January 20, 2022

The technology-oriented Nasdaq Composite closed yesterday 10.7% below its all-time closing high, set in November. Some technology- related stocks are facing headwinds for multiple reasons. Many trade at high valuations. Most do not offer dividends to buffer the impact of higher interest rates. Some companies are showing great revenue growth but no profits. We are adjusting by selling two positions and adding an international story with enormous promise.

New Recommendation

BlackRock Hits $10 Trillion
BlackRock, founded in 1988, now manages an incredible $10 trillion for individuals and institutional investors like pension funds and university endowments. That’s more than 10% of the world’s gross domestic product in 2021. Part of this is due to the nice run for U.S. stocks and the rise of its leading iShares ETFs.

BlackRock manages institutional and individual assets all over the world but it has been mostly propelled by U.S. stocks, which have returned more than double the gains of the rest of the world since the end of 2019.

From 1950 to 2010, U.S. stocks returned just under 7% above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton. This performance is due to a great degree to the power of compounding returns. That small difference becomes vast over time.

Only since 2010 has the situation reversed, with Europe in crisis and the U.S. led by Big Tech stocks delivering even higher returns to investors.

With companies ever more global, what a company does and how well is much more important than the location of its headquarters. This week we head to Europe for our new recommendation.

New Explorer Recommendation
Exscientia (EXAI)
Consistent with our resolution to add some international flavor to our portfolios in early 2022 and the Explorer’s ongoing search for new and innovative companies, we go to the U.K. and Oxford this week for our new recommendation. Founded in 2012 and based in Oxford, England, Exscientia (EXAI) is using artificial intelligence (AI) to develop new medicines and is attracting high quality partners. And the company is turning this into explosive growth.

You have probably heard more than you want about the incredible potential of artificial intelligence. AI enables computers, robots and other devices to think like humans but far faster and more powerfully. This is why it is sometimes referred to as machine learning. The potential of AI can be applied to many industries but perhaps the most exciting is the field of medicine.

In the classic Wall Street movie “Margin Call,” the CEO of the profiled investment bank advises new hires that there are two legitimate ways to make money: be first or be smarter. Exscientia has the first AI platform clinically validated to improve treatment outcomes for cancer patients and the world’s first AI-designed drugs to enter clinical trials. So really, Exscientia is both first and smarter, with a rapidly growing pipeline of more than 25 projects in motion with the goal of drug discovery in ovarian and hematological (blood) cancer.

In terms of partnerships, it has a Bristol-Myers Squibb collaboration in both immunology and oncology. That’s on top of a design partnership with French drug giant Sanofi, Germany’s Bayer, and Japan’s Sumitomo Dainippon. On January 7, Sanofi agreed to pay Exscientia up to $5.2 billion to develop 15 experimental oncology and immunology drugs. You can see its ambition and growth reflected in its expanding facilities with the expansion of facilities at Oxford Science Park, a new laboratory in Oxfordshire, and a medical center in Vienna, Austria.

As background, Exscientia (EXAI) went public on the Nasdaq in October at 22 a share (where it still trades today) so keep in mind that this is an attractive speculative stock which may have a bumpy ride ahead. It is a young company that is not and will not be profitable next year. But we like the upside. BUY A HALF

Portfolio Changes and Updates

Model Portfolio

Portfolio Changes
ChargePoint Holdings (CHPT) – Move from buy to sell
Grab Holdings (GRAB) – Move from buy to sell

Updates
Butterfly Network (BFLY) shares fell from 7.5 to 6.2 this past week as the company released preliminary revenue for the 2021 fourth quarter and full year. Revenue for the fourth quarter is anticipated to be approximately $17.9 million to $18.9 million, an increase of 14% to 21% over the same quarter last year. For full-year 2021, revenue is expected to be about $62 million, an increase of approximately 33% to 35% over full-year 2020.

