Portfolio Changes: Cloudflare (NET) – Move from Buy a Half to Hold a Half
Four Trends Powering the Great Rebalancing
Happy New Year to everyone and wishing you all the best investing in 2025.
Let’s keep in mind this year the merit in legendary global investor Sir John Templeton’s sage advice:
“Diversify. In stocks and bonds, as in much else, there is safety in numbers.”
With this in mind, I see four big trends out there that offer us the opportunity to take a contrarian approach to make some money and lower risk.
The first is the baby boomer senior trend that will impact stocks in 2025 and beyond. 4.2 million people in the U.S. are forecast to cross that age threshold this year, according to a report by the Alliance for Lifetime Income’s Retirement Income Institute. This will likely be the “peak 65” zone, a period of years from 2024 to 2027 in which more than 4 million will hit that age level each year.
As we get older, strategy is more important than ever as more Americans than ever will turn 65 in 2025.
The second trend that I have been talking about for months – the extraordinary concentration in markets.
According to Goldman Sachs, the market cap of the largest stock is now 750 TIMES the market cap of a 75th percentile stock.
To put this in perspective, even at the peak of the 2000 dot-com bubble, the metric only reached 550X.
Investing is the art of balancing risks and opportunities so don’t just go out and sell these great companies.
This balancing is challenging because there are thousands of stocks and stock markets are always uncertain. The chances favor that the largest stocks might continue to outperform but you can balance this by allocating new money to other asset classes that appear undervalued such as small-cap, value, industrial sectors such as energy and defense, as well as international plays.
There are ample books and articles out there regarding the right rules in investing such as the need for discipline, patience, and research. All are important but not good enough because what has worked in the past may not work in the future because the world and financial markets are constantly changing.
The third trend is the continued rise of ETFs.
Investors poured more than $1 trillion into U.S.-based exchange-traded funds in 2024, blowing past the previous record set three years ago. Total assets in U.S.-based ETFs reached a record $10.6 trillion at the end of November (ETFGI data), a jump of more than 30% from the start of 2024. Invesco’s QQQ, which tracks the tech-heavy Nasdaq-100 Index, attracted more than $27 billion of new cash through mid-December. iShares Bitcoin Trust (IBIT) in just 11 months grew to more than $50 billion in assets. This is more than the combined assets of more than 50 European market-focused ETFs. Our Grayscale Bitcoin Trust (GBTC) ETF was up 114% for the year.
This highlights the need to build portfolios with both stocks and ETFs – a major goal of the Cabot Explorer. Some ETFs out there are not what they seem, others are dangerous, and clearly one must have a strategy to optimize results and limit risk and volatility. Picking the right ETF is just as important as picking the right stock.
The fourth trend out there that will impact stock markets is China’s continued struggle to handle both high debt and weak demographics which are leading to lower economic growth and stock prices. Much of this can be traced to China’s property meltdown which since 2021 has destroyed around $18 trillion of Chinese household wealth, according to an estimate by Barclays. In short, the outcome of the U.S.-China rivalry will depend on which better deals with its debt burden, both of which are sky-high, as this chart from Bank for International Settlements shows.
This means we need to be highly selective and look for special opportunities as countries in Asia and around the world grapple with a very different China then the one they are used to.
No doubt we will all live in interesting times in 2025.
New Recommendation
American Superconductor (AMSC)
Economic growth is closely correlated with more energy demand.
This is because all economic activity involves converting energy from one form to another.
In other words, energy isn’t just a market sector. It’s the foundation of almost every sector.
For example, a billion-dollar data center, which isn’t unusual, consumes about $600 million in electricity over a decade.
If we add artificial intelligence (AI) into the mix, it will consume somewhere between $1.5 billion and $2 billion of electricity over a decade.
This will require a lot of new gigawatts as well as the infrastructure and technology to increase overall efficiency.
This is where American Superconductor comes into the picture as it 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 megawatt scale power control gear leads to safer and more resilient and efficient power grids.
This underscores that it is not just about generation power. Distributing it is just as important.
The company is already the leading supplier of high-performance superconductor cables.
Its top markets are strategically important growth markets such as:
Maritime – for U.S. Navy and commercial fleets
Maglev technology (for train transportation) – 20%-plus growth rate
Wind power – connecting turbines to the grid
AI data centers – huge growth opportunity.
American Superconductor’s sales were up 60% in its latest quarter.
During the second quarter of fiscal 2024, it booked nearly $60 million of new orders, with new energy power system orders coming in stronger than previously expected. It ended the quarter with over $200 million in 12-month backlog and over $300 million in total backlog.
This underfollowed stock has had a good run but since November has pulled back from 36 to 25, offering us a good entry point.
This is an aggressive microcap idea so you may want to purchase incrementally.
