Cabot Explorer Issue: November 21, 2024

Portfolio Changes:
Moog Inc. (MOG-A) – Move from Buy a Half to Watch List
Sea Limited (SE) – Move from Buy a Half to Hold

Quick Note: Due to the Thanksgiving holiday, you will receive next week’s Explorer update a day early, on Wednesday, November 27, 2024.

Profit from the “Great Rebalancing”

A much-anticipated Nvidia (NVDA) quarterly report was on target while flat sales growth at Target (TGT) sent its stock down 21%.

The U.S. dollar keeps surging and recently traded at a roughly a two-year high, weighing on the pound, yen and euro. The Japanese currency traded around 156 per dollar, its weakest level since late July.

This trend is also hitting gold and the most probable reason for gold’s decline has been the run-up in the 10-year Treasury yield and U.S. dollar following the election.

Europe’s stock market has underperformed the U.S. by the most in almost three decades. While the S&P 500 index is up about 25% so far this year to record highs, Europe’s benchmark Stoxx 600 is only up 5%. That underperformance in returns is the biggest since 1995, according to Bloomberg. The other side of the coin is that the S&P 500 is now trading at 22.5 times forward earnings and is at a record high 70% premium to the Stoxx 600. The European Union (EU) bloc is the world’s third-largest economy, with a market of 450 million consumers, and controls the world’s second-most-used currency, the euro.

The EU also has better relations with China than America though tensions are rising. Hundreds of employees at the Hennessy cognac factory in France are fighting plans to move brandy bottling to China. Hennessy, owned by the French luxury giant Louis Vuitton Moët Hennessy, is considering the move after China recently put 39% import tariffs on European brandy imports.

Money is beginning to flow out of U.S. stocks and into a variety of overseas markets, including Europe. This trend is likely to continue for years to come for three simple reasons:

1. Too much money is allocated into the American stock market compared to other global markets.
2. U.S. stocks are too expensive relative to overseas stocks.
3. Big investors are rebalancing to reduce risk because stormy U.S. domestic politics and rising geopolitical tensions means “all eggs in one basket” is too risky.

Consider that the American population is about 4% of the world population and the U.S. economy makes up about 23% of the global economy.

So, you might rationally expect somewhere around 23% of global funds to be in American stocks. But you also need to consider that the U.S. has some other less tangible factors, such as the world’s reserve currency, long established trading alliances, military supremacy, and significant energy and agricultural resources.

The actual share of global investment in U.S. stocks is a record high of about 75%.

For some context, India now holds a 3% weighting; China’s is 2%. These two countries have a combined population of 2.6 billion people – 8X the U.S. population.

So that’s less than 5% weighting for two of the world’s top five economies. And some emerging market countries like Vietnam are also growing 5 times faster than the American economy.

It won’t happen overnight, but Europe, Asia, and emerging markets will likely gain higher shares of capital flows.

U.S. stocks are and will be at the center because America has some of the best corporate governance and shareholder-friendly stock markets in the world. But if there is one iron law of investing, it is the “reversion to the mean.” This pushes markets at the extremes of value to the center of attention.

This brings us to today’s recommendation.

New Recommendation

Airbus (EADSF)

I wish I could give you better news about Boeing (BA), a very strategically important company to America’s future.

Unfortunately, any positives on Boeing are outweighed by a flood of negatives.

At least it has recently ended a costly strike that was costing the company about $1 billion a month in cash flow.

To save cash, Boeing is cutting about 10,000 workers it needs to expand production.

Boeing stock is down about 45% so far in 2024.

Boeing has lost money every year since 2018, when a series of crashes and near-crashes tarnished its brand for quality and reliability.

Boeing is falling behind Airbus in both orders and aircraft deliveries but in 2023, the then-Boeing CEO got a 45% pay raise, to nearly $33 million. No wonder the workers were frustrated.

Connections between management and the shop floor are frayed since production/assembly in Seattle is now 2,300 miles from Boeing’s CEO and headquarters in Arlington, Virginia.

For nearly 40 years the company built the 737 fuselage itself in the same plant that turned out its B-29 and B-52 bombers. In 2005 it sold this facility to a private investment firm and the link between management and production became even weaker. Boeing has pledged to fix its quality-control problems by strengthening oversight and training, but many remain skeptical.

Having Jack Welch financial “bottom line”-focused executives did work for a while. Boeing stock surged more than 600% from 2010 to 2019. But since then, performance has deteriorated. The company has suffered nearly $40 billion in losses since 2019. Ratings agencies recently cut Boeing’s credit to just above “junk” status. Boeing needs to rebuild its reputation which has been battered by two fatal accidents in 2018 and 2019 and severe problems with a fuselage panel this past January. FAA approval for two new versions of the 737 Max is on hold.

Boeing’s defense unit has also taken big write-downs on several Pentagon contracts, including one to convert two 747 jumbo jets into new Air Force One jets. The unit is also part of a joint venture that built the Air Force’s V-22 Osprey crash, killing eight.

