Cabot Explorer Issue: July 18, 2024

Portfolio Changes: None

Cabot Explorer Japan ETF Pick Is up 31% in 2024

Markets and especially the tech-heavy Nasdaq index led by semiconductor stocks sold off yesterday. Reasons include perceived rising protectionist and isolationist pressures in both Europe and America. Meanwhile, small-cap stocks continue to rally, and some overseas markets were also up.

As one would expect, our tech stocks pulled back somewhat while all three of our dominator stocks gained ground this week.

Many investors still seem to think that exchange-traded funds (ETFs) are boring, and one is just like another. I couldn’t disagree more. The number and complexity of ETFs are staggering. The choices are challenging, and one group of ETFs that I have long found interesting is country ETFs.

One winner this year which has quietly outperformed all the major U.S. indexes over the past 12 months is our currency-hedged ETF Japan recommendation, the WisdomTree Japan Hedged Equity Fund (DXJ).

Unlike in America, in Japan, it’s not just a handful of tech giants fueling its bull market. This broad-based strength highlights that the Japanese economy is firing on all cylinders.

In addition, the weakening yen (and our recommendation to hedge this risk) has supercharged returns. Japanese bank stocks are even rising based on the Bank of Japan finally raising interest rates, leading to better profitability for these financial institutions.

Furthermore, China’s overall weaker economy and lackluster financial markets have forced global money managers to move capital out of China into other Asian markets. Japan is a natural place to land as it is both liquid and high quality.

India is also benefiting from the outflow of capital, and the offshore manufacturing rebalancing trend is also a key factor in the rise of other Asian markets. Last year, Apple’s annual sales in India hit a record of almost $8 billion, underscoring a rapidly growing market. Apple’s India revenue jumped about 33% in the 12 months through March and Apple’s pricey iPhones accounted for more than half of sales.

In the U.S., more than half of the returns in the S&P are coming from a handful of stocks. Nvidia, Microsoft, Eli Lilly, Meta and Amazon accounted for 55% of the returns in the first half of the year. Meanwhile, just five of the 500 stocks in the S&P 500 index (Microsoft, Apple, Nvidia, Alphabet, Amazon) account for 27% of the total value of the index.

Explorer Weekly Stock Commentary

ASML Holdings (ASML) shares pulled back 10% yesterday despite releasing a good earnings report, with quarterly sales of 6.2 billion euros, gross margin of 51.5%, and net income of 1.6 billion euros. The real issue is probably political as the Biden administration considers more restrictions on chip technology to China, and former president Trump criticized Taiwan over its defense spending. The company is sitting on a significant order backlog and confirmed expectations for a stronger second half of 2024. Again, keep in mind that this is an aggressive stock so expect some volatility. Buy a Half

Centrus Energy (LEU) shares were up 8% this past week despite a pullback yesterday as nuclear power becomes a more common topic of conversation in America due to new, safer nuclear technology. Centrus supplies essential nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. The stock is trading at attractive trailing and forward price-to-earnings ratios. Buy a Half

Cloudflare (NET) shares were off 2% this past week in a tough tech market. This leading cybersecurity company blocks billions of threats every day for its expansive client list. Its network speed beats even tech giants Amazon and Google as the company delivers a strong cash flow. It will report its next earnings on August 1. Buy a Half

Neo Performance (NOPMF) shares were up again for their third straight weekly gain. Neo is a unique player in rare earths and critical metals because its operations run the gamut of the supply chain. Neo remains a value stock due to its strategic importance and sizable cash position coupled with low debt. Buy a Half

NIO (NIO) shares finished their first week as an Explorer stock unchanged. NIO designs and manufactures premium smart electric vehicles and is known for its styling and next-generation technologies. The company’s signature is its unique battery-swapping charging solution. Nio stock seems an undervalued EV player at these price levels, but we need to accept that this is an aggressive stock recommendation and that its chief risk is rising protectionist sentiment. Buy a Half

Novo Nordisk (NVO) shares pulled back 5% in the wake of some good and bad news. Drugmaker Roche entered the market as a potential competitor while Novo Nordisk’s Ozempic was linked to lower rates of dementia and other cognitive issues in an Oxford study.

