Cabot Explorer Issue: February 13, 2025

Portfolio Changes: Airbus (EADSF) – Move from Buy to Sell

BYD Surge Highlights Chinese Consumer Trend

Centrus Energy (LEU) shares rocketed 40% this past week and have surged 78% so far in 2025 while newcomer American Superconductor’s (AMSC) shares jumped 18% this week.

You may also have noticed that our BYD (BYDDY) recommendation is already up 24% in 2025 and has increased about 80% over the last year. This highlights an important trend in China that is unlikely to reverse.

In China, a consumer preference for multinational brands from everyday items like coffee to luxury markets was clear for decades, boosting the sales and value of companies like LVMH (LVMUY) and Starbucks (SBUX).

For example, between 2004 and 2023, the foreign luxury consumer sector nearly tripled in value.

But the pandemic, the collapse in property prices, and better quality and value from domestic companies has dampened these markets. High youth unemployment and a crackdown on China’s imports combined with surging e-commerce domestic deals also played a role.

This same trend can be seen in China’s electric vehicle (EV) markets.

With Chinese government financial support and encouragement, more than 100 Chinese brands raced into the EV market. Featuring economies of scale and killer competition, Chinese EVs have sharply improved while simultaneously coming down in price.

In 2024, electric and plug-in hybrid cars accounted for roughly 50% of passenger-car sales in China, and most of those electric cars were made by Chinese brands, such as BYD and Geely.

BYD recently passed Volkswagen (VWAGY) to become China’s bestselling carmaker, while sales of American automakers such as General Motors (GM) suffered to the extent it will have to swallow a $5 billion charge linked to weak Chinese sales. It wasn’t all that long ago that a Buick was perceived as a highly sought after vehicle in China.

BYD alone sold 3.7 million passenger cars last year in China, up 37% from a year earlier. Tesla’s sales grew too but not as quickly, rising 9% to around 660,000 cars.

Now BYD, China’s biggest automaker, appears to be in the lead for artificial intelligence-powered driving technology for Chinese car buyers, with the launch this week of a new system for low-price, mass-market vehicles. BYD has said it plans to invest about $14 billion in AI and automotive intelligence technology spearheaded by an army of more than 5,000 engineers. BYD plans to make its driving-assistance technology system, called “Eyes of God” in Chinese, available in all its models. Tesla’s release of its latest driver-assistance software in China has been stymied by regulatory hurdles which may be linked to the worsening U.S.-China trade issues.

Another strategic sector that has fallen into China’s lap is shipbuilding. The Chinese government has poured an estimated $200 billion of support into the shipping and shipbuilding sector since 2000 and its market share of commercial and naval global shipbuilding has gone from 5% to over 50%.

Advanced semiconductor chips represent one area where America and its partners have a lead as Chinese chip imports last year were close to $400 billion, according to Chinese customs data. Semiconductors are at the forefront of the U.S.-China rivalry with important implications for tech stocks.

Now let’s turn to today’s recommendation of a Chinese consumer stock you may remember.

New Recommendation

Luckin Coffee (LKNCY)

U.S. consumer multinationals are struggling in China right now, bogged down and challenged by both Chinese rivals and geopolitical tensions.

Apple iPhone sales are down in China while Huawei sales soar. Wal-Mart has closed more than 100 stores in China over the past five years. General Motors is taking a $5 billion charge due to high costs and plummeting sales in China. Nike used to count on China providing 20% of total revenue but it’s closer to 10% now while sales at Chinese sneaker maker Anta surge.

In the world of coffee, the story is the same.

China now has more coffee shops than the United States, according to the World Coffee Portal, a market research firm. But coffee king Starbucks’ overall sales growth is down, quarter after quarter.

With strong brand recognition from its member rewards program, along with two successful product launches during the most recent quarter, Dutch Bros (BROS) looks like a stock you can keep for the long term. However, some investors are concerned about the company being able to maintain its growth momentum, though yesterday’s fourth-quarter earnings report (75% EPS growth, 35% revenue growth) suggests otherwise.

Starbucks, which has made a major bet on China’s emerging coffee market, also faces formidable homegrown competitors and this is impacting its market share.

One such upstart is Luckin Coffee (LKNCY).

In many ways this stock resembles fellow Explorer recommendation Dutch Bros, which has demonstrated some impressive growth as an operator and franchisor of drive-through coffee stores.

Luckin has more of a kiosk, delivery, and technology-driven retail strategy blending quality, high convenience and high affordability. Luckin Coffee was founded in 2017 and started out of the gate fast only to run into some serious accounting and management problems. After regrouping, it has resumed a torrid growth trajectory. The company opened 2,342 new stores including two in Singapore in just the first quarter of the current fiscal year.

Today, consumers are less interested in foreign brands, more cost conscious and enticed by local rivals that are popping up on corners all around the country offering something a little different. Dozens of competitors to Starbucks spin out new flavors of tea and coffee every week, at lower prices, creating competition so ferocious that Starbucks saw a 14% plunge in same-store sales in China in its most recent financial quarter.

Luckin Coffee, a Chinese brand that started seven years ago, now generates more revenue in the country than Starbucks. It has more than three times as many stores and opens a new one, on average, every hour.

And here is the killer: the price of a cup of Starbucks coffee is more than double that of a Luckin coffee.

In addition, Luckin is adept at adapting to local tastes and launching new products that broaden the market. For instance, it brings to market about 60 new products each year, offering a new drink every week. Its new coconut latte sells nearly $140 million worth annually.

All this shows in the numbers as Luckin’s latest quarter revealed a year-on-year increase of 41%, an operating margin of 15%, and the company opened an incredible 1,382 new stores, bringing total stores to 21,300.

Next week, I’ll be in Singapore and will have my first cup of Luckin coffee. Their first Luckin store opened in Singapore in 2023, and in the third quarter, the company added eight new stores, bringing the total to 45 self-operated stores. This is just the start of its plan to go international.

This is an aggressive stock with a lot of momentum in a growth market. 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 are up 27% so far in 2025 as the company is expected to release new earnings today. Incidentally, gold has gone from trading at $282 an ounce in 2000 to nearly $2,900 today – a gain of 900%. Agnico has mines in Canada, Australia, Finland, and Mexico, with exploration and development activities focused on Canada, Australia, Europe, Latin America, and the U.S. Buy a Half

Airbus (EADSF) shares increased 3% this week but I have been disappointed that the company has been unable to exploit Boeing’s troubles to gain market share. Perhaps this is just too big a company to make the changes necessary to expand production. I’m moving this to a sell to make room for new ideas. Move from Buy a Half to Sell

American Superconductor (AMSC) shares jumped 18% this week as the company reported quarterly revenue grew 56% year over year and posted a profit, driven by organic expansion and contributions from the acquisition of NWL, Inc. The company produces advanced grid interconnection systems, high-temperature superconductor cables and wind turbine design in important growth markets such as maritime, Maglev technology, and AI data centers. Buy a Half

Banco Santander (SAN) shares are up 31% so far this year as investors in European stocks take note of this diversified global quality bank with exposure in Europe and emerging markets trading at a value price. Buy a Half

BYD (BYDDY) shares were up 15% this week as the company announced a new system for low-price, mass-market vehicles. BYD has said it plans to invest about $14 billion in AI and automotive intelligence technology spearheaded by an army of more than 5,000 engineers. BYD plans to make its driving-assistance technology system, called “Eyes of God” in Chinese, available in all its models. This comes at a time when Tesla’s release of its latest driver-assistance software in China has been stymied by regulatory hurdles which may be linked to overall worsening U.S.-China trade issues. Buy a Half

Centrus Energy (LEU) shares rocketed 40% this past week and have jumped 78% so far in 2025 as the company reported 2024 full-year revenue of $442 million, gross profit of $112 million, and net income of $73 million.

It is a key processor and producer of enriched uranium including the grade needed for modular nuclear facilities. Goldman Sachs predicts that data center energy consumption will surge by 160% by 2030. Buy a Half

Cloudflare (NET) shares jumped 20% this week to post gains of 60% so far this year as the company provided guidance that it expects gross sales to increase 25% in 2025 and several analysts increased price targets for the stock. Hold a Half

Dutch Bros (BROS) shares are up 133% in the last year and look poised to jump this morning after reporting a profitable quarter with revenue up 35%, 151 new shops opened in 2024, and same-store sales growth of 5.3% last year. The key going forward is staying disciplined in opening new locations and not being too aggressive. Feel free to take partial profits. Hold a Half

Recursion Pharmaceuticals (RXRX) shares were up 5% this week. Recursion is a biotech using artificial intelligence (AI) software to increase the tempo of drug development. Founded in 2013, it received its first green light to begin a clinical trial with REC-994, an experimental drug it discovered with help from its AI-driven discovery platform in 2018. Buy a Half

Sea Limited (SE) shares are demonstrating strong momentum, up 20% in the last month and about 100% in the last six months. The company’s three engines are e-commerce Shopee platform, digital financial services (SeaMoney), and the digital entertainment wing (Garena). I look forward to checking the potential of its fintech enterprise Sea Money next week in Singapore as its fast-growing loan book gives Sea Money an edge over Western fintechs like PayPal. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares took a breather this week after a nice run for a giant IT company which grew its top line only 1% in 2024. The company offers all the tools clients need to train and manage AI models that can be run on multiple public clouds. Buy a Half

Visa (V) shares were steady this week but are generally underperforming I think primarily due to a regulatory antitrust cloud over the company that could impact its impressive moat. Payment networks such as Visa are big beneficiaries of network effects since merchants only want to carry a certain number of payment options. Buy a Half

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

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

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 21.1%. Buy a Half

Sprott Platinum and Palladium ETF (SPPP) offers direct exposure to both platinum and palladium which are selling at a sizable discount to gold offering potential upside appreciation. 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

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 forecasted gold production of approximately 3.45 million ounces in 2024 (full-year earnings results are due out later today). 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 paid a dividend of $1.60 per share in 2024.

American Superconductor (AMSC) aims to modernize the electrical grid by helping it connect and distribute power. Its products allow and coordinate the power grid including transmission lines, substations and generators. For example, its mega-watt scale power control gear leads to safer and more resilient and efficient power grids. The company is already the leading supplier of high-performance superconductor cables and its top markets are strategically important growth markets such as: Maritime, Maglev technology, and AI data centers – a huge growth opportunity.

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. 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 drive-through coffee stores, with 950 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 in 2024, 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, Inc. (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 (ERJ) and Gulfstream, owned by General Dynamics (GD).

Recursion Pharmaceuticals (RXRX) is using artificial intelligence (AI) software to increase the tempo of drug development. Recursion Pharmaceuticals was founded in 2013 and received its first green light to begin a clinical trial with REC-994, an experimental drug it discovered with help from its AI-driven discovery platform in 2018. Unfortunately, REC-994 for cerebral cavernous malformation failed to improve outcomes for patients with the rare neurovascular condition in a phase 1 study and another also failed to meet expectations. The journey continues and any progress on clinical validation of its platform could send the stock soaring.

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 February 27, 2025.

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