Fears and evidence of rising inflation hammered Wall Street this week so today we are selling two lagging positions and adding a blue-chip inflation hedge. The Fed may begin pulling back on monetary stimulus and increasing interest rates. It is possible that all of this is being overdone and that inflation will be only transitory, in which case market bulls will swoop in to buy stocks at some point. We need to stay in the middle. Avoid panic selling and buy conservative quality.
Cabot Explorer 735
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Rising Inflation Equals Jittery Investors
Consumer prices surged in April by the most in any 12-month period since 2008. The surge came against the backdrop of a loose monetary policy and constrained production, and rising demand as the Covid-19 pandemic eases. The Labor Department reported its Consumer Price Index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March.
Fears of rising inflation hammered Wall Street this week so today we are selling two lagging positions and adding a blue-chip inflation hedge. Yesterday, tech stocks had their worst day since March 18, according to Yahoo Finance data, while the Dow had its worst day since late January.
The cyber-related gasoline shortage didn’t help market sentiment either, but I think the big picture behind all this is that money managers are reassessing frothy stock valuations relative to rising costs squeezing profits. This reevaluation started with the SPACs and is moving down through tech and other high flyers.
Some are also wondering if the Fed will begin pulling back on its support of markets by pulling back on monetary stimulus and increasing interest rates. It is possible that all of this is being overdone and that inflation will be only transitory, in which case market bulls will swoop in to buy stocks at some point. We need to stay in the middle. Avoid panic selling and buy conservative quality.
New Explorer Recommendation
Specialty Chemical, EV Battery, Inflation Play
Cabot Corporation (CBT)
The basic chemicals and specialty materials market is one of the world’s largest industrial sectors. These materials are used in the aerospace, automotive, agriculture, building and construction, electronics, and transportation sectors. One of the lesser-known manufacturers of specialty chemicals is Cabot Corporation (CBT). Headquartered in Boston, the company was started in 1882 and now operates 45 manufacturing facilities in 21 countries around the world with strong growth in emerging markets.
Its edge is a combination of technical, commercial and manufacturing talent that’s among the best in the industry, leading to constant innovation and technology. Its research and development capabilities have been proven over a century and the result is new products, decreased manufacturing downtime, higher margins and improved energy efficiency.
One of the company’s key growth end markets is material used to make lithium-ion batteries. It sells carbon nanostructures, fumed metal oxides and conductive carbon black to battery manufacturers. Its chemicals are key enablers of increased battery performance. They create electrically conductive connections between battery layers. This enables faster charging, greater energy density and extended ranges and all of these are vital qualities needed for EV batteries. That makes it a one-stop shopping deal for battery manufacturers.
The future prospects for Cabot look very promising. The market for conductive carbon additives alone is expected to grow by $1 billion by 2025. Cabot reported adjusted earnings per share for its second quarter that were up a record 79% year over year to $1.38, from $0.77 year over year. Pre-tax earnings in materials increased 46% year over year to a record high of $89 million.
For fiscal 2021, Cabot projects earnings per share of $4.95, meaning that the stock is trading at just over 12 times forward earnings. In addition to a healthy balance sheet, Cabot also has a dividend yield of 2.3%. The stock is an effective hedge against inflation, and a play on economic recovery with exposure to the lithium-ion battery sector.
BUY A HALF
Model Portfolio
Stock | Price Bought | Date Bought | Price 5/13/21 | Profit | Rating |
Altimeter Growth Corp. (AGC) | 14 | 4/15/21 | 12 | -18% | Buy a Half |
Anglo American (NGLOY) | 20 | 2/18/21 | 24 | 23% | Hold a Half |
Cabot Corporation (CBT) | New | — | 60 | — | Buy a Half |
Cloudflare, Inc. (NET) | 24 | 4/30/20 | 70 | 191% | Hold a Half |
Draganfly (DFLYF) | 1.68 | 4/29/21 | 1.28 | -24% | Sell |
Fisker (FSR) | 15 | 2/4/21 | 10 | -32% | Buy a Half |
International Business Machines (IBM) | 130 | 1/7/21 | 141 | 9% | Buy a Half |
Marvell Technology Group (MRVL) | 50 | 4/1/21 | 42 | -16% | Buy a Half |
Paysafe (PSFE) | 19 | 1/21/20 | 11 | -40% | Sell |
Sea Limited (SE) | 15 | 2/8/19 | 213 | 1336% | Buy a Half |
Taiwan Semiconductor (TSM) | 81 | 8/6/20 | 108 | 33% | Buy a Half |
Virgin Galactic (SPCE) | 7.34 | 12/5/19 | 16 | 119% | Hold a Half |
Portfolio Changes
Draganfly (DFLYF) Moves from Buy a Half to Sell
Paysafe (PSFE) Moves from Hold to Sell.
Updates
Altimeter Growth Corp. (AGC) shares have held fairly well in the tech sell-off, dipping from 12.3 to 11.5 this past week. We can’t expect much in terms of news until the merger with GRAB gets nearer to completion and is listed on the Nasdaq. Grab Holdings, Southeast Asia’s ride hailing and food-delivery giant, is the first Southeast Asian tech unicorn to go public through a SPAC. Altimeter Capital, which organized the initial public offering of Altimeter Growth in September 2020, is putting $750 million into the deal.
I suggest you buy a half position here if you have not already done so. BUY A HALF
Anglo American (NGLOY) shares are benefiting from record high copper and iron ore prices as talk of a “commodity super cycle” gains traction. This play on infrastructure basic materials is also the largest producer of platinum, with about 40% of world output, and explores for diamonds, copper, platinum group metals, coal, iron, nickel, and manganese ores. HOLD A HALF
Cloudflare (NET) shares pulled back marginally despite heightened concerns over cybersecurity and reporting a sold first quarter last week.
Revenue in the first quarter came in at $138 million, compared to the consensus estimate of $131 million. That resulted in an as expected net loss per share of $0.03. The company’s retention rate, which measures spending from existing customers, hit a record 123%. Cloudflare now has four million total customers with its large-customer count up 70% year-over-year, accounting for more than half of total revenue.
I’m going to keep this a hold. Cyber is still a strong power trend and Cloudflare has built a global cloud platform that delivers a broad range of network services. We have already taken some profits but aggressive investors can purchase additional shares on dips. HOLD A HALF
Draganfly (DFLYF), a speculative recent recommendation, has run into a tough micro-cap and tech sell-off, forcing me to sell this position at a loss.
Draganfly manufactures and sells commercial drones also known as unmanned aerial vehicles (UAVs) worldwide. Its products include quad-copters, fixed wing aircraft, ground based robots, and handheld controllers, as well as software used for tracking, live streaming, and data collection. MOVE FROM BUY A HALF TO SELL
Fisker Inc. (FSR) shares have been impacted by the pullback in both SPAC-born and electric vehicle companies. Fisker will release its first-quarter results on May 17 with little revenue, and the stock seemed to be taking a hit on Monday due to the company’s disclosure that it “remains on target” to start production of its Ocean vehicle in the fourth quarter of 2022, with plans to unveil the production model this November.
As I mentioned last week, I’m sure some of you using trailing stop losses have exited the stock. It is now trading at a bit more than 10 after trading as high as 28 in February. Since we took some profits near the top I have shown more patience than normal with Fisker, liking the contract production model and their niche EV market. A key element to the Fisker story is that it won’t manufacture its own vehicles, at least not from the beginning. Rather, Fisker will use large contractors, such as Foxconn, to build its vehicles.
We have to accept that the company will have little or no sales revenue in 2021 and that the company’s first product, the custom Ocean, a mid-priced SUV, won’t even go into production until late next year. This is an aggressive stock. AGGRESSIVE INVESTORS - BUY A HALF
International Business Machines (IBM) shares were mildly impacted by the tech sell-off, falling from 146 to 141 as the company led its virtual IBM Think Conference. CEO Arvind Krishna highlighted that IBM is doubling down on hybrid cloud and artificial intelligence as the company unveiled a whole host of new initiatives aimed at pushing the tech giant into areas of potential growth.
Among the highlights are AI enhancements that boost IBM’s Cloud Pak for Data. IBM customers can get answers to questions as much as eight times faster than previously and at nearly half the cost of comparable data warehouses. IBM already has more than 20 quantum computers connected to the cloud and is offering free access to half of them so that researchers and the general public can experiment. This is a great core holding and performing well with a dividend yield of 4.6%. BUY A HALF
Marvell Technology Group (MRVL) shares held up well this week on no news, which is always a good sign. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks. The company’s processors and products are cutting-edge and already generate $3 billion in annual sales. Marvell’s key growth markets include drones, data integration and consumer and industrial robotics. The company expects to post double-digit growth in both sales and net profit in 2021. Despite being in these high-growth markets, the stock is trading at a reasonable 22 times earnings. BUY A HALF
Paysafe (PSFE) reported earnings this week, with revenue of $377 million, an increase of 5% with a net loss of $49.1 million, compared to a net loss of $51.1 million the previous year. Its total payment volume of $27.7 billion increased 8%. Despite these solid numbers, this SPAC-born company has seriously underperformed and we are faced to move this to a sell. MOVE FROM HOLD TO SELL
Sea Limited (SE) shares seem to be trading within a wide band of 210 to 240 and ended this past week near the bottom of this range. There is no reason not to expect another great quarter so I’m keeping this stock a buy. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in the world’s fastest growth markets of Southeast Asia. BUY A HALF
Taiwan Semiconductor (TSM) shares dipped from 114 to 108 this past week, which is some way from its 138 high in February but still more than double its share price (49) at this point a year ago.
The company announced this week plans to open five new fabrication facilities in Arizona in addition to the one announced last May, which may be up and running by 2024. But this plant would only represent 2% of its annual production and involve second-generation products. Importantly, the company controls 84% of the small-chip market. About 60% of revenue came from customers with headquarters in North America and 20% from those based in China. I would take advantage of recent weakness to be a buyer of this dominant, strategic semiconductor stock. BUY A HALF
Virgin Galactic (SPCE) shares again lost ground this week as the company works on technical issues prior to its launch of commercial space flights, and prior to that, making sure that the VSS Unity is complete and the space plane is ready to start pre-flight procedures. Virgin Galactic will give an update on the issue the week of May 17.
Virgin Galactic stock is trading at a price of just over two times our entry point. Since we have taken profits several times at higher prices, I will keep hanging on to shares to in the Explorer portfolio, but more conservative investors may well want to sell their shares at this point as it may take some time for this stock to gain traction and momentum.
It will likely be late summer before the ship, designed and manufactured in California, undergoes glide flight-testing. I’m keeping this stock a hold for now. HOLD A HALF
The next Cabot Explorer issue will be published on May 27, 2021.
Cabot Wealth Network
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