Cabot Explorer Issue: February 27, 2025

Portfolio Changes: None

Berkshire’s Stash of Cash

I am in Singapore this week as U.S. markets and Explorer recommendations struggle a bit.

I had a chance to visit three Luckin Coffee shops in Singapore. Hard to draw conclusions from this small sample but all three seemed very professional and fully automated with no cash accepted resulting in no lines at all. Spoke with maybe a dozen customers who like the ease of use, variety of flavors, and the price. Several said they also go to Starbucks. One only needs to download the Luckin app to get service which locks in customers to receiving a stream of deals and incentives.

I also met with a wealth manager from India who was sharp and agrees that Indian stocks are too expensive right now. We are going to talk every other week to share thoughts on markets and potential ideas. I also caught up with an old friend from the Singapore Stock Exchange (SGX). He asked whether Warren Buffett’s Berkshire’s stash of cash and Treasury bills of more than $320 billion is sending us a message. Buffett’s rule of thumb that the total market of U.S. stocks should not get much more than 100% of U.S. GDP is also well known; it is more like 200% right now. U.S. stocks now represent about 65% of world stock market value. Berkshire also reported that it repurchased no shares in the final three months of 2024, and this suggests Buffett doesn’t think Berkshire’s stock is cheap either.

Then there is concern about the narrowing of economic resources and power in America. The top 10% of households buoyed by big gains in stocks and real estate now account for about 50% of all U.S. consumer spending, a record going back to 1989, according to an analysis by Moody’s Analytics. The top 10% alone also account for almost one-third of gross domestic product and about 90% of all stock holdings.

Is President Xi Jinping trying to get back into the good graces of Chinese tycoons? He invited some 30 private business leaders to the Great Hall of the People in Beijing earlier this week, only the second time Xi has held such a meeting.

Meanwhile, Apple has fallen from first to third in China, pushed aside by two Chinese companies, Vivo and Huawei, that offer competitive features at lower costs. In 2024, Apple slipped to 15.5%, falling behind Vivo’s 17.2% and Huawei’s 16.6%. IDC analyst Will Wong estimates that the average selling price of smartphones from Vivo, Huawei and Apple last year were, respectively, $298, $658 and $1,007. A big gap. Now Apple has a new offering in the iPhone 16e which will begin selling in China this week at a starting price of about $600.

Canada is vulnerable to U.S. tariff trade pressure because it exports around $421 billion in goods and services to the U.S., which is about 20% of its $2 trillion economy

Europe is a bit less dependent but is also facing pressure and pushing back by arguing that more than 60% of foreign investment into the U.S. comes from Europe, and in the other direction, more than 60% of foreign investment by the U.S. goes into Europe. In addition, U.S. companies employ about 5 million Europeans, while European companies employ some 5 million Americans. European leaders are highlighting that their companies are major employers in America including BMW in South Carolina, Volkswagen in Tennessee, Airbus in Alabama, and Siemens in Texas and the Carolinas. In contrast, U.S. goods exported to Russia were a mere $11 billion, roughly 30% of U.S. exports to Belgium alone.

Europe’s stocks remain cheap even though they offer investors a global footprint. Seven of Germany’s largest companies generate around 80% of their sales abroad, according to Goldman Sachs Research.

New Recommendation

DBS Bank (DBSDY)

Bank Shot, Right Pocket

Investing in strong banks to tap economic growth in a country or region is a simple and time-tested strategy that can lower your risks, especially in emerging markets. The dean of global investing, Sir John Templeton, used investments in banks as proxies for gaining exposure to undervalued stock markets around the world.

By no means does this strategy always work – and unexpected events and the dramatic changes in how most banks make money have made it far less effective than it once was. Also, new investment tools allow investors to play other angles of proxy investing.

Stil,l the bank-stock logic makes sense and goes something like this. Banks sink broad and deep tentacles into a national or regional economy through their loans to and investments in companies. A pickup in economic growth leads to an increase in loan demand, higher levels of interest income and lower levels of nonperforming loans. Assuming solid management and a good balance sheet, this should lead to a jump in profitability and stock price.

To use a billiards analogy, proxy investing in banks is like a bank shot, whereby a ball is driven into a cushion before it is pocketed. It is a soft indirect shot that requires careful preparation and finesse. This also includes banks as they approach increasingly wealthy individuals and institutions to offer them profitable asset management services.

One premier Asian bank stock I recommend is what I refer to as “Fortress Singapore”: the Development Bank of Singapore (DBSDY), also known as DBS Group Holdings.

