Cabot Explorer Issue: November 7, 2024

Portfolio Changes: None

Nvidia Replaces Intel in Dow; Buffett Sits on a Gigantic Pile of Cash

A broad-based Republican victory in the election is spurring a sharp rally on Wall Street as investors bank on investor-friendly policies.

Bitcoin, the U.S. dollar, and gold also rose. It was reported that the gold reserves of Italy and France have risen in value by about $100 billion in the last two years. It is unusual historically for gold and the U.S. dollar to rise in tandem. Gold’s steady rise is also unusual given that traders would normally take profits along the way. U.S. economic sanctions have encouraged many to move into gold beyond the long reach of the U.S. government.

It is amazing how much money is being spent on politics. More than 11,000 political groups spent almost $15 billion to influence the election. Of course, this amount seems small weighed against a global economy of about $100 trillion, with the U.S. accounting for about $23 trillion (and about 35% of global debt).

It will be very interesting who gets the top economic policy posts and the GOP strategy going forward.

I’m in Toulouse, France this week where Airbus (EADSY) has its headquarters. I’ll be looking closer at the Boeing-Airbus duopoly and whether Boeing (BA) can make a comeback after ending its strike this week or if Airbus can gain from Boeing’s many troubles. I’ll be taking a tour of Airbus factory and meeting with company representatives.

Last Friday, the Federal Energy Regulatory Commission rejected Talen Energy’s request to increase the amount of power that it could provide directly from its existing Susquehanna nuclear power plant to Amazon’s data center from 300 megawatts to 480 MW. This will dampen the nuclear power stock rally as it somewhat hamstrings producers’ ability to increase the amount of power it can sell to private buyers.

Nvidia (NVDA) is among the few companies worth $1 trillion or more and this week came close to the market value of Apple (AAPL). It also became one of 30 blue-chip stocks in the Dow Jones Industrial Average by pushing Intel (INTC) to the curb.

This is a remarkable achievement accomplished in record time due to the AI chip boom.

Warren Buffett’s Berkshire is now sitting on more than a $325 billion cash stockpile as he has unloaded Apple and Bank of America shares this year without finding any major acquisitions. Berkshire sold about 100 million more Apple shares in the third quarter. The remaining stake of roughly 300 million Apple shares is worth about $70 billion and remains Berkshire’s biggest single investment.

In another turnaround, Volkswagen has been replaced as China’s leading carmaker by the Chinese electric vehicle giant BYD (BYDDY). BYD rapidly expanded all-electric car sales over the past three years and has booming sales of plug-in gasoline-electric hybrids that can go long distances on only battery power with gasoline engines as backups.

Chinese consumers are increasingly preferring domestic brands pretty much across the board. Another example is Starbucks which has more than 7,300 stores in China and same-store sales there fell 14% in the fourth quarter.

It is interesting that, like the Explorer, Blackstone is now following a thematic approach such as focusing on AI, life sciences, and India as well as investing in data centers and renewable energy.

The U.S.-China rivalry is complicating and splitting European country strategies.

For example, tariffs on electric vehicles (EVs) from China are splitting the 27 members of the European Union, with France for the tariffs, Germany opposed to them and 12 nations abstaining. Meanwhile, countries like Mexico and Vietnam have experienced surges in Chinese trade and investment and, in turn, have increased their exports to the United States.

Some European countries are adroitly playing the U.S.-China balancing game as well, and this brings us to today’s new recommendation.

New Recommendation

Banco Santander (SAN)

I did not realize that the second-largest manufacturer in Europe after Germany is Spain, which exported 87% of its auto production last year.

Spain is aggressively reaching out to China for more trade and investment but Spain’s economic ties with the United States are much larger than between Spain and China so the country must tread carefully. The risk is that cars produced with Chinese partners or technology could be shut out of the American market.

Still, Spain has emerged as the star of the European Union with its highest economic growth rate as Germany and France have struggled a bit.

One of the best conservative ways to capture growth in a country or region is through top quality banks due to their tentacles at home and overseas. First, you need to sort out the laggards from the quality banks that have upside potential and strong track records.

You may have never heard of Santander Bank (SAN), founded in Spain 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%.

Santander now also oversees 500 billion euros of assets for wealth management clients and has 105 million credit cards issued.

The stock is up 26% so far this year, showing relative strength, but still trades at just 6.3 times trailing and forward earnings as well as only at about 70% of book value.

It also sports a healthy 4.5% dividend.

The bank has a strong commitment to returning value to shareholders, announcing an interim cash dividend increase of 23% compared to the previous year’s dividend.

This is a quality international bank that offers us exposure to two regions – one developed and one emerging.

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 off 5.5% this past week despite recently reporting quarterly earnings of $1.14 per share, beating expectations. Agnico reported its fourth consecutive quarter of record free cash flow amid high gold prices while reducing its debt by $375 million. Agnico Eagle operates a sizable portfolio of 11 assets located in four countries. Buy a Half

Centrus Energy (LEU) shares rebounded strong yesterday but were still down 16% for the week as the federal regulatory agency FERC blocked a deal between Talen Energy and Amazon Web Services for a private energy offtake agreement. Both companies announced that this is a temporary setback and would continue to work together. 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 gained another 2% this week as the company announced the acquisition of Kivera, a cloud security and compliance platform. The company will report its next quarter later today, November 7. Cloudflare offers AI computing services using its global network of servers and AI accelerators, complementing its core cybersecurity services. Buy a Half

Dutch Bros (BROS) shares gained 4% yesterday and looks poised for a very strong day today after reporting quarterly earnings of $0.16 per share, beating the Zacks Consensus Estimate of $0.12 per share. The drive-thru coffee chain operator and franchisor posted revenue of $338 million in the period, which also beat forecasts. The American drive-thru coffee chain went public at 23 a share, then more than doubled to a record high of 76.25 two months later, but now trades at about 35. As of the end of June, there were 912 Dutch Bros outlets. Buy a Half

MOOG (MOG-A) shares were up 17.6% this week after reporting a quarter with revenue up 8.7% and net income up 21% year over year. The company provides precision motion control solutions used in aerospace and defense applications such as Lockheed Martin’s F-35 fighters as well as for the Boeing 787 and Airbus A350. Buy a Half

Sea Limited (SE) shares were steady this week as it expects to report earnings on November 12 with a solid revenue increase and good earnings comparison year over year. Sea shares are up about 140% this year as it focuses on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were up 4.2% this week and have handily beat the S&P 500 so far this year. Recently, IBM reported third-quarter results with double-digit revenue growth in software and offers us exposure to cloud computing, data analytics, cybersecurity, and artificial intelligence (AI) with the latter business tripling in the June quarter of this year, from $1 billion to $3 billion. Buy a Half

Unilever (UL) shares were off 2.7% this week after recently reporting a bigger-than-expected rise in sales growth. The stock has a 3% dividend and delivers a 32% return on equity and an 8% return on assets as this high-quality European multinational sells consumer products with a strong position in emerging markets. Buy a Half

Visa (V) shares were up almost 6% this this week as markets believe that the new Trump administration will likely not be aggressive in terms of antitrust initiatives. The company also reported its fourth-quarter earnings last week with revenues growing 12% year over year and profits up 17% for both the quarter and the year. Buy a Half

Watch List

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 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

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.

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,with more than 900 stores as of the end of the second quarter (third-quarter results are due out today), 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.

MOOG (MOGA.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.

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 November 21, 2024.

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