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 have mostly moved sideways after the October high for gold’s price. But the gold miner continues to report remarkable gains in profit which jumped 165% in its most recent quarter. 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 by-product metals. A stronger dollar is weighing on gold, but higher geopolitical risks seem to be driving investors to safe havens such as gold and I’m considering adding another position in early 2025. Buy a Half
Airbus (EADSF) shares have been up marginally since being added as an Explorer stock. As Boeing (BA) struggles, the French satellite company Eutelsat has chosen Airbus to build 100 small satellites and Air India has placed an order for 100 Airbus jets. Airbus has an edge in fuel-efficient, mid-sized aircraft but China’s COMAC heavily subsidized C919 is already flown on domestic routes by China’s three big state-owned carriers. Shortly, it will fly between Hong Kong and Shanghai, its first regular commercial route outside China’s mainland. Buy a Half
Banco Santander (SAN) shares were up a bit this week and if the bank can boost its return on assets to closer to 1% this year, the stock could do very well in 2025. SAN currently has a forward P/E ratio of only 5.5 and is trading at just 62% of book value. Banco Santander has added almost 5 million new customers over the last 12 months and 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 were largely unchanged as we await whether it sold 4 million EVs this year as projected. The Honda/Nissan potential merger is aimed at achieving scale as Nissan sold 3.4 million cars globally in the first 11 months of 2024 and Nissan sold just over 3 million. 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. Buy a Half
Centrus Energy (LEU) pulled back 2% this past week as its subsidiary, American Centrifuge Operating, secured a contract from the U.S Department of Energy (DOE) to expand commercial production of Low-Enriched Uranium (LEU). For background, natural uranium contains about 0.7% of the isotope U-235 that is necessary for nuclear fuel. Then, a company enriches that natural uranium to about 3% to 5% to make low enriched uranium. However, some nuclear reactors require even more refinement to about 20%, at which point the substance is called “high assay” LEU, or HALEU. This is a process that only a few companies including Centrus can handle. Buy a Half
Cloudflare (NET) shares gave back half of last week’s 6% gain this week. I like everything about this stock except its high valuation, which is why I’m moving this stock to a hold. 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. Move from Buy a Half to Hold a Half
Dutch Bros (BROS) shares are getting more attention as a compelling growth story. After starting as a pushcart, it has grown to 950 shops across 18 states, generating $1.1 billion in trailing-12-month revenue. Dutch Bros has expanded beyond coffee to lemonades, teas, smoothies, and energy drinks, and it’s starting to test food offerings in select shops. 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 gave up 5% this week no doubt due to profit taking after being up 165% during 2024. This stock is getting expensive, trading at more than eight times book value, so I’m keeping it a hold. The company focuses on younger consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Hold a Half
Explorer Dominator Blue-Chip Recommendations – More Buy and Hold
Alphabet (GOOG) shares will be impacted in 2025 by both the antitrust lawsuit brought by the federal government, which contends it has a search monopoly, and the company’s own focus on AI. This includes its models for language AI (Gemini 1.5) and video AI where it has a clear lead. Its chief attraction right now is its valuation compared with other big tech stocks. Buy a Half
International Business Machines (IBM) shares were up 38% in 2024 and have steadily gained investor interest as a sleeper conservative play on artificial intelligence. IBM has recently built on this theme by announcing 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
Visa (V) shares have struggled a bit in the latter part of 2024 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 has a wide moat in digital payments connecting 4 billion account holders to more than 130 million merchants and 14,500 financial institutions and is well positioned to perform well in 2025. The company’s dividends have also increased by almost 392% in the past decade. 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. GBTC was up 114% in 2024 as Bitcoin prices soared. 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
Stock | Price Bought | Date Bought | 1/1/25 | Profit | Rating |
Alphabet (GOOG) | 192 | 12/19/24 | 190 | -1% | Buy a Half |
Agnico Eagle Mines (AEM) | 88 | 10/24/24 | 78 | -11% | Buy a Half |
Airbus (EADSF) | 146 | 11/21/24 | 160 | 9% | Buy a Half |
American Superconductor (AMSC) | -- | NEW | 25 | --% | Buy a Half |
Banco Santander (SAN) | 5 | 11/7/24 | 5 | -6% | Buy a Half |
BYD (BYDDY) | 66 | 12/5/24 | 68 | 3% | Buy a Half |
Centrus Energy (LEU) | 43 | 6/20/24 | 67 | 54% | Buy a Half |
Cloudflare (NET) | 79 | 2/1/24 | 108 | 36% | Hold a Half |
Dutch Bros (BROS) | 32 | 8/15/24 | 52 | 64% | Hold a Half |
International Business Machines (IBM) | 133 | 6/29/23 | 220 | 65% | Buy a Half |
Sea Limited (SE) | 49 | 2/29/24 | 106 | 117% | Hold |
Visa (V) | 241 | 8/24/23 | 316 | 31% | Buy a Half |
ETFs
Price Bought | Date Bought | 1/1/25 | Profit | Rating | |
Aberdeen Asia-Pacific Income Fund (FAX) | 16 | 5/23/24 | 15 | -8% | Buy a Half |
Grayscale Bitcoin Trust (GBTC) | 47 | 2/15/24 | 74 | 59% | Buy a Small Allocation |
iShares MSCI India Small-Cap ETF (SMIN) | 83 | 8/1/24 | 86 | 4% | Buy a Half |
JP Morgan Equity Premium Income ETF (JEPI) | 54 | 5/4/23 | 58 | 6% | Buy a Full |
Morgan Stanley China A Share Fund (CAF) | 12 | 1/25/23 | 12 | 0% | Buy a Half |
Oberweis Micro-Cap Fund (OBMCX) | 42 | 9/12/24 | 45 | 6% | Buy a Half |
WisdomTree Emerging Markets High Dividend Fund (DEM) | 32 | 9/29/22 | 40 | 25% | Buy a Half |
WisdomTree Japan Hedged Equity ETF (DXJ) | 103 | 2/29/24 | 110 | 7% | Buy a Full |
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 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 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, and has 950 stores in 18 states 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 (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 16, 2025.
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