Cabot Explorer Issue: July 7, 2022

No question this is a challenging market but Explorer stocks held their ground. Cloudflare (NET) had a good week up five points, and Ford (F) remains my favorite pick on risk/reward basis. This week we move to a surprising trend that will benefit America, the climate, and your portfolio.

Cabot Explorer Issue: July 7, 2022

No question this is a challenging market but Explorer stocks held their ground. Cloudflare (NET) had a good week up five points, and Ford (F) remains my favorite pick on risk/reward basis. This week we move to a surprising trend that will benefit America, the climate, and your portfolio.

Investing in the World’s Cleanest & Most Dependable Energy Source

While many think that wind and solar are the answer to climate change, about 60% of the reduction in CO2 emissions during the past 15 years has come from switching from coal to natural gas.

And while trillions of private and tax dollars were spent on wind and solar projects over the last 20 years, the world’s dependence on fossil fuels only declined from 87% to 84%.

So if the top risks to the world right now are climate change and geo-political conflict, the growth of nuclear energy in both America and China is essential.

Nuclear energy is virtually emissions-free energy, takes up very little land, consumes very little fuel, contributes to fuel diversification and the stability of the grid, creates skilled, well-paid jobs, and produces very little waste.

It‘s the technology that solves both energy poverty and climate change.

Then there is the important issue of reliability. Nuclear power plants on average operate at full power on 336 out of 365 days per year. Hydroelectric systems deliver power on average 138 days per year, wind turbines 127 days per year and solar electricity only 92 days per year. Even plants powered with coal or natural gas only generate electricity about half the time for various reasons. Nuclear power is a clear leader on reliability.

In addition, nuclear plants can run for 100 years while solar panels and wind turbines last only about 20 years.

No wonder nuclear power accounts for 70% of France’s electricity mix and 30% for Switzerland, South Korea and Sweden.

In the public’s perception, there are two issues with nuclear power: the risk of accidents and the question of disposal of nuclear waste.

There have been three large-scale accidents involving nuclear power reactors since the onset of commercial nuclear power in the mid-1950s: Three-Mile Island in Pennsylvania, Chernobyl in Ukraine, and Fukushima in Japan. These incidents all represent old technology and that is one reason Japan has announced it is expanding nuclear energy.

Nuclear waste disposal, although a continuing political problem in the U.S., is no longer a technological problem. More than 90% of spent fuel could be recycled to extend nuclear power production by hundreds of years and can be stored safely in impenetrable concrete-and-steel dry casks on the grounds of operating reactors, its radiation slowly declining. Price and performance are the key factors, and advanced nuclear energy can be cheaper than coal and more dependable than solar or wind.

The United States has long led the world in developing and nuclear energy technologies providing about 30% of global nuclear energy production and 52% of America’s carbon-free electricity in 2020 according to the Department of Energy even though American commercial nuclear development has markedly slowed.

If this progress on the technological front continues, we could face a world where China and Russia become preeminent in nuclear science and technology. China plans at least 150 new reactors over the next fifteen years. There is another angle and that is increased nuclear energy in the world’s electricity mix weakens the hand of China’s de facto ally Russia. For example, the Ukraine situation would be much easier to handle if Europe, and in particular Germany, had not made the decision to close all of its nuclear reactors by the end of 2022, making it so dependent on Russia’s natural gas.

However, the nuclear fleet in advanced economies is 35 years old, on average, and many plants are nearing the end of their designed lifetimes. With advancing age, plants are beginning to close, with 25% of existing nuclear capacity in advanced economies probably shutting down by 2025.

America and China are at opposite ends of the spectrum when it comes to the average age of nuclear energy facilities.

In addition, the U.S. Navy has a long and impressive history with nuclear technology, and the future of the nuclear Navy is secure. It has its own design and research laboratories, supports its own extensive computing capabilities, and trains its own operators. While any expansion of nuclear technology in America should be commercially led, the Navy could support the development of human capital in the nuclear field by expanding cooperation with universities and industry.

The Biden Administration included nuclear power in its clean energy plan, but politicians from both sides of the aisle are gun-shy about educating voters about the benefits of expanding nuclear energy.

The American Nuclear Infrastructure Act, introduced last June, seeks to expand America’s nuclear energy sector and the U.S. Department of Energy is allocating $61 million to nuclear R&D projects across America.

New Explorer Recommendation
Centrus Energy (LEU)There are significant American beachheads to support and validate the expansion of nuclear energy in America. For example, for Duke Energy (DUK), 40% of the electricity the company produces comes from nuclear power. America has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years.

Centrus Energy, based in Bethesda, Maryland, supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, Belgium and internationally.

The nuclear power industry is rapidly changing, with a new generation of advanced reactors under development. Centrus provides an integrated solution for meeting the industry’s engineering, manufacturing and fuel needs. Drawing on decades of experience, Centrus can help with the design and manufacture of critical components as well as design, and licensing of facilities to produce new fuels.

One near-term catalyst for this stock is that the Biden administration is pushing lawmakers to support a $4.3 billion plan to buy enriched uranium directly from domestic producers to wean the U.S. off Russian imports of the nuclear reactor fuel. Russia accounts for about 23% of the enriched uranium needed to power U.S. commercial nuclear reactors.

Energy Department officials are making the case that any interruption in the supply of enriched Russian uranium could cause operational disruptions at commercial nuclear reactors.

The proposal aims to spur development of more domestic enrichment and other steps needed to turn uranium into reactor fuel. This would create a government buyer directly purchasing enriched uranium, including the type used in a new breed of advanced reactors now under development.

Right now, America has only one remaining commercial enrichment facility – a New Mexico plant owned by Urenco Ltd., a British-German-Dutch consortium. Energy Secretary Jennifer Granholm has called the U.S. reliance on Russian imports a clear vulnerability. Other backers of expanding U.S. enrichment capabilities include Senator John Barrasso, a favorite of mines and a Wyoming Republican who serves as the top GOP member of the Energy and Natural Resources Committee.

Centrus Energy is building an enrichment facility in Ohio and would be very likely to benefit, especially if this funding moves forward. In addition, the stock is trading at about 25, way off its 52-week high of 88 and at just 2.6 times earnings. Centrus also has an operating margin of 23%. I believe downside risk is low and upside is significant, and I have a six-month target of 50. BUY A HALF

Model Portfolio

Portfolio ChangesNone.

Updates
Cloudflare (NET) shares went from 45 to 50 this week. Thanks to its strong competitive position and the broad tailwinds behind the cloud computing industry, Cloudflare consistently delivers impressive financial results. revenue soared 53% to $731 million in the past year.

Cloudflare provides content delivery and security services to over 19% of websites on the Internet; the next best is at 2%. Its global network connects with 10,500 other networks – including Internet service providers, large enterprises and other cloud vendors. In fact, in terms of speed, Cloudflare consistently outperforms public clouds including Google.

Globally, about 95% of its Internet users are within 50 milliseconds of their data centers. This is still a buy given that the stock is trading at its lowest valuation of the past two years. BUY A HALF

CVS Health Corporation (CVS) shares made a modest gain this week. This is a good value stock for this sort of market because its first-quarter revenue was up nicely and CVS Health’s earnings per share has grown 26% each year, compounded, over the past three years.

CVS Health is one of the nation’s leading healthcare companies with almost 10,000 stores and its core markets grow each year even in a weak economy. CVS stock is still a buy representing value since it is trading at just under ten times earnings. BUY A HALF

Fanuc (FANUY) shares pulled back marginally this week despite a weaker Japanese yen. Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots Fanuc’s stock offers us a high quality stock that should be firm with its strong balance sheet with $7 billion in cash. Fanuc is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25. BUY A HALF

Ford (F) shares were flat even as it reported a year-over-year EV sales jump of 77% to 4,353 in June, powered by the F-150 Lightning and Mustang Mach-E. The Mustang Mach-E replaced Tesla’s Model 3 as Consumer Reports’ top EV for 2022, and demand for the all-electric Lightning F-150 pickup truck has been so overwhelming, Ford was forced to end accepting new orders for it.

This year’s revenue is expected to grow about 15%, followed by 10% growth next year. Earnings per share are projected to grow from last year’s $1.59 to $1.93 per share this year to $2.15 next year, so the stock is trading at just five times forward earnings. Ford sales jumped 31.5% in June and deliveries of F-Series trucks rose 26.3% from a year ago.

Ford’s overall EV sales rose 76.6% from a year ago, making it the second-best seller of plug-in models behind Tesla.

What will move this stock? The much anticipated F-150 Lightening EV truck should be hitting markets later this summer. Ford stock stands out in its value as it trades at just under four times trailing earnings. I encourage you to buy if you have not already done so. BUY A FULL

Nio (NIO) shares lost a little ground this week as Covid restrictions persist. CNBC reported yesterday that the number of cities in China that have implemented Covid-related restrictions has doubled. One of the affected areas is a province called Anhui, where Nio has a factory. Nio reported its second-quarter vehicle deliveries late last week, with quarterly vehicle deliveries up 14% year over year and June deliveries increasing 60%. Nio’s ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S. HOLD A HALF

Oracle Corporation (ORCL) shares added two point this past week but like most of tech are struggling to gain momentum. As the world’s leading database management software company, Oracle is a conservative company and has historically been one of the safest stocks in software. Oracle is a solid tech stock for an uncertain market but also has limited upside given its size and the competition in its markets. HOLD A HALF

Rio Tinto (RIO) shares went from 63 to 57 this week as fears of recession seem to overpower the clean tech, EV story of increased demand for copper and other key metals. Rio should have some downside protection given that it is trading at about four times earnings and now offers a dividend yield just over 12%. Over the past five years, Rio has generated strong cash flow and the stock trades at only four times trailing earnings, which is about half of its historical valuation. BUY A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares were pretty steady this week even as lithium prices pull back after an explosive rally.

Last week I encouraged you to sell about half your shares to lock in some profits and moved this to a hold until an uptrend redevelops. The company reported first-quarter revenues more than four times the comparison with the previous year. Revenue from the lithium segment surged more than tenfold. SQM’s lithium output is almost 20% of global lithium output. Importantly, this isn’t just a lithium play. It’s also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine so SQM was seen as a joint fertilizer and lithium play. HOLD A HALF

The next Cabot Explorer issue will be published on July 21, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld

Analyst Bio

Carl Delfeld

Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.

He received his Masters in Law and Diplomacy at the Tufts Fletcher School; worked for the First National Bank of Boston (now Bank of America) in London, serving as director of the Japan and South Korea Group; served as vice president at the investment bank Robert W. Baird & Company, developing new business in Tokyo, Hong Kong and Sydney; was Asia advisor to the U.S. Congressional Joint Economic Committee, the U.S. Finance Committee and the U.S. Department of the Treasury; wrote for Forbes Asia and the Far Eastern Economic Review; served as a member on the U.S. National Committee on Pacific Economic Cooperation and the Japan-U.S. Friendship Commission; was chairman of the Asian Pension Forum and wrote a book, titled, Red, White & Bold; the New American Century.