Cabot Explorer Issue: December 29, 2022

Portfolio Changes:
Infineon Technologies (IFNNY) Moves from Hold to Sell

As we finish a tough year for stocks we should guard against pessimism since interest rate hikes should slow and level out and lower valuations for growth stocks could ignite a rally. Explorer stocks had little news as we sell one holding and are close to selling MP Materials (MP) as well. This week we go back to a small-cap medical technology stock trading at an attractive price.

Cold Weather and Cold Markets

Centrus Energy (LEU) shares were down two points on no news and despite a net income margin of more than 50% and the stock trading at a remarkably low price multiple of 10 times forward estimates.

Corteva (CTVA) shares were unchanged as this DowDuPont agricultural sciences spin-off offers products to help farmers increase output and acre productivity.

Ford (F) shares were soft again this week trading a bit over 10, or about six times forward earnings estimates. The stock was hit by higher input prices for EVs as lithium and other clean tech metals impact its costs and margins, forcing the company to raise prices.

Infineon Technologies (IFNNY) shares pulled back again this week after my downgrade last week and the company announced it is looking for acquisitions raising uncertainty so I’m moving this stock to a sell.

Kraken Robotics (KRKNF) shares were largely unchanged this week as CEO Karl Kenny will be appointed Executive Chairman, passing the CEO role to current COO Greg Reid.

MP Materials (MP) shares have been surprisingly weak and have dropped through our stop-loss, trading at a bit over 23. Some of this is year-end trading so I hesitate to sell but if we don’t get some sort of rebound, I’ll have to move this stock to a sell.

Novo Nordisk (NVO) shares were up again this week. Novo Nordisk holds a 31.6% share of the diabetes care market and should carry its momentum into next year. In the first nine months of the year, sales of Rybelsus soared by 140% year over year and Ozempic’s revenue jumped by 86% year over year

Rolls-Royce PLC (RYCEY) shares were steady and unchanged in their second week as an Explorer recommendation. It is an aerospace and power play but is also a key player in Britain’s nuclear industry.

Toyota Motors (TM) shares have been showing relative strength in part due to their sensible strategy of offering a blend of gasoline, hybrid, electric and hydrogen-powered vehicles. The market awaits its new, more powerful, and sportier Prius 2023.

Market Brief

To say the least, the ramp up in Fed benchmark interest rates to beat back inflation has not been kind to growth stocks this year

For some stocks, like Tesla (TSLA), it has been a perfect storm of input prices, increased competition, China issues, expansion capital costs, and Elon Musk stock sales and outside interests all battering the stock. Tesla shares have fallen almost 70% this year but Tesla shares were the most popular buy yesterday among individual investors on the Fidelity brokerage platform.

I can understand being a buyer after the sharp pullback, but be careful. TSLA trades with a forward price-to-earnings ratio of about 24 compared to two Explorer recommendations in the same field – Ford (F) at 6 times and Toyota (TM) at 8 times projected earnings. By the way, EV companies Rivian (RIVN) and Lucid (LCID) have both fallen more than 80% this year.

As we finish a tough year for stocks we should guard against over-pessimism since interest rate hikes should slow and much lower valuations for growth stocks could ignite a rally in 2023. Explorer stocks had little news this past week as we sell one holding and are close to selling MP Materials (MP) as well.

The lessons from this disappointing year to keep in mind going forward are to pay attention to valuations, stop-losses, and quality of management. The U.S. dollar gained almost 9% this year but pulled back sharply in the last quarter. This week we go back to a small-cap medical technology stock trading at an attractive price.

New Recommendation: Butterfly Network (BFLY) - Aggressive Recommendation

New CEO, Smart Technology

We previously made some money with Butterfly stock and return today since after spiking to 8.60 in early August, the stock is trading at $2.20 now.

Butterfly is a revolutionary medical device powered by artificial intelligence that is already saving lives and will ultimately improve healthcare for Americans and billions more all over the world. It addresses the need for America to lower costs and improve a medical system that accounts for an incredible 20% of our economy, but still delivers uneven and costly services.

The scientist who founded the company’s device that has been described by Inc. magazine as “a device that will change healthcare forever” is Dr. Jonathan Rothberg. He has been awarded the National Medal of Technology and Innovation, America’s highest honor for technological achievement.

Bill Gates backs the company and the company’s products are FDA-approved.

The Butterfly device addresses several issues that afflict American medicine, the main one being costly medical imaging services. Based in Guilford, Connecticut, Butterfly Network can make medical imaging accessible to everyone around the world – at the lowest possible cost.

Let me explain. Right now, most medical imaging services are far more expensive than they need to be.

But Butterfly Network is changing that. It makes a handheld, battery-powered probe – so small that it fits into a doctor’s pocket – called the Butterfly iQ+.

When attached to a smartphone or tablet, it provides a window into the human body, enabling health professionals to check a patient’s heart, lungs, liver, arteries and more without ever leaving the examination room.

The key technology is its patented “Ultrasound-on-Chip.” The combination of hardware, software and artificial intelligence allows it to detect disease and solve problems early rather than after a patient becomes sick.

Butterfly’s breakthrough software can be tied to a medical network to provide instantaneous images and improve both the speed and quality of healthcare. This is so much better than scheduling a test in a week and then having the patient come back and pay for another appointment.

Instead, if your doctor has the Butterfly iQ+ in their pocket, they just connect it to an iPhone, scan your body and it has a digital image right in front of him.

Plus, while an MRI machine can cost more than a million bucks, the Butterfly iQ+ costs a little over $2,000. Since it also requires a subscription service, it also is a steady source of recurring revenue for the company.

The top 100 hospitals in the country already use Butterfly iQ devices.

These devices are also a boon to emerging markets. About 60% of the world has no access to medical imaging. In Africa and Latin America, for example, most pregnant women never receive an ultrasound before giving birth.

According to Butterfly, more than 4.7 billion people around the world lack access to medical imaging. In line with that, the company just signed a partnership to bring Butterfly’s iQ+ device to the Middle East, North Africa, Turkey, and India.

Butterfly also has launched new solutions in obstetrics that will be delivered through the iQ+ platform to reduce maternal and fetal mortality.

The device is already available in the United States, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. And anyone can purchase it on the Butterfly Network website.

Butterfly estimates the target market to be worth $8 billion per year, but while sales are growing at a 40% clip, the company is not yet profitable. In November, Butterfly announced that third-quarter revenue increased 44% but earnings failed to meet expectations.

While Butterfly has a world-class technology, it has become clear over the last few months that current management has not made the most of the business opportunity. On December 6, founder and chairman Dr. Jonathan Rothberg announced that current President and CEO Todd Fruchterman will leave the company at the end of the month. Rothberg will serve as interim CEO while the company searches for a new chief executive who can accelerate its path to profitability.

Butterfly Network is an emerging company set to sharply expand the capabilities of the healthcare industry, helping it to lower costs, make better decisions and deliver better care. With small caps in favor, an impending change in Butterfly’s CEO, and a stock trading well off its 2022 highs, I like the upside potential of this aggressive recommendation. BUY A HALF POSITION

Model Portfolio

Explorer Stocks in Brief

Centrus Energy (LEU) surprised investors as it came out with a quarterly loss of $0.42 per share versus the Zacks consensus estimate of $0.78. This compares to earnings of $2.95 per share a year ago. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins are above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million. Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. BUY A HALF

Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. While the market was down sharply this year, Corteva was up more than 24%. Although the down market does lead to quality companies growing revenue and net profits trading at bargain prices, a strong case can be made for stocks like CTVA that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%. BUY A HALF

Ford (F) is making the transition to a leader in both conventional and electric vehicles (EVs). Ford has a forward price to earnings ratio of just over 6 with a dividend yield of 5.3%. It continues to see rising demand for its electric vehicles and Ford stock will benefit from the big $7,500 EV subsidies going forward. Ford remains my favorite conservative stock despite a challenging market and supply chain issues. Ford wants to produce EVs at annual rates of 600,000 by late 2023 and more than 2 million by 2026. BUY A HALF

Infineon Technologies (IFNNY) shares pulled back again this week after my downgrade last week and the company announced it is looking for acquisitions raising uncertainty so I’m moving this stock to a sell. MOVE FROM HOLD TO SELL

Kraken Robotics (KRKNF) is probably the most speculative of Explorer stocks, but it is a well-run company and a prime takeover candidate in the growth defense sector, coupled with a strong management team. Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software-centric sensors and underwater robotic systems. BUY A HALF

MP Materials (MP) is an effective way to play clean tech, defense, semiconductors, but shares have been surprisingly weak and have dropped through our stop-loss, trading at a bit over 23. Some of this is year-end trading so I hesitate to sell but if we don’t get some sort of rebound, I’ll have to move this stock to a sell. HOLD A HALF

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 are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on its sizable and growing demand for this weight-loss drug, this well-managed, highly profitable company with an excellent growth profile has limited risk and potential to develop new products. BUY A HALF

Rolls-Royce PLC (RYCEY)
Today, Rolls-Royce, the former maker of luxury cars, operates as an industrial technology company in the United Kingdom and internationally. The company operates in four segments: Civil Aerospace, Power Systems, Defense, and New Markets. The Civil Aerospace segment develops, manufactures, and sells aero engines for large commercial aircraft, regional jet, and business aviation markets, as well as provides aftermarket services. Rolls-Royce stock has been hard hit by the impact of Covid on air travel and thus the miles flown by Rolls-powered commercial jets, which is how it derives much of its revenue. The result is the company has taken on quite a bit of debt. However, downside risk is offset by how important the company is to the U.K. government because of its strategically important aerospace and defense business.

Keep in mind that trading at a bit over $1 a share, Rolls-Royce is an aggressive idea. BUY A HALF

Toyota Motors (TM) pioneered hybrid cars in the late 1990s with the Prius, and today hybrids, including plug-in cars, accounted for around 20% of Toyota’s U.S. sales in September. Toyota remains the No. 1 hybrid seller in America, led by a gas-electric version of the RAV4 sport-utility vehicle, the nation’s top-selling hybrid. The new Prius will join eight other hybrid models, plus the all-new Toyota Crown, and two plug-in hybrid models. BUY A HALF

Explorer ETF/Fund Positions

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure with an emphasis on income and value. BUY A HALF

The next Cabot Explorer issue will be published on January 12, 2023.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld