Cabot Explorer Issue: January 16, 2025

Portfolio Changes: WisdomTree’s Japan Hedged Equity (DXJ) – Move from Buy to Sell

Macro Trends Increasingly Drive Markets

In theory, and often as we prefer, in practice, corporate profits drive stock prices.

J.P. Morgan’s (JPM) booming profits are a testament to this, but what’s behind the profits?

It seems that recently, and perhaps even more in 2025, macro issues will drive the direction of markets and sector trends.

Identifying trends and allocating money to the right sectors and picking the leaders in these sectors is increasingly important. Those that follow the Fed and try to predict the direction of interest rates are one example of this macro-oriented strategy.

As hopes that the Federal Reserve will continue interest-rate cuts slowly fade, let’s dig a bit deeper and look at what will drive both interest rates and profits going forward. It won’t be the Fed but rather the U.S. Treasury’s $28 trillion bond market that will determine interest rates.

These institutional players read the tea leaves, and it seems that they collectively are looking for incrementally higher rates to compensate for America’s escalating debt.

One report was out on Monday that China exported $3.6 trillion worth of goods and services as its trade surplus reached almost $1 trillion last year while America will post a trade deficit of about $1 trillion. While China ran a deficit in oil and other natural resources, its trade surplus in manufactured goods represented 90% of exports and 10% of China’s economy. Classic mercantilism.

Macro, of course, can cut both ways. While high wire budget battles on Capitol Hill play out, U.S.-China tensions escalate and pull back, and tariff threats dominate the headlines, this could boost volatility in equity markets. Hopes for less of the above as well as fewer corporate regulation and lower taxes for investors are also actions that could boost markets.

There will be surprises. For example, Goldman Sachs strategists are predicting that Chinese stock markets will rise about 20% by year-end.

Another key issue in 2025 will be whether artificial intelligence (AI) meets its elevated expectations.

This has implications well beyond AI stocks into related sectors and products such as semiconductor chips, data and energy.

Competition is heating up globally. A Chinese AI firm recently released DeepSeek-V3, a model that appears to perform about as well as OpenAI’s relative model but was trained for under $6 million and is light enough to be run locally on a computer. Cost, speed, and scale means this will increasingly be at the center of U.S.-China rivalry.

Achieving AI superiority has emerged as central to both sides of the rivalry.

Finally, I’m moving WisdomTree’s Japan Hedged Equity ETF (DXJ), which offers exposure to a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations, from a buy to a sell. The currency hedge this ETF has in place has helped boost our returns, but the yen is likely to reverse this year so it’s time to move on.

This week we move to a commodities recommendation and rather than a shotgun approach, we rifle in on two vital metals overlooked by many including the millions of gold bugs out there.

New Recommendation

Sprott Platinum and Palladium ETF (SPPP)

A ratio between two commodities (as represented by the Reuters/Jeffries CRB Index) and the Nasdaq 100 (which includes mega-cap tech stocks) sure looks like a double bottom, where “real stuff” or “real assets” have rarely been cheaper relative to gold or the speculative future cash flows promised by disruptive technologies like AI and quantum computing.

I expect gold will likely move higher this year, but two other precious metals are positioned for even bigger gains.

Supply and demand signal that palladium and platinum will outperform as EV demand slows and South Africa faces some production challenges.

Platinum and palladium are usually considered rarer, more useful, and, therefore, pricier and more valuable than gold. But platinum isn’t just cheaper than gold right now... it’s trading near the lowest discount to gold in history. By this, I mean the price of platinum divided by the price of gold for nearly four decades.

We can take advantage of the relative price gap between gold and these critical minerals and capture the potential snapback – what analysts refer to as “reversion to the mean.”

Looking back, platinum usually traded for more than gold during the last three decades and at times the premium was significant, with platinum trading for more than double the price of gold in the early to mid-2000s.

That trend then largely reversed – bringing us to a discount that has gotten extreme. The only other time we saw a similar situation was in 2020 when platinum traded for a 60% discount to gold and then platinum rallied 121% over the next 11 months, while gold surged 25%.

The setup is similar for palladium. This critical metal has crashed even worse than platinum in recent years. Platinum and palladium are both poised for major moves higher. And if you’re a contrarian investor, you need to consider owning both in 2025. And the best way to do that is buy the Sprott Platinum and Palladium ETF (SPPP). Let’s start with a half position.

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 up just short of 4% this week as the company announced it will report its next earnings on February 13. It will require strong earnings to keep the stock on an upward trend since I note that Agnico’s current valuation metrics, such as its forward P/E ratio of 17, underline a big premium relative to the industry’s average forward P/E of 10. Agnico’s most recent net profit was up 165% and gold is Agnico Eagle’s primary revenue source, accounting for roughly 99% of total revenue. Buy a Half

Airbus (EADSF) shares were unchanged this week as the company’s CEO confirmed that it will reach its target of manufacturing 75 single-aisle aircraft a month in 2027, as it strengthens its supply chain and skilled workforce.

I hope for a turnaround from Boeing and am closely watching its stock, but the U.S. manufacturer delivered less than half the number of jets shipped by its European rival in 2024, with a similar story for new orders. Airbus delivered 766 jets in 2024 and seeks to maintain leadership of the jet-making industry for a sixth year straight. Buy a Half

American Superconductor (AMSC) shares were up 6% yesterday and 11% so far this year. The company recently reported third-quarter revenues of $54.47 million, up 60% year on year. Founded in 1987, the company aims to modernize the electrical grid by helping it connect and distribute power. Its products coordinate the power grid, and it is already the leading supplier of high-performance superconductor cables. Its strategically important growth markets such as maritime, Maglev technology, and AI data centers are all huge growth opportunities. Buy a Half

Banco Santander (SAN) shares were up about 4% for the second consecutive week. This profitable international bank currently has a forward P/E ratio of only 5.5 and is trading at about 60% of book value. Banco Santander has added almost 5 million new customers over the last 12 months in Europe, Latin America, and North America. Buy a Half

BYD (BYDDY) shares were steady this week and the stock is one of the few foreign stocks that the typically American-centric Warren Buffett likes, and the only Chinese stock among Berkshire’s current holdings. BYD’s revenue is on track to grow by 24% in 2024, with sales of approximately 4.3 million passenger cars. Buy a Half

Centrus Energy (LEU) shares are off to a good start this year, up 8.5% so far, and were up about 8% this week as demand for uranium is increasing with potential additional demand from artificial intelligence (AI). According to research from Goldman Sachs, data center energy consumption is expected to surge 160% by 2030. Buy a Half

Cloudflare (NET) shares were up 44% in the last year as the company will report its financial results for the fourth quarter after the U.S. market closes on Thursday, February 6. I like everything about this stock except its high valuation, which is why I moved NET to a hold. Beyond enabling AI models to run on its network, Cloudflare offers clients an AI Gateway to help developers manage AI models running elsewhere. Hold a Half

Dutch Bros (BROS) shares are up 12% so far this year as the company effectively leverages its Dutch Rewards loyalty program and the stock is getting more attention as a compelling growth story. Dutch Bros seems to have found a way of connecting with its customers and offering what people want. As coffee giant Starbucks stumbles, Dutch Bros has expanded beyond coffee to lemonades, teas, smoothies, and energy drinks. Hold a Half

Sea Limited (SE) shares rose 4% this week and were up 162% in 2024. Shopee platform is the largest e-commerce platform in Southeast Asia and has also expanded to parts of Latin America. In addition to Shopee, the company offers digital financial services (SeaMoney) and digital entertainment (Garena). The stock is getting expensive trading at more than eight times book value so I’m keeping it a hold. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

Alphabet (GOOG) shares are bouncing around just under 200 as the company benefits from steady growth in the cloud, connecting to AI, and a potential YouTube surge if TikTok is banned in the U.S. Alphabet will report quarterly financial results on January 27. Buy a Half

International Business Machines (IBM) shares were up nicely in 2024 as the company has built the world’s largest quantum computing network through its “Quantum Platform.” IBM has recently built on the AI theme by announcing a series of key AI partnerships with Amazon. Buy a Half

Visa (V) shares were up nicely in 2024 but struggled and lost momentum late in the year as the U.S. government seeks to make the case that Visa is a near monopoly on the debit card side of the business. Visa does have a wide moat in digital payments, but this legal challenge is surely a cloud over the stock. 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

iShares MSCI India Small-Cap ETF (SMIN) is an $856 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. But with the yen likely to reverse course this year, it’s time to move on and pocket a small profit on this fund. Move from Buy to Sell

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Agnico Eagle Mines (AEM) follows a conservative strategy 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 paid 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 is 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.

Alphabet (GOOG) is becoming a play in artificial intelligence (AI). To dominate in 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.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters are 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 latest 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. Also in the 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 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 this 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, woith 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, 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 (ERJ) and Gulfstream, owned by General Dynamics (GD).

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 30, 2025.

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