May 30, 2024

Note: I have added a new video Quick Start Guide to Cabot Explorer, in which I take you on a guided video tour through the various features of this service, including Issues, Updates, & Alerts and where to email me with questions. Newer subscribers, in particular, may find it helpful. You can find the Quick Start Guide on the right rail of the Cabot Explorer main screen.

Portfolio Change: None

U.S. Market Stalls, Europe is Cheap, India’s Strength, and Chinese Bottom?

As we approach the end of May, the S&P 500 is still up 10% for the year, including a 4.6% gain so far in May. But the market was off yesterday as bond yields creep upwards. It was a lackluster week for Explorer stocks as well.

U.S. stocks trade at a P/E ratio over 21x earnings while European stocks trade at a cheaper 14x earnings on average. U.K. stocks look even more compelling at just 12x earnings.

Still, European markets have broadly matched the performance of the U.S. market in 2024.

The “Granolas” – Europe’s counterpart to our “Magnificent Seven” – make up about 25% of its market but still trade at a 30% discount to U.S. mega-caps.

These stocks have matched the 3-year returns of U.S. tech giants but with less volatility.

I’m taking a close look at the Dutch semiconductor equipment maker ASML Holding (ASML). Despite a recent below-expectations quarter, the company has maintained its full-year revenue guidance and expects its business to pick up significantly in the second half of the year. Stay tuned.

Turning to China, some believe its market has hit bottom and is due for a rebound.

In the first quarter of 2024, 13 U.S.-listed China ETFs closed, exceeding the previous record of five in both 2020 and 2023. Globally, 18 China ETFs closed in the quarter, more than half of the previous year’s record of 34. All this while the IMF just increased its Chinese economic growth projection to 5% for 2024. That is double the GDP growth projection for America.

Meanwhile, Indian equities’ weight in MSCI’s emerging-markets index has more than doubled to 18% from 8% four years ago. India now has 100 stocks with market capitalizations above $10 billion, nearing China, which has 124 large-cap members of the CSI 300 index.

The number of stocks with over $10 billion cap in India is about four times that in South Korea and Taiwan, highlighting the rising power of India among emerging markets. India’s mega stock number has more than tripled in the last three years.

Finally, Denmark is nervous about a return of the “Nokia risk” as Novo Nordisk (NVO) now represents about half of the country’s private sector corporate growth. Nokia, of Finland, was in a similar position until its collapse in the early 2000s, leading to a sharp decline in Finland’s stock market and economy.

Explorer Weekly Stock Commentary

Below is a brief update on each Explorer stock. Any changes in ratings will be highlighted. This section is all you need to read each week.

Explorer Disrupter Recommendations – need to watch more closely and have 20% trailing stop loss in place.

Cloudflare (NET) shares were flat in May despite Q1 revenue that came in at $379 million (up 30% year over year). This cybersecurity stock is a bit pricey from a valuation point of view but remains a buy at its current price due to its upside potential. Buy a Half

Franco-Nevada (FNV) shares pulled back to 122 this week. The company provides funding to hundreds of mining companies to develop new gold, silver, copper, platinum, and other mining projects. Then, in return for the upfront capital, Franco-Nevada receives royalty payments for the life of the mine’s revenue. This gold-silver-platinum royalty and streaming company remains a buy. Buy a Full

Neo Performance Materials (NOPMF) shares followed two weeks of gains with a small pullback this week. Neo remains a buy because it’s trading at a 50% discount to book value, has ample cash and low debt levels, plus a forward dividend of 6%. Buy a Half

Novo Nordisk (NVO) shares were off 2% this week but are up 31% over the last six months. Novo Nordisk now accounts for half of private-sector job growth, outside agriculture, in Denmark. Hold a Half

PayPal (PYPL) shares finished the week at 61 after starting May at 68 so I’m watching this stock closely. PayPal processed 6.5 billion payments by about 400 million customers in the first quarter. It announced plans to build an ad sales business around the significant data it generates from tracking the purchases as well as the broader spending behaviors of millions of consumers who use its platform. This stock is relatively inexpensive, but it needs more impressive growth numbers to develop a sustained uptrend. Hold a Half

Sea Limited (SE) shares gave back the five points they gained last week after news that antitrust regulators in Indonesia are investigating whether Sea unfairly favored its own delivery services for orders placed on its Shopee e-commerce platform. Sea recently launched an “on-time guarantee” and delivered 70% of packages within three days in Southeast Asia. Investing in live streaming about a year ago led to Shopee’s e-commerce platform becoming the largest live-streaming e-commerce platform in Indonesia. Buy a Half

