September 28, 2023
The market and most Explorer positions struggled a bit this week except Conoco (COP), which is benefitting from crude oil hitting 2023 highs. Consumers and businesses are looking forward to the Fed ending interest rate increases as the inflation fight continues. Food inflation slowed to about 3% year-over-year in August, down from a troubling 13% a year earlier. Those topics, plus Japan, China and the electric vehicle arms race, in today’s Cabot Explorer update.
Portfolio Changes: None
Japanese Investors Remain Cautious
The market and most Explorer positions struggled a bit this week except Conoco (COP), which is benefitting from crude oil hitting 2023 highs. Consumers and businesses are looking forward to the Fed ending interest rate increases as the inflation fight continues. Food inflation slowed to about 3% year-over-year in August, down from a troubling 13% a year earlier.
Turning to global issues, as Japan becomes more active on the world stage and its stock market rallies, Japanese investors remain cautious. Japan’s 2023, led by foreign capital, has pushed the Nikkei index to a three-decade high, but still 17% below its 1989 high. Long-term returns look anemic compared with what an investor would have gotten by investing in U.S. stocks. Since 1989, the S&P 500 has grown more than twelve-fold over that time.
Burned by dismal returns since the bursting of Japan’s asset bubble in the late 1980s and early 1990s, generations of families in Japan have stashed most of their money in low-yielding savings accounts rather than trying to increase their wealth through the stock market.
Japanese households are still skeptical of Japanese stocks, putting an average of just 11% of their savings into stocks and 54% in cash and bank deposits, according to Bank of Japan data released last month. In the U.S., households have about 39% of their money tied up in the stock market and only 13% in cash and bank deposits, according to Federal Reserve data.
Turning to China, the three pandas living in the National Zoo in Washington will soon be sent to China, which has the rights to pandas in captivity all over the world. Their departure will leave Washington without at least one panda for only the second time since Richard Nixon’s breakthrough with Beijing in 1972. The latest sign of strained relations between China and the U.S.?
One bright spot in China is electric vehicles, an area in which it has become a global powerhouse expecting to garner about 60% of the world’s 14 million new passenger EV sales this year, according to Bloomberg.
BYD’s (BYDDY) Atto 3 is a small, front-wheel-drive crossover with one of the most advanced batteries in the game. The Atto 3 costs about $20,000 in China and is priced at $38,000 in the U.K. and other parts of Europe.
Besides Tesla (TSLA), many foreign EV makers are losing market share in China, and this includes Germany which had about a 17% share with many of those vehicles made locally. China also dominates in EV batteries as you can see from the below chart (courtesy of SNE Research).
China’s CATL is by far the world’s biggest battery maker, has built a massive cell plant in central Germany and its licensing deal with Ford for EV production in Michigan is under fire in Washington. Starting in 2020, Ford tried to follow Tesla’s strategy of bypassing dealers to sell its cars directly to consumers, but it has been a bust and Ford pulled the plug just last month. Ford remains at best an also-ran in the world’s biggest auto market. Ford’s market share in China was 2% last year, with sales down 61% from 2016 on a wholesale basis.
Weekly Explorer Stock Updates
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 and will be followed by a new recommendation every other week.
Explorer Trading Recommendations - need to watch more closely
Alibaba (BABA) shares didn’t do much for us this week as University of Michigan’s data suggests China’s consumer sentiment is starting to tick up after a prolonged slump. Some of this sentiment is perhaps linked to improving manufacturing and exports of electric vehicles. This is a contrarian recommendation in a high-quality company selling way off its high. Buy a Half.
BYD (BYDDY) shares were flat this week but reached a significant milestone by producing 500,000 Atto 3 electric sport utility vehicles just 19 months after the model first hit the market. BYD is also expanding its premium Denza brands. The Yangwang U8, a $150,000 off-road vehicle, will begin deliveries in October. BYD remains confident of selling 3 million EVs which is about the total number of EVs sold in America over the last decade. Buy a Half.
Neo Performance (NOPMF) shares were steady this week. Neo’s rare metals segment sources, produces, refines, and markets high-temperature metals that include tantalum, niobium, hafnium, and rhenium; and electronic metals, such as gallium and indium for jet engines, medical imaging, and wireless technologies. Buy a Half.
Novo Nordisk (NVO) developed Ozempic for people with diabetes and Wegovy for weight loss. Since Ozempic was approved in the U.S., it has accounted for almost two-thirds of prescriptions for weight loss despite its high cost. Medical research cited by the Centers for Disease Control and Prevention said obesity-related healthcare accounts for more than $170 billion in excess medical costs on an annual basis. In August, it was announced that Wegovy may also cut the risk of serious events such as heart attacks and strokes by 20%. Hold a Half.
