Cabot Stock of the Month Issue: December 14, 2023

Market Review

Well, I’d call November a pretty good month! The Dow Jones Industrial Average soared by around 2,000 points since our last issue. Wall Street seems positively optimistic that the Fed will begin to lower interest rates mid-year, according to a recent CNBC survey. Also, the risk of a recession continues to decline, with Goldman Sachs saying the probability is now around 15%.

Both of those instances may create a very good market in 2024.

Meanwhile, job openings—while down a bit—still remain healthy; the unemployment rate has fallen to 3.7%, and consumer sentiment is up. And there may be some better news for housing, with Realtor.com predicting that mortgage rates “will slide into the 6% territory in 2024.” Economists are also forecasting that price increases will ease, and inventory will rise—all excellent indicators of an improved market.

Style-wise, 2023 was a great year for growth stocks, but value stocks did appreciate, and small caps seem to be attracting new attention.

Sector-wise, investors loved Technology (up 50%), Communication Services (46.86%), and Consumer Discretionary (34.09%) stocks. The worst-performing sectors were Utilities (down 10.06%), Energy (-5.99%), and Consumer Staples (-5.96%).

For 2024, I have my eye on Technology, Healthcare, and maybe Real Estate.

Here at Cabot, we are positive, but still focused on judicious stock-picking, and are not buying into the dartboard approach!

I wish you a healthy and happy holiday season and look forward to bringing you some prosperous recommendations in the New Year!

Feature Recommendation - Exscientia (EXAI): An Exciting Frontier—AI As Drug Designer and, Ultimately, Healthcare Cost Cutter

I like a diversified portfolio—a basket of stocks and ETFs that include a range of conservative, moderate, and aggressive investments that appeals to novice as well as experienced investors.

Last month, I recommended a solid, conservative company in the healthcare arena. This month, with the market seeing an incredible end-of-year rally, and international issues looking attractive in the near future, I’m stepping up to a more cutting-edge stock that has almost unlimited potential.

And for this recommendation, I turned to our international expert, Carl Delfeld, Chief Analyst of Cabot Explorer. Here is Carl’s take on this exciting stock.

“Founded in 2012 and based in Oxford, England, Exscientia is using artificial intelligence (AI) to develop new medicines and is attracting high-quality partners.

“You have probably heard more than you want about the incredible potential of artificial intelligence (AI). AI enables computers, robots, and other devices to think like humans but far faster and more powerfully. Some refer to AI as ‘inhuman intelligence,’ or machine learning.

“The potential of AI can be applied to many industries but perhaps the most exciting is the field of medicine. Exscientia has the first AI platform clinically validated to improve treatment outcomes for cancer patients and the world’s first AI-designed drugs to enter clinical trials.

“Exscientia leverages AI to more effectively and quickly, and more cheaply develop drugs. The applications of AI to cut costs and build profits seem endless.

“Exscientia has a rapidly growing pipeline of more than 25 projects in motion with the goal of drug discovery in areas such as ovarian and hematological (blood) cancer.

“In total, the company has stated it has eight drugs that are either in trials or likely to be in clinical trials soon. It also has expanding facilities at Oxford Science Park, a new laboratory in Oxfordshire, and a medical center in Vienna, Austria.

“And the company has received grants from the Gates Foundation, as well as equity ownership by that foundation (about 1.3%). Many of Exscientia’s shareholders, in fact, are still the early venture investors from before they went public a little over two years ago (including Softbank, which owns about 5%).

“Exscientia stock is trading way off its high but is in an uptrend. It went public at 22 a share so the company has about $500 million in cash on the books—a big number for a company with a market capitalization of just $658 million.

“Finally, keep in mind that this is an attractive, speculative stock that may have a bumpy ride. It is a young company that is not and will not be profitable next year. This is an aggressive idea so some may wish to purchase shares incrementally. BUY A HALF POSITION.”

Exscientia could be a blockbuster if its AI solutions can indeed shorten development timelines, reduce failure rates in drug trials, and reduce costs for pharmaceuticals.

Exscientia’s flagship program is GTAEXS617, a cancer treatment candidate that is in phase 1/2 trials for treating non-small-cell lung cancer, colorectal cancer, breast cancer, and ovarian cancer, a market that adds up to about 75,000 patients annually in the U.S., according to the company’s management. The completion of these trials is expected in 2028; and, yes, that’s a long way off. But this is a discovery stock, and as Carl mentioned, speculative.

Exscientia has some deep-pocketed partners. The company just inked a deal with German pharma giant Merck Kommanditgesellschaft auf Aktien (not the U.S. Merck—a different company), who is looking to use Exscientia’s AI-based drug discovery methods for three projects in oncology and immunology. If all goes well, the company could eventually see up to $674 million in milestone payments, $20 million of which has been received already.

Additionally, Exscientia has entered into agreements to co-develop drugs with Bristol-Myers Squibb and Sanofi.

And it recently received a $2.3 million grant from Open Philanthropy, a philanthropic funder that has joined with the Novo Nordisk Foundation and the Bill & Melinda Gates Foundation, “to help catalyze the discovery and early development of novel antiviral medicines in preparation for future pandemics.” Under Exscientia’s grant, the company “aims to harness the activation of the host interferon response as a therapeutic approach for pandemic influenza.”

All in all, an interesting stock. And Wall Street seems to think so, too, with analysts pushing earnings forecasts up in the last 90 days. But since the company is not yet profitable, that means that loss forecasts have been declining.

The shares have long-term potential, as Carl says, but are a Speculative Buy.

About the Analyst: Carl Delfeld, Chief Analyst of Cabot Explorer

Carl received his Master’s in Law and Diplomacy at the Tufts Fletcher School; worked for the First National Bank of Boston (now Bank of America) in London, serving as director of the Japan and South Korea Group; served as vice president at the investment bank Robert W. Baird & Company, developing new business in Tokyo, Hong Kong and Sydney; was Asia advisor to the U.S. Congressional Joint Economic Committee, the U.S. Finance Committee and the U.S. Department of the Treasury; wrote for Forbes Asia and the Far Eastern Economic Review; served as a member on the U.S. National Committee on Pacific Economic Cooperation and the Japan-U.S. Friendship Commission; was chairman of the Asian Pension Forum. Carl has recently released his latest book: Power Rivals: America and China’s Superpower Struggle.

Additional books Carl has written include:

Red, White and Bold: The New American Century Paperback,

Think Global, Grow Rich: 7 Principles for Building a Global Portfolio,

The New Global Investor: Using ETFs to Build Smarter, Simpler and Safer Portfolios.

With forecasts for international and emerging stocks looking brighter in 2024, I thought it would be a great time to consult with Carl, Cabot’s in-house expert in this arena, and find out his current thinking on non-domestic companies as well as the multinational stocks that he covers. Here is our interview:

Nancy: Goldman Sachs recently issued a report that said they expect emerging market stocks to outperform the S&P 500 in 2024. Do you agree/disagree, and why?

Carl: I agree that international markets will do well in the coming years since they have lagged over the last several years and therefore are relatively inexpensive compared with the U.S. market. However, it is very much a country-by-country call. Japan has been in an uptrend but some countries such as China are out of favor. This is why I prefer using globally dominating multinationals to capture international growth as well as some select ETFs and then layer on top emerging and international stocks.

Nancy: In that same report, Goldman predicted that the Chinese stock market will rise by double digits next year. What are your thoughts?

Carl: There is a great degree of uncertainty regarding China. Economic growth is slowing, debt is quite high, transparency is poor, and political risk is rising. On the other hand, stocks are cheap, and in certain sectors, China still dominates the West such as in electric vehicles, manufacturing, critical minerals, and certain technologies.

Nancy: Your portfolio has nice coverage of the electric car/component industries. Recently, in one of your Cabot Explorer updates, you noted that EV demand is strong globally, but has paused in the U.S. due to upcoming incentives/rebates. Would you please expand on those thoughts and bring my subscribers up to date on the status of the EV industry?

Carl: Sure. China dominates the entire EV supply chain providing about 80% of the raw material mineral inputs, 70% of the EV batteries, and 2/3 of all EV vehicle production. For 2023, about 40% of all vehicles sold in China will be EVs, for Europe, the number will be 20%, and for the US 9%. China’s EV market is very competitive and many of its leading makers are exporting to and manufacturing in overseas markets such as Southeast Asia, Europe, and Mexico. BYD (BYDDY), Toyota (TM), and Tesla (TSLA) seem to be the clear global EV leaders.

Nancy: The artificial intelligence (AI) industry is booming, with growth forecasts around 17% for 2024. Which subsectors of AI have caught your interest recently?

Carl: My recommendation this month is Exscientia (EXAI) which leverages AI to more effectively and quickly, and more cheaply develops drugs. The applications of AI to cut costs and build profits seem endless and this will be a key area of focus for the Cabot Explorer for 2024 and beyond.

Nancy: Your portfolio includes ConocoPhillips (COP), an oil/gas stock that has seen some nice upward movement lately. The price of oil is down, and natural gas is up; how much effect do these daily price changes have on COP’s price? What are the primary factors driving the stock’s current trend?

Carl: Conoco (COP) has been doing well even when energy prices are volatile because it is globally diversified and a low-cost producer. It is a great core energy stock with a strong cash flow and a decent dividend.

Nancy: Which sectors are attractive to you for the first quarter of 2024? And why?

Carl: For 2024, I plan on looking closely at emerging market stocks including Southeast Asia, AI technology plays, beaten-down but promising fintech ideas, drugs and pharmaceutical stocks, and stocks across the board that present us with both an attractive entry price and are in an uptrend. It is hard to consistently beat a combination of quality, value, and an uptrend of momentum which I refer to as the “Value Bounce.”

Portfolio Updates

Tom Hutchinson, Chief Analyst of Cabot Dividend Investor updated his outlook on Qualcomm Inc. (QCOM), saying, “The struggling chipmaker stock got a 27% bump in a little over a month. While the overall tech sector rallied on falling interest rates, Qualcomm was also helped by the earnings report. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers next year. Also, strong smartphone sales in China are indicating that phone sales have already bottomed. QCOM is still lagging the overall tech sector this year as it doesn’t benefit as immediately from AI as some other companies, and it is still working through a lull in smartphone demand. It’s looking like 2024 could be a much better year. BUY.”

The shares of QCOM are attracting some big investors, with 17 billionaires now owning some $146 billion of the stock. And 13 Wall Street analysts consider the shares a Buy.

QCOM shares currently trade at a P/E of around 20, which is attractive compared to the industry’s average P/E of 25. And its dividend yield of 2.35% gives investors a bit of cash flow while they await further appreciation of the stock. Buy.

I’ve had it with Devon Energy (DVN). Although analysts continue to like the company—especially its 6.46% dividend yield—the shares have just disappointed. I recommend that you Sell your shares.

Bruce Kaser, Chief Analyst of Cabot Value Investor and Cabot Turnaround Letter is still a fan of Citigroup (C). He cited a recent article in Barron’s that “highlighted the challenges that the company faces yet also some positives that include its relatively small unrealized bond portfolio losses ($34 billion) and its relatively small commercial real estate portfolio.”

Bruce went on to say, “Investors have lost hope in Citigroup. Valued at roughly 50% of tangible book value, Citi shares are pricing in what amounts to a ceiling on its earnings power of about $4.50-$5.00/share, based on the assumption that a roughly 8x multiple is “about right.” This perhaps is based on the 4Q23 estimate of $1.18/share being the permanent run-rate ($1.18 x 4 quarters = $4.72). We find it hard to believe that Citi’s earnings won’t improve over the fourth quarter run rate. Not only are consensus annual estimates at $6/share, but the company is taking a more aggressive cost-cutting stance, and its stronger segments continue to show growth. BUY.”

Investors may find promise in Citi’s dividend yield of 4.34%. And in its recent earnings report, which saw third-quarter revenues grow 8.8%, to $20.1 billion. Also, big money is piling into the shares, with the number of hedge funds owning the stock rising to 79, an increase of four, in the last quarter, about $7 billion worth of stock. And, of course, Warren Buffett owns the largest share of the company.

I agree with Bruce and Warren. Continue to Buy.

Michael Brush, Chief Analyst of Cabot Cannabis Investor, reported on Curaleaf’s (CURLF) earnings, commenting, “Curaleaf reported third-quarter revenue of $333 million, a 2% increase over the prior year but a 1% decline sequentially.

“Operating cash flow from continuing operations came in at $47 million and free cash flow was $33 million. Curaleaf reported adjusted EBITDA of $75 million. It ended the quarter with $118 million in cash.

“The company has cut $90 million in annualized expenses in the past twelve months. It reported net losses of $92.3 million or 13 cents a share.

“The company opened two stores in Connecticut and expanded its European business by commencing sales in Poland. It signed a deal to sell its Oregon assets, and it continued to scale back production in Nevada.

“Curaleaf expects slight Q4 sales growth to help it finish 2023 with 5% sales growth for the year. BUY”

The company announced that it has received conditional approval from the Toronto Stock Exchange to list its subordinate voting shares, which should add to its exposure. Continue to Hold.

Tyler Laundon, Chief Analyst for Cabot Early Opportunities and Cabot Small-Cap Confidential, updated his recommendation of TransMedics Group (TMDX), noting, the company “continues to act well with shares popping back above the 200-day moving average line yesterday (the stock’s post-Q3 report gap higher sent it above the short and mid-term lines). Recall that the Q3 beat was massive. And it seems to me that, while analysts were very impressed, they’re also being a little slow to get over-enthusiastic on the name (though most are generally positive). This is likely because of the uncertainty associated with the new aviation business and how it could track.

“Stepping back, a few of the positive big-picture trends emerging from the Q3 call were: (1) heart revenue was 20% ahead of expectations and management will speak further on the benefits of TMDX’s OCS method vs. NRP at the ISHLT conference in April 2024, (2) aviation added just over $2 million in Q3 and the company has nine planes, scaling to 20 by the second half of 2024 to cover entire U.S., and (3) company delivered operating income if we take out acquisition-related expenses. Bottom line – the trends are good.

“Management presented at the Piper Sandler Conference in November. One interesting note is the international opportunity, especially Europe, once reimbursement is secured. That’s a longer-term initiative as TransMedics will need to go country by country to get reimbursement. HOLD A QUARTER.”

I agree. Continue to Hold.

Tom Hutchinson also commented on Brookfield Infrastructure Partners (BIP), saying, “This infrastructure partnership has been moved from the Dividend Growth Tier to the High Yield Tier. The 5.6% yield makes it a high-income stock and the rise in yield is prompted by lousy performance. BIP has been bludgeoned over the past two years by rising interest rates. But things are changing. It is likely rates have peaked and interest rate-sensitive stocks have been rallying. BIP has rallied about 30% off the low made at the end of October. If the economy slows, BIP could be a star again in 2024. BUY.”

Ditto. Continue to Buy.

Bruce Kaser had this to say about NOV, Inc (NOV): “The company’s large installed base helps stabilize its revenues through recurring sales of replacement parts and related services. We see the consensus view as overly pessimistic, given the company’s strong position in an industry with improving conditions, backed by capable company leadership and a conservative balance sheet.

“NOV’s shares remain moribund due to weak demand across most of its markets. However, international demand is starting to tick upward, pricing is improving, and order growth is ramping up, even if modestly. The company continues to tighten its cost structure and generates positive free cash flow. NOV’s balance sheet carries modest debt.

“We are encouraged by the fundamental improvements underway as well as the vote of confidence provided by Greenhaven Associates. This firm, led by legendary yet not widely known Edgar Wachenheim, recently initiated a sizeable position in NOV. BUY.”

I agree. Continue to Buy.

Carl Delfeld, Chief Analyst of Cabot Explorer, was happy to report that, “International Business Machines (IBM) shares broke above 160 this week as IBM and Meta Platforms (META) have come together to launch AI Alliance with the goal of a more open model of AI. IBM is a conservative way to gain exposure to AI, the cloud, and cybersecurity. It also provides a high and safe yield. Buy a Half.”

Billionaires also like IBM, with 14 holding significant shares of the company. As well, 53 hedge funds also own more than $843 million of IBM shares.

This company has proven itself a survivor and innovator over its 112 years of existence. Continue to Buy.

Mike Cintolo, Chief Analyst of Cabot Growth Stocks and Cabot Top Ten Trader, is pulling the plug on Noble (NE), with a recommendation to Sell the shares. Mike said, “Eventually, it’s very likely Noble (NE) is going to have a big run even if oil prices aren’t sky-high as big explorers soak up all the deep-water rigs on the market. However, that time is not now, and despite giving our remaining shares plenty of room to get moving, they (and the oil group in general) remain on the outs. SELL.”

I concur. Sell.

Tyler Laudon, also issued a Sell recommendation of IonQ (IONQ), saying, “Momentum has faded from the quantum computing space over the last couple of weeks as investors have taken more of a risk-off approach. That has hurt our position in IonQ (IONQ), which just dipped below its 200-day moving average line yesterday (while the broad market was up).

“It hasn’t helped that co-founder and Chief Science Officer Chris Monroe has decided to move on, a somewhat odd development given commentary from management that the company is doing well and getting closer to true commercial scale (even if ‘closer’ might mean a couple of years). Given the combination of an iffy macro, poor stock performance (IONQ is our worst-performing position) with a long-term trendline break, and higher bar for management to surpass to gain favor with investors in the near term, we’re going to step aside today. No doubt, IonQ remains a very compelling company and it will stay on my radar. But not in our portfolio. SELL.”

I agree. Sell.

Bruce Kaser still finds Gates Industrial Corp, plc (GTES) attractive, noting it “is well-positioned to prosper in an electric vehicle world, as its average content per EV, which require water pumps and other thermal management components for the battery and inverters, is likely to be considerably higher than its average content per gas-powered vehicle. The shares have 27% upside to our 16 price target. BUY.”

Analysts expect the price of Gates’ shares to rise to north of $15, a nice upside to its current trading price. And they have been boosting their EPS forecasts for the past 30 days. Continue to Buy.

Our latest recommendation, UnitedHealth Group Inc. (UNH) was updated by Tom Hutchinson, reporting, “This healthcare insurer has a spectacular long-term track record but has struggled somewhat with just a 5% return this year. Most healthcare stocks have struggled in the 2023 market for a host of reasons. But those reasons are unlikely to persist going forward. UNH has been rejuvenated of late and is on the move. It’s up 16% in the last few months and just hit a new 52-week high last Friday. UNH could continue to move higher and make up for lost time as new stock comes back into favor. BUY.”

I agree. Continue to Buy.

Portfolio

*Aggressive (A), Moderate (M), Conservative (C)

ETF Strategies

The recent market rally has been very kind to our ETF portfolio. Currently, Adaptive Alpha Opportunities ETF (AGOX), Communication Services Select Sector SPDR Fund (XLC), Invesco Semiconductors ETF (PSI), First Trust Water ETF (FIW), iShares Russell Top 200 ETF (IWL), iShares Core S&P 500 ETF (IVV), iShares US Energy (IYE), Vanguard U.S. Momentum Factor ETF (VFMO), and Vanguard Dividend Appreciation Index Fund (VIG) are showing positive returns.

I was chatting with Carl Delfeld about lithium, and he mentioned something I thought worth noting. He said, “Lithium is critical for EV batteries and evolving as the ‘oil of the 21st century.’ Prices have come back sharply in 2023 and may come back in 2024.

“Global X Lithium & Battery Tech ETF (LIT) offers solid exposure to other beaten-down lithium names at a low cost. With an expense ratio of 0.75%, some of its top holdings include Albemarle (ALB), Tesla (TSLA), BYD (BYDDY), Panasonic Holdings (PCRFY), and Livent (LTHM) to name a few of the fund’s 46 holdings. Lithium Americas (LAC) focuses on the Thacker Pass lithium site in Nevada that has tremendous potential, with 16.1 million tons of battery-grade lithium carbonate equivalent available for extraction.”

Although the shares of LIT are underwater in our portfolio, I agree with Carl about lithium’s potential and continue to believe the ETF is a good long-term hold.

Our Watch List has three names remaining:

O’s Russell Smallcap Qlty Divd ETF (OUSM)
GX U.S. Infrastructure Development ETF (PAVE)
Vanguard Small-Cap Growth Index Fund (VBK).

AI Moves into Healthcare, with Amazing Potential

A recent study by Johnson & Johnson included a quote from Jeff Headd, Vice President, Commercial Data Science, Janssen North America Business Technology, noting, “The rapid growth in available healthcare-related data in recent years allows us to ask bigger questions. Using the latest innovations in AI and machine learning (ML), we are able to quickly analyze these vast datasets (including electronic medical records, lab results or even medical imaging like X-rays, MRIs and CT scans), uncover new insights and then drive actions with real potential to improve patient outcomes.”

J&J notes that “The role of AI is to augment a human decision or action in a way that improves speed, quality or both.” In its report, the company outlines five ways that AI is boosting the healthcare industry, including:

1. Facilitating earlier detection of disease
2. Driving drug discovery
3. Enabling more targeted clinical trial recruitment
4. Ensuring treatments can reach patients
5. Analyzing the OR for efficiency and physician learning

The 2021 AI industry in healthcare was some $11 billion worldwide and is expected to reach $188 billion by 2030, a 37% compound annual growth rate. And the U.S. market is growing just as fast:

The following chart depicts the various uses for AI and machine learning (ML) in healthcare. As you can see, it covers a wide variety of ways to improve efficiency and ultimately, reduce costs.

And the next pictorial shows the largest—and most expensive—conditions/diseases that are likely to see enormous benefits from using AI in healthcare.

To get an idea on how Exscientia is utilizing AI, take a look at the company’s perception of how it uses targeted patient-specific conditions to design the precise drug to address those conditions

This is just the tip of the iceberg for how AI can radically change the healthcare/drug marketplace.

I think it’s worth a shot, but remember that the shares of EXAI are an aggressive, speculative buy, and likely will take a while to substantially appreciate. This is truly getting in on the ground floor.

Portfolio

*Aggressive (A), Moderate (M), Conservative (C)
**Purchase price reflects a 3-for-1 stock split

The next Cabot Money Club Stock of the Month issue will be

published on January 11, 2024.