Boeing now must also manage the fallout from President-elect Donald Trump’s plan to impose large tariffs on imports from China. Boeing is America’s largest exporter, and therefore very exposed to any trade war. China is the largest global market for new aircraft purchases, with Boeing forecasting that China’s fleet of commercial jets will double in the next 20 years.

Boeing is one of only two manufacturers, along with rival Airbus (EADSF), 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 of Boeing’s supply chain challenges, Airbus has a clear edge right now.

Airbus just reported a 28% quarterly increase in net profit as it gained market share by beating Boeing to develop a line of fuel-efficient, mid-sized aircraft that are cheaper for airlines to fly. Airbus is benefiting from its decision to deliver the fuel-efficient, ready-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.

We wish Boeing the best, but Airbus will likely gain market share as well as outperform in the interim.

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 bucked the trend of weaker gold prices, rising about 9% this past week. A stronger dollar is dampening sentiment for gold, but higher geopolitical risks seem to be driving investors to safe havens such as gold. Buy a Half

Banco Santander (SAN) shares were up 2.6% this week as the bank’s fully digital Open Bank launched operations in Mexico offering no minimum balance requirements and no fees. It enters the Mexican market with the launch of the open debit account, offering savers a 12.5% annual return. Banco Santander was founded in Spain back in 1857, and its strength is 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, net profits increased 16%. Buy a Half

Centrus Energy (LEU) shares, up 38% so far this year, had an off week, pulling back 7.6% after Russia raised issues regarding supplying uranium to U.S.-linked companies. We will have to watch this uranium supply issue as well as regulatory issues closely. Interest in nuclear energy is increasing with new technology and the AI needs for powerful data centers. Nuclear energy now accounts for about 75% of low-emission energy in the United States. Buy a Half

Cloudflare (NET) shares were up this week and are showing relative strength, up 22% over the past six months. Cloudflare is expanding in Mexico as its digital footprint is growing at a rapid pace. In addition, 35% of the Fortune 500 now uses its services as Cloudflare offers AI computing services to complement its core cybersecurity services. Buy a Half

Dutch Bros (BROS) shares gained another 10.6% this week following last week’s 36% gain. Last week it announced revenue grew 27.9% year over year to $338 million in the third quarter. The drive-thru coffee chain operator and franchisor is focused on the West Coast and the key going forward is to open new stores that meet aggressive expectations with store count going from 950 to 4,000 over the next couple of years. I’m getting close to taking partial profits off the table. Buy a Half

MOOG (MOG-A) shares were up a bit this week and have done well with the stock up 35% since reporting a solid third quarter. I suggest we take profits and look for a broader-based defense stock and a company that is more transparent and offers more information between quarterly reports. Some of you may wish to keep the stock so I’m moving it to the watch list to keep an eye on it. Move from Buy a Half to Watch List

Sea Limited (SE) shares were up 10.7% this week after rising 10.3% the previous week after the company reported a better-than-projected 31% rise in revenue for the September quarter. Shares are now up roughly 160% this year but are still about 70% below their all-time highs. You may consider selling some shares to take profits off the table as I move the stock to a hold. The company focuses on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Move from Buy a Half to Hold

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares reached 215 this week following strong revenue growth in software and this week announced a partnership with Advanced Micro Devices (AMD) to deploy AMD Instinct MI300X accelerators as a service on IBM Cloud. IBM offers us conservative exposure to a blend of cloud computing, data analytics, cybersecurity, and artificial intelligence (AI). Buy a Half

Unilever (UL) shares were steady this week as the company moderated European job cuts and deals with discontent from the management team of its Ben & Jerry’s ice cream property over the conflict in the Middle East. The company continues to adjust brand strategy across the world. It does face some risks from higher tariffs since Unilever has manufacturing bases in both Mexico and China. China is Unilever’s largest production base in the world, where 10 million products a day are manufactured. Buy a Half

Visa (V) shares were flat for the second week in a row as the U.S. government seeks to make the case that Visa is a near monopoly on the debit card side of the business. This is no doubt weighing on shares. Visa captures a tiny slice of every transaction with a Visa debit or credit card in over 200 countries without taking on any credit risk. This is a solid core holding but I’m also looking at American Express (AMEX).as this company as Visa Buy a Half

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

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

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 a $960 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 earn 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

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 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 plans to pay a dividend of $1.60 per share in 2024.

Banco Santander (SAN) was founded in 1857 in Spain. 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. 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%.

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, 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, the company has about 900 locations across 17 states in the U.S. Dutch Bros has seen its share price soar but in the last month its stock has pulled back from 42 to 29 due to a combination of some profit taking and guidance from management that growth may moderate a bit. Dutch Bros has more than 900 stores as of the end of the second quarter, including 36 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 28 consecutive years of dividend increases.

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.

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, trading 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.

The next Cabot Explorer issue will be published on December 5, 2024.

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