Tesla (TSLA) shares trended lower this week as Deutsche Bank cut its price target from 300 to 285 citing growth and production concerns for 2024. Tesla has submitted a proposal to set up a battery storage factory in India and plans to build a new EV factory in India that would produce a car priced around $24,000. Buy a Half.
Explorer Multinational Blue-Chip Recommendations - More Buy and Hold
ConocoPhillips (COP) shares were up again this week as crude prices keep rising. The company is among the lowest-cost producers and delivers a relatively strong cash flow. Buy a Half.
International Business Machines (IBM) shares gave back four points this week as this tech income stock has an enviable dividend streak, having paid dividends since 1916 with 28 consecutive years of increases. Big Blue is making a transition to IT infrastructure to cloud computing, AI, and quantum computing. Buy a Half.
Pfizer (PFE) shares were unchanged this week following FDA approval of its updated Covid shot. In addition to cancer treatment specialist Seagen (SGEN), Pfizer bought Biohaven Pharmaceuticals for its migraine assets, and Global Blood Therapeutics for its sickle cell disease treatment. Hold a Half.
Visa (V) shares fell from 239 to 229 this past week even though the company recently reported net revenue of $8.1 billion and diluted earnings per share of $2 in the third quarter of 2023, ended June 30, both year-over-year double-digit increases. The company’s operating margin was an impressive 62%, highlighting its continued profitability. The Boston Consulting Group predicts the industry will reach $3.3 trillion in annual revenue by 2031. Buy a Half.
Explorer ETF/Fund Positions
JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value focused strategy. Current yield is about 10%. Buy a Full.
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 China ex-State-Owned Enterprises Fund (CXSE) is a way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.
Explorer Stocks Summary
Brief company summaries that will not change week to week.
Alibaba (BABA) is one of China’s most well-known brands and the country’s largest e-commerce company. The stock got knocked down over the last few years thanks to a heavy political hand by the Chinese government and a sluggish consumer economy. The shares are now selling at a cheap valuation that barely prices in any future growth, which seems to me unrealistic given all the opportunities for this tech giant to grow beyond its massive consumer platform. Cloud computing and artificial intelligence (AI) are just two examples. This is a contrarian recommendation in a high-quality company.
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.
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.
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 many modern technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to the performance of many important products and emerging technologies. Based in Toronto with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals. 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.
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.
Pfizer (PFE) served more than a quarter of a billion patients that were treated with its medicines and vaccines in the first quarter of this year. Pfizer has 10 products with sales greater than $1 billion a year.
Tesla (TSLA) has always confused investors and Wall Street analysts alike. One reason is that it often has valuations that are, many times higher than its auto industry peers. What many miss is that it is not an auto stock but rather a tech stock and platform stock. Tesla’s value is really in its ever-expanding platform, AI capabilities, charging infrastructure, battery manufacturing, autonomous driving capability, and other areas ripe for disruption that nobody even knows Tesla is working on. Revenues have scaled from $32 billion in 2020 to $54 billion in 2021, to $81 billion in 2022, and are set to move past $100 billion in 2023.
Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa has the largest card network in the U.S., processing $14.5 trillion of payment volume in the last twelve months. 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.
|Stock||Price Bought||Date Bought||Price on 9/20/23||Profit||Rating|
|Alibaba (BABA)||90||9/7/23||86||-4%||Buy a Half|
|BYD (BYDDY)||56||2/24/23||61||9%||Buy a Half|
|ConocoPhillips (COP)||100||5/18/23||123||23%||Buy a Half|
|International Business Machines (IBM)||133||6/29/23||143||8%||Buy a Half|
|JP Morgan Equity Premium Income ETF (JEPI)||54||5/4/23||54||-1%||Buy a Full|
|Neo Performance Materials Inc. (NOPMF)||7||7/13/23||6||-13%||Buy a Half|
|Novo Nordisk (NVO)||63||12/2/22||92||46%||Hold a Half|
|Pfizer (PFE)||38||6/1/23||32||-15%||Hold a Half|
|Tesla (TSLA)||247||8/10/23||242||-2%||Buy a Half|
|Umicore SA (UMICY)||-||-||-||-||Sold|
|Visa (V)||241||8/24/23||230||-5%||Buy a Half|
|WisdomTree China ex-State-Owned Enterprises Fund (CXSE)||33||3/10/23||29||-11%||Buy a Half|
|WisdomTree Emerging Markets High Dividend Fund (DEM)||32||9/29/22||37||15%||Buy a Half|