) shares added two points this week on no news but the shares are just about where they sat a month ago. This leading motorcycle maker is banking on its LiveWire electric motorcycle to open new markets and recently reported a fourth-quarter profit that saw motorcycle revenue surge 54%. Harley has announced it would be spinning off its LiveWire all-electric motorcycle business into a stand-alone publicly traded company and thinking that this may be the better play, I’m moving this to a hold. MOVE FROM BUY TO HOLD A HALF

Marvell Technology Group (MRVL) shares were up strongly last year as the company acquired cloud data center switch provider Innovium, and optical-networking company Inphi. Combined with its existing portfolio of hardware designs addressing high-speed movement of data, Marvell is nicely positioned to be a key player in 5G and data center construction. 5G and cloud and data centers should be a strong driver of Marvell’s growth in the next few years though the stock is certainly not cheap by any means. Marvell’s last quarter was impressive as earnings jumped 72% on a 68% increase in sales as revenue increased in all five of its end markets. HOLD A HALF

Novonix (NVNXF, NVX) shares followed last week’s 13% gain with a week reflecting the market pullback and recovery, though shares were up 6% yesterday. The Australian company plays a critical role as a strategic provider of U.S. synthetic graphite that are both higher quality and lower priced than Chinese graphite. Another plus is its strong partner, Phillips 66. This is a speculative idea but it remains undervalued and a buy recommendation. BUY A HALF

Oracle Corporation (ORCL) stock was up two points this past week as the company announced the availability of Java 18, the latest version of the world’s number one programming language and development platform. Java 18 delivers better performance, stability, and security that will further improve developer productivity. Oracle’s co-founder Larry Ellison owns 43% of the company and this significant ownership indicates that he has prioritized equity instead of cash returns and therefore is focused on the long-term success of the company. BUY A HALF

QuantumScape (QS) shares were up 15% this past week on reports from Electrek that the Porsche all-electric 911 could be powered by solid state batteries supplied by QuauntumScape. This represents a second straight week of nice gains for the stock though shares are still about 60% off their 52-week high.

QuantumScape is viewed as a leader in promising solid-state battery technology and it expects to start commercial production within two years. The potential of QuantumScape’s technology has attracted some high-profile, influential investors such as Bill Gates, and Volkswagen has invested $200 million in the company as it develops battery technology that will charge to 80% of capacity in 15 minutes. You will need some patience with this one but solid-state batteries could be one of the most promising technological breakthroughs of the EV revolution. BUY A HALF

Sea Limited (SE) shares had another positive week as the market seemed relieved that it is exiting the India market. This will improve the risk/return profile for Sea and will limit the losses that normally accompany early expansion in a new e-commerce market. Though opinions on Sea stock are all over the map, the stock seems to have stabilized as the company more than doubled its sales year over year, though its net losses regrettably grew by 18%. Sea’s e-commerce wing, Shopee, remains strong. This stock is still a hold for now. HOLD A HALF

StoneCo Ltd. (STNE) shares were up 59% in the stock’s first week as an Explorer recommendation after the company reported a quarter with revenue growing by 87% year over year. This second week, Stone stock gave up two points to finish just over 12 as a bit of a board shakeup took place, though the firm’s chairman and CEO are still in place.

Based in Sao Paulo and founded in 2000, 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 Brazilian fintech company at its IPO in late 2018 as Brazil is largely a cashless society and 45 million Brazilians still don’t have a bank account. BUY A HALF

The next Cabot Explorer issue will be published on April 14, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld