Cabot Explorer Issue: December 19, 2024

Portfolio Changes: Unilever (UL) – Move from Buy a Half to Sell

Google It

As we head into the end of the year, markets have paused though are still bullish. A little bit of worry is a sign of a healthy market and some of the pullback is no doubt taking profits for tax reasons.

The budget showdown in Washington, which needs to be settled by Saturday, is not helpful.

The Federal Reserve cut interest rates by a quarter point yesterday and in a preemptive move, suggested only two more reductions next year. This is a signal that interest rates will remain somewhat elevated as inflation that has come down significantly remains a stubborn trend.

Big tech remains in the driver’s seat since it offers investors companies with high growth, lots of cash, and no debt. Rotating to international, small caps, and value stocks makes sense to lower volatility and risk.

The Dow Jones index made some history this week with its first 10-day losing streak since 1974.

China remains both an investment and export-dependent economy: it is the world’s largest source of investment (around 28%) and manufacturing output (35%), but it represents only around 12% of global consumption despite making up about 18% of world population. So, China’s domestic economy cannot generate enough demand to absorb everything China produces.

This will only accelerate trade friction in the coming year.

As I reflect on my recently completed venture to Europe and plan for my early 2025 Asia trip, I see big challenges and opportunities.

Europe has plenty of good companies and well-educated workers but lacks dynamism, scale, and speed.

While Europe over the past 50 years has created 14 companies worth more than $10 billion totaling $400 billion of market value, Americans have created nearly 250 such companies, worth $30 trillion.

This one fact is startling. Apple (AAPL) is worth more in market value than the 30 largest German companies combined. And the German economy is struggling right now due to political upheaval at home, weaker sales to China, higher energy costs, and other factors.

Nevertheless, it would be a mistake to ignore or underestimate Europe’s potential. The European Union (EU) of 450 million consumers reached a major trade agreement last week with four South American countries, concluding a long-delayed negotiation that took on new urgency as President-elect Donald J. Trump threatened to impose tariffs on some of the world’s largest economies.

The deal between the European Union and members of Mercosur – a bloc that includes Argentina, Brazil, Paraguay and Uruguay – would establish one of the largest trade zones in the world and would be the European Union’s biggest trade agreement ever.

Meanwhile, the Bitcoin bull rambles on hitting another record above $107,000. This is partly a byproduct of the president-elect’s support for digital assets.

This week we replace one dominator stock with another one that you are very familiar with.

New Dominator Recommendation

Alphabet (GOOG)

To become a player in artificial intelligence (AI) or even better, dominating AI, it takes two things: lots of data and lots of computing power (and the energy to run it).

Perhaps the biggest challenge for companies hoping to capitalize on that idea has been a lack of data – the kind that Google is sitting on through decades of running the internet’s dominant search engine. But the parent of Google, Alphabet, is much more than this as evidenced by the just announced breakthrough in quantum computing with Willow, a chip that’s faster than the world’s most powerful supercomputer. This highlights the firepower of the company and long-run potential to dominate new emerging technologies.

Alphabet also owns the world’s most-visited video platform (YouTube), the world’s third-largest cloud (Google Cloud), and a host of interests in other technologies, like autonomous driving, quantum computing, and smartphone software.

Still, as one of the world’s most famous brands, it is so dominant in internet searches that regulators ruled it a monopoly earlier this year.

The U.S. Justice Department is after Google following a federal judge’s landmark ruling that the tech giant illegally monopolized online search. The DOJ’s proposed remedies include a forced sale of Google’s Chrome browser and a provision forcing the tech giant to make the data it uses to generate search results available to rivals. This would not be good for shareholders, but it seems unlikely, and furthermore, some separation of Google’s products and platforms could turn into a positive outcome.

As this regulatory cloud lifts, it will allow attention to the reality that Alphabet is doing quite well this year, as robust advertising translated to revenue rose 15% year over year in the third quarter. Earnings per share (EPS) surged 37% with fatter margins leading to $1.55 a share last year and to $2.12 this year.

Google Cloud is also gaining market share for the company. Alphabet is competing for AI leadership with other technology rivals, but its advantages are substantial. It owns key ingredients to develop AI such as a cloud business (Google Cloud), an AI model (Gemini), and ample data on which to train its AI – a powerful combination.

Unlike some other big tech companies with sky-high valuations, GOOG is trading for 21 times 2025 earnings.

In addition, Alphabet has $93 billion in cash and generated $55 billion in free cash flow over the past four quarters so it can match any competitor in terms of financial resources and firepower. Analysts estimate the company will grow earnings at an average annual rate of almost 18% for the next three to five years.

Given its existing businesses and potential for AI upside, its reasonable valuation, and secure financial resources, the stock is a buy.

BUY A HALF

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 a 20% trailing stop-loss in place.

Agnico Eagle Mines (AEM) shares pulled back this week after three straight weeks of gains. Gold is Agnico Eagle’s primary revenue source, accounting for roughly 99% of total revenue with a bit of exposure to copper, silver, and zinc, treated as byproduct metals. The company is pushing ahead with the development of the Odyssey project in the Canadian Malartic Complex, Detour Lake, Hope Bay, San Nicolas, and the Kittila mine – the largest primary gold producer in Europe. A stronger dollar is weighing on gold, but higher geopolitical risks seem to be driving investors to safe havens such as gold. Buy a Half

Airbus (EADSF) shares were steady as the French satellite company Eutelsat has chosen Airbus to build 100 small satellites following last week’s Air India order for 100 Airbus jets. Airbus has a backlog of more than 8,600 orders to fill as it capitalizes on its line of fuel-efficient, mid-sized aircraft. Fuel is one of the airlines’ biggest costs. Buy a Half

Banco Santander (SAN) shares were off 4.8% this past week as the bank added Canada to its expansion plan for 2025 after it announced it was going nationwide in America and Mexico with it digital OpenBank platform. Banco Santander has added almost 5 million new customers over the last 12 months and now has a total of 171 million customers. Despite new markets, the bank remains focused on Latin America and Europe. Buy a Half

BYD (BYDDY) shares pulled back a little as the company announced a new EV model which after subsidies is priced at just $7,000. The company confirmed that it will sell 4 million EVs this year as BYD has already surged past Tesla in terms of sales. At about $108 billion in market capitalization, BYD stock costs just 23 times annual earnings and 20 times annual free cash flow compared to Tesla’s 117 P/E ratio and its price-to-free cash flow ratio of 413. BYD is also the world’s largest EV battery maker. Buy a Half

Centrus Energy (LEU) gave back some of its recent gains despite its subsidiary, American Centrifuge Operating, securing an award from the U.S Department of Energy (DOE) to expand commercial production of Low-Enriched Uranium (LEU). This marks Centrus’ third win under the DOE’s Nuclear Fuel Supply Program this year. Nuclear energy now accounts for about 75% of low emission energy in the United States. Buy a Half

Cloudflare (NET) shares were up 6% for the week despite a market pullback yesterday. About 20% of all web traffic flows through Cloudflare’s products and 95% of Internet users access its services every day as it blocks an amazing 170 billion threats a day. The company expects its revenue to grow 28% this year and analysts expect its adjusted earnings per share to grow 52% this year. Buy a Half

Dutch Bros (BROS) shares gave back 3% this week but are having a great year as investors appreciate its growth and profitability. Expanding the physical footprint is the key growth strategy as the company operates 950 stores today, more than double from the end of 2020. Management has set an aggressive target of having 4,000 locations open in the next 10 to 15 years. Hold a Half

Sea Limited (SE) shares are up 174% this year but getting a bit expensive, trading at more than eight times book value, so I’m keeping it a hold. You may consider selling some shares to take profits off the table if you have not already done so. The company focuses on younger consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Hold

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares have outperformed both AMD and Nvidia recently, delivering a 38% total return in six months. IBM recently announced a series of key AI partnerships with Amazon. IBM offers us conservative exposure to a blend of cloud computing, data analytics, cybersecurity, and artificial intelligence (AI). Buy a Half

Unilever (UL) shares have underperformed during the last six months, up only 3%, so I’m moving this stock to a sell and replacing it with Alphabet (GOOG). Part of its problem is concern over how it will mitigate risks from higher tariffs since Unilever has manufacturing bases in both Mexico and China. Move from Buy a Half to Sell

Visa (V) shares are flat over the past month as the U.S. government seeks to make the case that Visa is a near monopoly on the debit card side of the business. Nevertheless, Visa remains a global leader in digital payments connecting 4 billion account holders to more than 130 million merchants and 14,500 financial institutions as it dominates the U.S. payments sector. This stock is well positioned to perform well in 2025. Buy a Half

Watch List – Stocks we like but do not follow week-to-week

ConocoPhillips (COP), Franco-Nevada (FNV), MOOG (MOG-A)

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

iShares MSCI India Small-Cap ETF (SMIN) is a $930 million fund that holds a basket of about 500 small-cap India stocks. It is nicely diversified with the top 10 stocks accounting for just 12% of assets. The lead sector is industrials at 25%, followed by finance at 15%, consumer goods at 14%, basic materials at 13% and healthcare at 10%. Buy a Half

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 top Chinese-listed stocks. Buy a Half

Oberweis Micro-Cap Fund (OBMCX) fund stands out for several reasons. The fund’s sound investment process and strong management team earns it a rare Morningstar Medalist Rating of Gold. Over the past five years it has posted an impressive average annual return of 18.9%. 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 a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Full

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Agnico Eagle Mines (AEM) follows a conservative strategy and with a history spanning more than 60 years, and now operates a sizable portfolio of 11 assets located in four countries. Management forecasts gold production of approximately 3.45 million ounces in 2024. The company estimates it has about 54 million gold ounces of proven and probable reserves. Furthermore, Agnico Eagle has paid a dividend for 41 consecutive years with a dividend compounded growth rate of 23% per year since 2005 and will pay a dividend of $1.60 per share in 2024.

Airbus (EADSF), along with Boeing, is one of only two manufacturers that make the full-size commercial jets needed by the world’s airline industry. China’s COMAC is making gains but probably a decade away from being a competitive rival. Boeing’s troubles are Airbus’s opportunity. Airbus, incorporated in the Netherlands but based in Toulouse, France, is making planes as fast as it can and has a backlog of more than 8,600 orders to fill. Airbus last year beat Boeing for the fifth straight year in the orders and deliveries race, with 2,094 net orders and 735 delivered planes. I visited its facilities recently and while it shares some Boeing’s supply chain challenges, Airbus has a clear edge right now. Airbus is benefiting from its decision deliver the fuel efficient to launch A321neo, a single-aisle aircraft with 180 to 230 seats. Fuel is one of the airlines biggest costs. Airbus’s new A321XLR model will also enable airlines to use cheaper narrow-body jets on long-haul flights.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. In the second quarter, it welcomed over 4 million new customers compared to the previous year. About 55% of deposits and loans are in Europe with the balance in Latin America. In its most recent quarter, Santander’s revenue was up 8% while net profits increased 16%.

BYD (BYDDY), in both 2021 and 2022, more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., Europe, and Asian markets. BYD is the world’s largest EV battery maker and with CATL and others, is working on sodium-ion batteries. Much less energy dense than lithium batteries, sodium batteries should be much cheaper. BYD will also launch a next-generation Blade battery in 2025, with longer range and faster charging. That, along with various other models, could help rev up BEV sales growth next year. BYD expects solid-state batteries for high-end models by 2027, but not fully reaching lower-end models until 2030-2032.

Centrus Energy (LEU), based in Bethesda, Maryland, supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. Centrus Energy is building an enrichment facility in Ohio and would be very likely to benefit especially if federal funding moves forward to support this and other nuclear projects. I believe Centrus stock will benefit from increasing demand for its services, and that downside risk is low while upside potential is significant.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields, though cloud computing is its bread and butter. 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.

Dutch Bros (BROS) is an operator and franchisor of 950 drive-through coffee stores as of the end of the third quarter, including 38 that it opened in the quarter. It’s expanding at a steady pace, expecting up to 165 new stores this year, and it envisions up to 4,000 stores over the next 10 to 15 years.

Watch List: 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 29 consecutive years of dividend increases.

Watch List: MOOG (MOG-A) supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350, Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer and Gulfstream, owned by General Dynamics.

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.

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.

The next Cabot Explorer issue will be published on January 2, 2025.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.