November 23, 2021

With the short holiday week and only three trading days since last week’s update, we will go directly to a new recommendation. Markets welcomed the nomination of Jerome Powell as head of the Fed for another term, believing that he will keep interest rates low through early next year. As for our stocks, Cloudflare (NET) had a down day yesterday but we have no change in recommendation.

Have a great Thanksgiving holiday.

New Recommendation

With the short holiday week and only three trading days since last week’s update, we will go directly to a new recommendation. Markets welcomed the nomination of Jerome Powell as head of the Fed for another term, believing that he will keep interest rates low through early next year. As for our stocks, Cloudflare (NET) had a down day yesterday but we have no change in recommendation.

Have a great Thanksgiving holiday.

New Explorer Recommendation
Ford (F)
Though Rivian’s (RIVN) recent IPO and its trading since then has been quite extraordinary, and electric vehicle (EV) momentum is accelerating, I believe that Ford represents a better risk/reward idea that comes with several benefits.

First, Ford earlier made a capital investment in Rivian, which makes the current situation more interesting. Rivian has a market value of $105 billion, whereas Ford is at $81 billion. However, Ford made a $500 million investment in Rivian for a 12% stake, so its position is now worth $12.6 billion. Nice return.

Executives from both companies last week announced a mutual decision to focus on their own projects instead of jointly developing new models. This means they will be competitors rather than partners, thus essentially negating one of the reasons Rivian was so credible as an entrant into the EV marketplace. Meanwhile, Ford is forging its own path in the EV world.

Mr. James Farley, who took the top job as Ford’s CEO in October 2020, has accelerated Ford’s electric-vehicle plans. Ford’s strategic plan, outlined in May, has positioned the company as an aggressive player in electric vehicles, committing $7 billion to three new battery factories in Tennessee and Kentucky, along with a plant to build electric pickup trucks, as part of $30 billion in electric-vehicle investments planned through 2025.

Its Mustang Mach-E electric SUV, a competitor to the Tesla Model Y, is off to a strong start with about 22,000 models sold so far this year. Ford estimates global Mach-E demand could be 200,000 vehicles a year in the near future.

In addition, Ford has more than 160,000 nonbinding orders for its electric F-150 Lightning pickup truck, which is scheduled to go on sale this spring. Ford plans to produce 80,000 F-150s a year. To do so, it has invested in its Michigan-based Rouge Electric Vehicle Center, Van Dyke Electric Powertrain Center, and in the Rawsonville Components Plant. The Ford F-150 Lightning is expected to have a starting price of just $40,000 if you get it without the bells and whistles, and will have a range of over 300 miles.

Big picture, Ford plans to sell 600,000 EVs annually by 2023. By 2030, Ford expects to generate 40% of its revenue from electric vehicles (EVs).

Another plus is that Ford announced on November 18 that it has entered into a chipmaking partnership with U.S.-based GlobalFoundries, which has operations all over the world to produce semiconductors. Ford has a big footprint of its own and is a quality brand in Europe, where there is a strong affinity for electric vehicles.

Furthermore, valuation matters in investing. Rivian is the high flyer now but could be ahead of itself and has a lot to prove. Its product has a higher price point and it will not benefit going forward from the Ford collaboration.

Rivian will have basically zero revenue and profits in 2021 while Ford expects to earn between $4 billion to $5 billion in adjusted free cash flow (FCF) and $10.5 billion to $11.5 billion in earnings before interest and taxes (EBIT). The bet for Rivian assumes much higher growth and profitability than Ford going forward. We shall see.

Finally, Ford offers a balanced approach to investing in EVs – if electric vehicles in America do not take off in the coming decade as assumed (shortage of rare earths and metals, perhaps?), it will simply sell more regular cars.

BUY A HALF POSITION

Portfolio Changes and Updates

Model Portfolio

Portfolio Changes
None.

Updates
Please see the latest Cabot Explorer Update for recent commentary on stocks in the portfolio.

The next Cabot Explorer issue will be published on December 9, 2021.