Cabot Explorer Issue: September 26, 2024

Portfolio Changes: None

Centrus Energy (LEU) Jumps 38% and China Launches Stimulus

The MSCI World Index now has a remarkable 72% market value weighting in U.S. stocks.

In other words, 72% of the market value of stocks trading around the world represent companies headquartered in America.

This begs the question: Should investors be this concentrated in a single market?

Meanwhile, India now holds a 2.3% weighting, compared to China’s 2%, reflecting India’s robust stock market and investor interest. India now commands 22% of the MSCI Emerging Markets Index compared to China’s 19%, a surprising shift from China’s 40% dominance in 2020.

I think the above warrants some diversification of portfolios, with the next 5-10 years in mind. Not radical changes, but incremental ones.

There was some big news this week that will impact stocks. The U.S. Justice Department sued Visa, alleging the global payments giant illegally monopolized the debit-card market. Elsewhere, Boeing added to all its troubles with a major labor strike. We can also expect that ports on the east coast will encounter dockworker strikes beginning next week. The 14 ports stretching from Maine to Houston are responsible for more than half of all the goods shipped in containers in and out of the U.S.

The biggest news is that China announced a package of policy reforms to boost markets and investor confidence. The People’s Bank of China said it would cut its benchmark interest rate and lower the interest rate payable on existing mortgages. In addition, it is offering $70 billion to funds, brokers and insurers to buy Chinese stocks and said it would put up another 300 billion yuan to finance share buybacks by listed companies. Will it work beyond the here and now? We’ll see.

Finally, George Gilder is a great writer, entrepreneur and tech guru that you normally think of as sort of an independent Republican. Reading his recent Life After Capitalism forced me to think through how California can be both an economic powerhouse and a high tax and high regulation state.

Gilder points out that California is by far the most enterprising, entrepreneurial state with 60% of the world’s venture capital investment annually flowing to startups based in California. And if California were a country, it would be the world’s 4^th-largest economy.

The only answer is that it is home to a blend of entrepreneurs, tremendous innovation, and ample risk capital. Bottom line: the American and world economy would most certainly be a basket case without California.

New Recommendation

Moog Inc. (MOG-A)

Boeing (BA) faces massive problems and Airbus (AIR.PA) manageable headwinds. This is ironic given the booming aircraft, defense and space industries.

Since these two companies represent a global duopoly in commercial and defense aircraft and space, I thought of recommending the healthier Airbus but its shares trade in Europe. The Cabot Explorer tries to limit recommendations to stocks trading on U.S. markets.

Since governments and commercial aircraft manufacturers are increasingly dependent on advanced military systems that require specialized hardware, today we look a key supplier with multiple partners/clients including the Boeing/Airbus twins. Moog Inc. (MOG-A) is a stock riding a lot of momentum.

Moog supplies advanced primary flight controls on the most modern military aircrafts. 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).

Since 2020, global defense spending has grown at a 4.2% annualized rate – up roughly 4x from pre-pandemic levels, according to the Stockholm International Peace Research Institute. I believe elevated defense spending is likely to continue, because of increasing tensions and rivalries in the world.

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).

As the world’s defense spending is regrettably on a strong upward trajectory, about 50% of Moog’s sales come from space and defense, including military aircraft, with 20% coming from supplying commercial aircraft. The final 30% of sales come from industrial and medical industries.

In its latest quarter, Moog reported revenues of $930 million, up 11.2% year on year and it also bumped up its full-year outlook. It now forecasts 8% sales growth to deliver revenue of $3.58 billion and a 20% EPS gain to $7.40. The company also projects that operating margins will expand to 12.4%.

Moog stock (buy the “A” shares – MOG-A) is now trading at just under 200 and is demonstrating relative strength and momentum.

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 20% trailing stop-loss in place

Centrus Energy (LEU) shares leaped 38% this week following the news that it inked a contingent supply agreement with Korea Hydro & Nuclear Power for a decade of low-enriched uranium deliveries to feed Korea’s reactors. There are roughly 65 new nuclear reactors under construction around the world, with an additional 110 planned. Centrus is at the middle of this growth as a diversified supplier of nuclear fuel and services for nuclear power plants in the U.S. and globally. Buy a Half

Cloudflare (NET) shares were up 6.8% this week as the company announced Speed Brain, a new product that works with some of the most popular web browsers to speed up how webpages load by up to 45% faster, for free. Its revenue had a compound annual growth rate (CAGR) of 46% from 2019 to 2023. Cloudflare currently delivers data in 330 cities and over 120 countries and is both a cloud and cybersecurity play. Buy a Half

Dutch Bros (BROS) shares gave back 5.3% after being up 5% in each of the previous two weeks. The company has reported double-digit annual sales growth over the last five years. That growth has never dipped below 30% while the last time Starbucks achieved annual growth of more than 20% was in 2021. Dutch Bros has doubled its store count and tripled its sales since 2020. Buy a Half

Novo Nordisk (NVO) shares pulled back 3.9% this week as pricing takes center stage. In the U.S., the list price for Ozempic is $968 for a month’s supply. The list price of Wegovy in the U.S. is $1,349.02. The cost of these popular medications is cheaper in other countries. For example, Ozempic is just $59 in Germany and Wegovy is only $92 in the U.K. Some analysts estimate that 72% of Novo Nordisk’s revenue since 2018 has come from U.S. sales. Most likely, Congress will attempt to bring U.S. prices down and the question is whether more scale will make up for lower prices. Hold a Half

PDD Holdings (PDD) shares jumped 14% this week following the announcement of China’s stimulus plan to get its economic growth and stock market back on track. From 2023 to 2026, analysts still expect PDD’s revenue to grow at a compound growth rate of 38%. This is an aggressive growth stock that has pulled back sharply and trades at just 8 times next year’s projected earnings. Buy a Half

Sea Limited (SE) shares were up 10.5% after last week’s 5.7% gain as Shopee’s e-commerce sales growth has accelerated. Shopee dominates fast-growing Southeast Asia with a 48% market share; in addition, Sea Limited offers digital-payments provider SeaMoney and Garena, a global online games developer. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares are up 26.4% over the last three months as IBM benefits from the growth of cloud, AI, and data platforms. IBM expects earnings growth of 5% for this year. Buy a Half

Unilever (UL) shares were up 16% over the last three months and are up 36% in 2024. The stock delivers a return on equity of 32% as the company offers a wide range of products in the fields of beauty, personal care, and home care. Buy a Half

Visa (V) shares were down 6.5% this week as the U.S. Justice Department sued Visa, alleging the global payments giant illegally monopolized the debit-card market. There are roughly 100 billion debit card transactions in the U.S. every year and Visa processes more than 60% of them. Visa charges over $7 billion in network fees on U.S. debit volume annually, earning Visa $5.6 billion in net revenue, according to the Justice complaint. This will be a big fight that I will follow closely. 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) 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.

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 that 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.

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 increasingly popular 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.

PDD Holdings (PDD) is growing much growing 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 10, 2024.

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