Super Micro Computer (SMCI) shares were quiet for the second straight week, but the company will likely follow Nvidia’s lead, and soon announce a stock split. The stock is up 208% so far this year and the consensus on Wall Street is that Super Micro revenue will rise by 122% in 2024. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares gave back last week’s gains on no news. IBM has a book of business related to Watsonx and AI of at least $1 billion, and this is growing on both the software and consulting sides of their business. Buy a Half

Unilever (UL) shares were steady this week after JPMorgan upgraded the stock. Its strategy is simple: cut costs, tie pay to performance, and slim down the business to focus only on the company’s most attractive brands. About 3.4 billion people use its products daily and 59% of its sales are from emerging markets. Thirty “power brands” account for almost 75% of Unilever’s total sales. Buy a Half

Visa (V) shares held their value this week. There are more than 4 billion Visa cards used at more than 130 million locations worldwide. This translates into 276 billion transactions equal to roughly $15 trillion every year. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a close ended fixed income mutual fund launched and managed by Aberdeen Standard Investments (Asia) Limited in Singapore. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility, Buy a Small Allocation

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Buy a Full

Morgan Stanley China A Share Fund (CAF) offers exposure to a basket of the largest Chinese-listed stocks. Buy a Half

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. Buy a Half

WisdomTree’s Japan Hedged Equity ETF (DXJ) offers exposure to broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Full

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Watch List: BYD (BYDDY) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). The company also manufactures and supplies EV batteries, including to Tesla, and makes its own chips. This is vertical integration that would make Henry Ford proud. BYD is in a strong position to be one of, if not the leader of the EV revolution in terms of size, scale, and growth.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields: cloud computing, AI, cybersecurity, and edge computing. its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data – from where it is located to where it is needed (edge computing) – is a massive business opportunity in which Cloudflare already excels.

Watch List: ConocoPhillips (COP) is a global energy industry giant and one of the largest independent exploration and production (E&P) companies in the world, as measured by production levels and proved reserves. The company, founded in 1917 and based in Houston, has operations in 13 countries, although almost half the company’s production is derived from U.S. sources.

Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

International Business Machines (IBM) is a blue-chip artificial intelligence (AI) and India play with a nice dividend yield. Known as “Big Blue,” IBM now primarily helps businesses and governments manage their information technology in the cloud era. The stock sells at a discount to the S&P 500 multiple and the information technology sector’s forward earnings multiple. IBM has paid a dividend every quarter since 1916 and has had 28 consecutive years of dividend increases.

Neo Performance (NOPMF) manufactures the building blocks of permanent magnets and powers many modern of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to permanent magnets. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo stock is down 14% this year as rare earth stocks have pulled back due to weak prices; the stock trades at just 17 times forward earnings and 48% of book value. Neo also has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 6% dividend, and incentives are aligned with about 20% of the outstanding stock held by management.

Novo Nordisk (NVO) specializes in treatments for diabetes, hemophilia, and obesity. The company supplies half of the world’s insulin, and its diabetes care products are used by over 34 million people today. Novo highlights that more than 750 million people are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on sizable and growing demand for this weight-loss drug, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia. Some of you may recall this stock was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

Super Micro Computer (SMCI), commonly known as Super Micro, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro stock looks relatively inexpensive right now for the growth that it has been delivering. The company trades at just two times sales. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. Furthermore, both Dell and HPE have relatively high debt whereas Super Micro has a net positive cash position. This is an aggressive pick in a sector experiencing extraordinary growth.

Unilever (UL) is a dominant consumer goods giant with a trove of recognizable 400 brands in its diversified portfolio- from Vaseline to Dove - that it sells in over 190 countries. However, thirty “power brands” account for almost 75% of Unilever’s total sales. It is a steady, stable stock for an uncertain environment and for a change, its stock is selling at a rare discount – down about 25% from all-time highs and at roughly two times sales. Two other reasons I like Unilever are that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa’s financial infrastructure also underpins much of the world’s commerce. The duopoly between Visa and Mastercard is often referred to as one of the best businesses in the world, with insurmountable moats, low operating costs, and plenty of opportunities for unlocking additional value. Visa currently trades at a discount to its archrival MasterCard. This leaves it much better poised to outperform the latter going forward.

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