Cabot Explorer Issue: October 24, 2024

Portfolio Changes: PDD Holdings (PDD) – Move from Hold a Half to Sell

Why Gold is Strong

As I mentioned recently, I’m now in Europe looking for intelligence and ideas.

This week I’m in Madrid and visited the stock exchange (bourse) and met with some local brokers to try to get a feel for the market and region. Like brokers always are, they were bullish on stocks and especially gold. One stock we discussed which I have followed from time to time is Banco Santander (SAN). It is in a nice uptrend and still well below book value, but I need to do some research and reach out to some friends who previously worked for Santander to get their views before considering a recommendation.

Regarding gold, it has breached the $2,700-an-ounce level and silver last week reached its highest level since 2012. Interesting to note that the Spanish silver dollar was the reserve currency for centuries and the coin most accepted in early America as a means of exchange.

Gold has hit successive all-time highs in recent months and our gold position in Franco-Nevada (FNV) is up around 24% so far this year.

The question is, of course, why is gold so strong, and will the bull market continue?

Analysts attribute gold gains to several reasons but to me gold and silver are just different forms of money. Investors are looking to hedge their bets and diversify assets for a variety of reasons.

The bottom line is that uncertainty is gold’s best friend.

Gold is seen as a haven demand amid uncertainty around China/Taiwan, the outcome of the U.S. election, concern over the Middle East, potential weakness in the U.S. dollar, as well as lower interest rates. As the U.S. dollar weakens, gold also becomes relatively cheaper for other currencies, further driving up gold prices.

Historically, retail investors tend to buy into a gold rally, while institutional investors reduce long positions to lock in profits. This dynamic may explain why gold prices have continued to rise, as articles about rising gold prices have spurred the fear of missing out (FOMO) effect among smaller investors.

China’s retail demand for bars and coins jumped by 68% year-on-year in the first quarter. This surge might be a response to the devaluation of the Chinese yuan and struggling property markets as Chinese turn more and more to gold as a means of preserving wealth. Americans are also getting in the game as Costco (COST) provides its customers with gold bars to buy. Of the 101 stores that Bloomberg surveyed earlier this month, 77% reported that they had sold out of the gold bars.

One overlooked reason for higher gold prices is the surge in central bank buying of gold. According to the World Gold Council, central bank purchases have been one of the primary drivers of gold prices as demand from central banks for gold reserves during the last six months leapt to 23% of total demand, up from an average of 10% over the previous decade. While the U.S. remains the largest holder of gold reserves followed by Germany, Turkey and China saw the largest increases by 30 tons and 27 tons, respectively, in the first quarter. I wonder if China could be considering linking its currency to gold in some way.

Now on to a new gold recommendation.

New Recommendation

Agnico Eagle Mines (AEM)

Last month I visited a key Agnico gold mine in Val-d’or, Quebec, Canada and came away very impressed.

Everything was well organized including a drilling strategy that continuously gathers data that steers exploration using sophisticated technology to optimize capital allocation. What really surprised me is that I was told that the mine had a breakeven price of about $1,400 an ounce – way below the current price of about $2,700.

Agnico Eagle 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. It is on track to achieving this guidance, reporting gold production of 1.8 million ounces through the first half of the year.

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.

Agnico Eagle also has an investment grade balance sheet, and its dividend payout ratio has averaged 64% over the past five years, highlighting its commitment to shareholders.

Finally, the stock is in a strong uptrend demonstrating momentum and strong institutional support.

All the above makes this stock an excellent gold stock Explorer recommendation.

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 jumped 17% this past week and is up 33% in the last two weeks as investment interest in nuclear energy increases with new technology. Nuclear energy now accounts for about 75% of low emission energy in the United States. Buy a Half

Cloudflare (NET) shares gained 11% over the last two weeks and is up about 48% during the last year. The company has beaten analyst expectations during the last three quarters and will report its next quarter on 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 were steady this week after gaining 11% the previous week. Meanwhile, Starbucks said global same-store sales fell 7% in the fourth quarter that ended in September, with a decline of 6% in North America and a 14% drop in China. As of the end of June, there were 912 Dutch Bros outlets, with a goal of 4,000 within the next few years. Buy a Half

MOOG (MOG-A) shares were down 3.7% this week. 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 Boeing 787 and Airbus A350. Moog reported revenues of $930.3 million, up 11.2% year on year during its last quarter. Buy a Half

PDD Holdings (PDD) shares, after a remarkable surge two weeks ago following an announcement of measures by the Chinese government to support the stock market, has pulled back 17% in the last two weeks. This leads me to take profits and move this to a sell as skepticism rises that Beijing will follow through on its promises. Move from Hold a Half to Sell

Sea Limited (SE) shares were steady this week and are up 145% so far this year after turning a profit and a corner with institutional investors. Sea is focused on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Buy a Half

Super Micro (SMCI) shares gave back this week the 7% it gained last week. Super Micro Computer’s rise is linked to the burgeoning demand for artificial intelligence (AI) computing power as it makes components for servers as well as complete server systems. Super Micro is an aggressive stock with considerable risk, but it may be one of the cheapest stocks associated with the AI investment trend, trading for 15 times forward earnings estimates. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were not inspired by the company’s recent quarter with software and AI-related gains offset by flat consulting revenue and lower sales across IBM’s infrastructure group. Overall revenue for the quarter was slightly below analyst expectations though its AI book of business is now about $3 billion. About 20% of that is related to software solutions, with the rest coming from consulting. Buy a Half

Unilever (UL) shares were down 4% this week with quarterly earnings expected today. The stock has a 3% dividend, 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 down slightly this week as investors anticipate quarterly earnings next week. Visa has built its network over more than 60 years and now accounts for around 60% of the total dollar amount of U.S. debit-card purchases and about 50% of U.S. credit-card purchases. There is the cloud of a threat of a U.S. Justice Department action to sue Visa, alleging the global payments giant illegally monopolized the debit card market. 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 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 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 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. The company has about 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 (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.

Super Micro Computer (SMCI) 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 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 Supermicro deliver quarterly revenue this year that is more than a full year of revenue as recently as 2021.

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 7, 2024.

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