Cabot Explorer Issue: October 10, 2024

Portfolio Changes: None

The Cabot Explorer Heads Overseas

JPMorgan (JPM) is due to report results Friday, kicking off bank earnings season. Lately, the market seems to be more focused on earnings than Fed interest rates, and this is a good thing.

As markets move towards the “Great Rebalance”, looking to diversify portfolios with different asset classes and international stocks, the Explorer and I are headed to Europe, Asia, and Latin America during the next year.

We should all benefit from on-the-ground intelligence and ideas though it will also necessitate some flexibility in terms of the timing of updates and issues. I’ll begin with Europe this fall, Asia in the new year and perhaps Latin America next summer.

China’s stock surge will probably not last given Beijing’s cheap-credit, property-driven economic model, which accounts for around one-third of China’s annual output.

One area that China dominates is electric vehicles (EVs) as BYD (BYDDY) stock (on our watch list) has made a nice move and General Motors (GM) looks to scale back its presence in the country. The company may just see China as a place to make and export EVs as Chinese production surpasses Chinese demand.

Finally, Rio Tinto (RIO) will pay $5.85 per share for U.S.-based Arcadium Lithium (ALTM), a key EV battery material. That’s a 90% premium to Arcadium’s closing price last Friday. A big bet on lithium – but a staggering premium.

New Recommendation

Super Micro Computer (SMCI)

We made a nice return with Super Micro beginning late last year and well into 2024. Share performance even exceeded that of market darling Nvidia (NVDA) as Super Micro stock climbed 188% in the first half of the year compared to Nvidia’s 149% increase. Both the S&P 500 and the Nasdaq 100 index invited Super Micro stock to join their indexes, further propelling momentum and share price. As usual, we sold some of the stock to take profits and then exited the stock several months ago over concerns of impending problems and high valuations.

The challenges the company and the stock now confront are serious, but these must be weighed against Super Micro’s high growth and much lower current price-to-earnings valuation ratio of 23 and a forward projected ratio of just 14.

The first challenge is a research firm with a short position in the stock issued a report alleging troubles at the company. Second, Supermicro delayed the filing of its 10-K annual report. And more recently, The Wall Street Journal reported that the Justice Department had launched a probe into Supermicro. All of this has led to shares pulling back rather sharply.

Our move back into the stock today is not without risk but the recent stock split, Super Micro’s strong market position in the AI server sector, and most importantly, its much lower stock valuation all give me confidence that the stock’s upside is much larger than the downside price risk. Keep in mind that Super Micro has been around for more than three decades, selling workstations, servers and other equipment but it vaulted into the spotlight along with the artificial intelligence (AI) boom.

Companies building AI platforms turn to Supermicro for their data center needs leading to a growth rate over the past 12 months that’s five times faster than the industry average. Supermicro’s technology and its ability to tailor a particular product to a customer’s need is helping the company deliver quarterly revenue this year that is more than a full year of revenue as recently as 2021.

All this needs to be balanced against recent lower margins and other problems at Supermicro. Supermicro has responded to the report, saying claims were “false or inaccurate,” and pledged to further address it in “due course.” Regarding the potential Justice Department probe, The Wall Street Journal admits that a probe hasn’t been confirmed.

Back to the positive, Super Micro recently announced that it had entered a strategic partnership with Japanese company Fujitsu Limited to develop and market a platform designed for high performance and energy efficiency and targeted for release in 2027. The average Wall Street estimate still calls for an 87% increase in SMCI’s revenue in the coming 12 months. 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

Centrus Energy (LEU) shares took a breather this week as the stock has gained about 50% over the last three months. Centrus announced an award from the U.S. Department of Energy to support a key step in the nuclear fuel production process. This is on top of a recent supply agreement with Korea Hydro & Nuclear Power for a decade of low-enriched uranium deliveries to feed Korea’s reactors. Buy a Half

Cloudflare (NET) shares were up 7% this week and NET can be framed as an emerging AI stock with a high projected growth rate. Cloudflare offers AI edge computing services using its global network of servers and AI accelerators and its cybersecurity features are also quite valuable for AI service providers. Cloudflare recently delivered quarterly revenues up 30% year on year and offers services in over 120 countries and is both a cloud and cybersecurity play. The company will report its next quarterly earnings on November 7. Buy a Half

Dutch Bros (BROS) shares were off 3.7% this past week as the company opened 36 new shops in the latest quarter, driving revenue up 30% year over year. As of the end of June, there were 912 outlets, with a goal of 4,000 within the next few years. Since right before its initial public offering (IPO) in 2021, it has doubled its store count and tripled its sales. Buy a Half

MOOG (MOG-A) shares finished just under 200 this week on no news. MOOG supplies advanced primary flight controls on the most modern military aircraft such as the Lockheed Martin F-35 Lightning II. The company also supplies primary flight controls for the Boeing 787 and Airbus A350. Buy a Half

PDD Holdings (PDD) shares, after a 32% jump last week, pulled back 7% this week in line with the Shanghai Composite as China’s stock rally slowed. From 2023 to 2026, analysts still expect PDD’s revenue to grow at a compound growth rate of 38%. This an aggressive stock that represents a blend of value and growth. Buy a Half

Sea Limited (SE) shares edged up this week and have several tailwinds such as Shopee exiting non-Asian markets, Free Fire experiencing a resurgence in popularity, and Garena continuing to work with the Indian government to bring Free Fire back to that country. Sea Limited’s revenue surged at least 20% in all three of its segments in its latest quarter. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were up 6.6% this week as IBM’s book of business in generative AI has grown to more than $2 billion. Grand View Research estimates that the market will reach $109 billion by 2030, a compound annual growth rate (CAGR) of 37%. IBM’s strong cash flow is driven by software, consulting, and infrastructure, as well as accelerated AI adoption consulting. Buy a Half

Unilever (UL) shares have been a little soft over the last month but are up 33% so far this year as the company delivers an impressive 32% return on equity and an 8% return on assets. The stock is a great multinational core holding. Buy a Half

Visa (V) shares were steady this week despite the threat of a U.S. Justice Department action to sue Visa, alleging the global payments giant illegally monopolized the debit card market. This may end up resulting in a fine, but Visa has stunning profit margins and also controls at least half of the U.S. credit card market. 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 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 the largest 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 Full

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.

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 and 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 29 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, and 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).

PDD Holdings (PDD) is growing much faster than its competitors. Its return on equity is a stunning 49%. PDD was only founded nine years ago (as Pinduoduo), and it has carved out a niche with its discount marketplace, which targeted shoppers in China’s lower-tier cities. From 2023 to 2026, analysts still expect PDD’s revenue to grow at a compound growth rate of 38%. That growth should be driven by its market share gains in China and by Temu, its cross-border marketplace that connects Chinese sellers to overseas buyers. This is a competitive market in China watched closely by regulators.

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 October 24, 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.