DBS is one of the largest banks in Southeast Asia with a presence in 19 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index.

The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore.

DBS has assets of roughly $750 billion and a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India. It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.

Its tentacles reach out through more than 200 branches in 50 cities. DBS produces steady profit margins, revenue, and earnings growth and is also increasing market share in consumer and corporate banking. Wealth management is also a strategic priority and a growing part of its business.

The stock has momentum – up 53% in the last year with an impressive return on assets and a return on equity of 17%. Despite all these strengths, DBSDY is trading at less than 12 times forward earnings and sports a solid 4.5% forward dividend yield.

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 were again steady this week as gold takes a breather. It is interesting to note that since 2000, gold is up about 900% while silver is only up about 500%, so I’m looking for the best silver play anticipating that this gap will close. 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

American Superconductor (AMSC) shares were up 6% yesterday but were down 24% for the week due to a combination of profit taking and concern about lack of power generation infrastructure necessary for AI growth and potential copper tariffs. The company is growing fast and the stock is still up this year, but we will watch this stock closely. 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 were up 6.6% this week and are up 41% so far this year as Santander raised its dividend 19%. Santander is a diversified global quality bank with exposure in Europe and emerging markets trading at a value price. Buy a Half

BYD (BYDDY) shares were up a bit to close at 100 as the Chinese EV maker inked a deal with DeepSeek to co-develop new autonomous technology. BYD has said it plans to invest about $14 billion in AI technology spearheaded by an army of more than 5,000 engineers. Buy a Half

Centrus Energy (LEU) shares were off 11.8% this week as AI infrastructure-related stocks faced headwinds and profit taking. Centrus is a key processor and producer of enriched uranium and Goldman Sachs predicts that AI data center energy consumption will likely surge through 2030 and require modular nuclear energy to meet demand. Buy a Half

Cloudflare (NET) shares were also weighed down by a weak market for tech stocks but are still up 35% so far this year. Trump administration plans to implement new tariffs that would apply to foreign semiconductors and thus raise costs for companies such as Cloudflare also impacted the stock. Hold a Half

Dutch Bros (BROS) shares gave back this week about a third of the previous week’s 32% gain following the coffee shop’s fourth-quarter earnings of 7 cents per share, a 75% improvement versus the same quarter in the prior year. The company opened 151 new stores in 2024, of which 128 were company owned, including 32 total stores and 25 company-owned locations in the fourth quarter. Hold a Half

Luckin Coffee (LKNCY) shares were down 8.3% this week despite reporting solid earnings last Thursday. Net revenues improved 36% in the fourth quarter of 2024, customer count improved 24.8%, the company opened 997 new coffee stores, and GAAP operating income improved 368% year over year. For the year, sales improved 38.4%, store count was up 37.5%, and customer count increased 48.5%. Luckin is expanding not just in China but regionally such as in Singapore and is even considering opening stores in the United States. In Singapore this week, I had a chance to visit three Luckin Coffee shops. Hard to draw conclusions from this small sample but all three seemed very professional and fully automated with no cash accepted resulting in no lines at all. One only needs to download the Luckin app to get service which locks in customers to receiving a stream of deals and incentives. During its last quarter, it opened an incredible 1,040 new stores, bringing total stores to 22,340. Buy a Half

Recursion Pharmaceuticals (RXRX) shares are volatile, off 23% this week after jumping 42% the prior week. The company is expected to report its next earnings tomorrow, February 28. Nvidia announced last week that it still owns about 7.7 million of its Recursion Pharmaceuticals shares. Recursion uses AI extensively as part of its drug discovery process. Buy a Half

Sea Limited (SE) shares are up 183% in the last year so consider taking some profits as the company will report its next earnings on March 4. The stock now trades near 10 times book value, so the expectations are high. The company’s three engines are its e-commerce Shopee platform, the digital financial services (SeaMoney), and the digital entertainment wing (Garena). Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were off 3% this week. IBM continues to develop new partnerships building upon its infrastructure hardware, hybrid-cloud solutions, and a suite of enterprise software applications to help organizations blend AI and machine learning into their business. Buy a Half

Visa (V) shares were steady this week and seem to be treading water as a regulatory antitrust cloud over the company could impact its impressive moat. Visa is a great company with an industry-leading operating margin of 66% but the stock needs to demonstrate some momentum. 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. 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.

Luckin Coffee (LKNCY) is a leading purveyor of coffee and specialty drinks in China. The price of a cup of Starbucks coffee is more than double that of 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 strong sales and store count growth.

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 (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 March 13, 2025.

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