After rapid growth, Novo shares are pausing but should resume an upward trend as the market potential is huge and demand is growing. Hold a Half

Sea Limited (SE) shares were up 76% in the first six months of this year with its rise sparked by a low valuation, improving financial trends, and a shift in investor expectations. Sea posted $3.7 billion in total revenue during the first quarter, a 22.8% increase over the first quarter of 2023 The company is expected to report its next earnings around August 13. Buy a Half

Super Micro Computer (SMCI) shares were more volatile than normal this week, piercing 950 and then pulling back to 816. The stock is up 150% over the last six months and we have taken some profits, so I’m keeping this a hold for now as revenue expectations for the coming quarter are high. This aggressive stock is at the heart of the AI boom, and we can expect its next earnings report on August 13. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were up 5.4% this week and expect a positive earnings report on July 24. IBM is a counterweight to more volatile tech growth stocks as well as a conservative play on AI and advanced cloud markets. Buy a Half

Unilever (UL) shares were up almost 3% again this week as the company announced it will cut more than 3,000 workers from its European operations and continue to slim its product line. This is a reliable, long-term global consumer play with significant exposure to emerging consumer growth markets. Buy a Half

Visa (V) shares were up 3.7% this week after some weakness and I encourage you to take advantage of that weakness to buy this stock as a core holding. There are over 4.3 billion Visa-branded cards in circulation and this tremendous scale leads to operating profit margins of around 65%. This should be a core portfolio holding. Buy a Half

Watch List – past recommended stocks that I still like and keep an eye on

BYD (BYDDY), ConocoPhillips (COP), Franco-Nevada (FNV)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a closed-end 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 the largest Chinese-listed stocks. 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

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

ASML Holdings (ASML) makes the lithography equipment that is used to make advanced chips. It is currently the only company that makes cutting-edge extreme ultraviolet lithography (EUV) machines that are used to make the world’s most advanced and expensive semiconductor chips. That is at the seven nanometer (nm) and below size and standard. I would argue that this company has a stronger competitive position than even Nvidia does given its highly prized specialty. This gives ASML significant pricing power and a wide economic moat, making it highly profitable as it sells some of these machines for close to $400 million apiece.

Watch List: BYD (BYDDY) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). The company also manufactures and supplies EV batteries, including to Tesla, and makes its own chips. This is vertical integration that would make Henry Ford proud. BYD is in a strong position to be one of, if not the leader of the EV revolution in terms of size, scale, and growth.

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: cloud computing, AI, cybersecurity, and edge computing. 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.

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 28 consecutive years of dividend increases.

Neo Performance (NOPMF) manufactures the building blocks of permanent magnets and powers many modern of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys - all using rare earths and minerals critical to permanent magnets. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 4.8% dividend yield, and incentives are aligned with about 20% of the outstanding stock held by management.

NIO (NIO), founded in 2014, designs and manufactures premium smart electric vehicle as well as innovations in next-generation technologies including assisted and intelligent driving, digital technologies, electric powertrains, and batteries. Nio’s stock seems to be poised for a rebound even though the macro picture for China is not encouraging. Nio has a premium brand image, which will differentiate it from its mass-market competitors and its advancing battery technology and charging solutions will ease range anxiety on electric cars. Nio stock is clearly an undervalued EV player at these price levels, but we need to accept that this is an aggressive stock recommendation.

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

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. Some of you may recall this stock when it was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

Super Micro Computer (SMCI), commonly known as Supermicro, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro stock looks relatively inexpensive right now for the growth that it has been delivering. The company trades at just two times sales. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. Furthermore, both Dell and HPE have relatively high debt whereas Super Micro has a net positive cash position. This is an aggressive pick in a sector experiencing extraordinary growth.

Unilever (UL) is a dominant consumer goods giant with a trove of 400 recognizable brands in its diversified portfolio – from Vaseline to Dove – that it sells in over 190 countries. However, 30 “power brands” account for almost 75% of Unilever’s total sales. It is a steady, stable stock for an uncertain environment and for a change, its stock is selling at a rare discount – down about 9% from all-time highs and at just over two times sales. Two other reasons I like Unilever are that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

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. This leaves it much better poised to outperform the latter going forward.

The next Cabot Explorer issue will be published on August 1, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.