Butterfly is a revolutionary medical device powered by artificial intelligence. When attached to a smartphone or tablet, it provides a window into the human body. The top 100 hospitals in the country already use Butterfly iQ devices. Viewed within the context of a weak tech market, this is an aggressive idea but I encourage you to buy this stock if you have not already done so. BUY A HALF

ChargePoint Holdings (CHPT) shares are off to a poor start this year after a weak December so I’m moving this stock to a sell. Investors seem to be losing patience with early-growth tech companies, especially in the electric vehicle sector. I own this stock and will follow it in order to determine a potential return at a lower price. MOVE FROM BUY A HALF TO SELL

Fisker (FSR) shares have been suffering along with ChargePoint (CHPT) as interest in the EV ecosystem wanes. However, I’m going to give this stock a bit more time as it moves closer to production and revenue. This is a speculative stock but I confirm a buy rating on Fisker for new investors as the market looks forward to the Ocean SUV going into production in the fourth quarter of 2022. BUY A HALF

Ford (F) shares pulled back a bit despite some positive news. The company said it will report a fourth-quarter gain on its stake in Rivian Automotive (RIVN) and will also realize a $3.5 billion accounting gain from its annual pension fund and a $3.6 billion tax benefit related to its global restructuring. Ironically, Ford has essentially turned this positive news to revising its full-year earnings guidance lower because of an accounting change related to the timing of Rivian’s initial public offering.

Ford recently announced a strong fourth quarter of sales and that it will sharply boost production of its F-150 Lightning pickup due to strong demand. Ford remains a conservative way to play the EV boom and I encourage you to buy if you have not already done so. BUY A HALF

Grab (GRAB) shares pulled back again this week and my patience has ended as we move this stock to a sell. I had thought this stock might have been another Sea Limited (SE) but the timing and a higher valuation going public through a SPAC plus a weaker market has poured cold water on this thinking. I will keep an eye on this stock. MOVE FROM BUY A HALF TO SELL

Marvell Technology Group (MRVL) shares tumbled from 86 to 77 this week as technology stocks were under selling pressure. Marvell shares were up 84% in 2021. This is a growth stock that is demonstrating some relative strength and holding firmer in a tough market than most so I continue to rate this semiconductor stock a buy. BUY A HALF

Novonix (NVNXF) shares started the week on a positive note but pulled back yesterday to post no change for the week. The company announced last week the commencement of the process to list its securities on the Nasdaq, which will raise its profile and liquidity. Based in Australia, the technology and advanced materials supplier is focused on synthetic graphite for the electric vehicle and storage battery industry. Novonix graphite not only gives America a domestic source, but the company believes that it is 2.5X better quality than Chinese graphite. This is an aggressive idea but it remains a buy. BUY A HALF

Nu Holdings (NU) shares dipped from 9.3 this week to 7.8, which may have triggered 20% trailing stop-losses for those who adhere to them. However, I’m going to give this stock another week to see if it can stabilize and gain back some ground. This is an emerging market speculative stock that has great growth possibilities. It already serves more than 1 million small- and medium-sized business banking customers in Brazil and Latin America. Nubank already has a base of 48 million retail customers with another 600 million people in Latin America yet to become one. FOR AGGRESSIVE INVESTORS – BUY A HALF

Oracle Corporation (ORCL) shares were caught up in some selling this week, falling to 83 and demonstrating that even stable high-quality tech stocks are facing headwinds. Oracle offers us cloud-computing growth at a very reasonable price. The stock is trading at less than 22 times earnings with big profit margins and a high return of equity. This stock is well suited to the current tough tech stock environment. BUY A HALF

Sea Limited (SE) shares’ sharp drop in price since last November highlights the Explorer strategy of letting stocks run while taking periodic partial profits along the way. Market sentiment has moved away from companies like Sea that post incredible and consistent top-line revenue growth but don’t see profitability arriving for some time.

We still have sizable profits in this stock but use your judgment in taking more profits while we see at what price things turn around. Speculators may want to buy some shares here. BUY A HALF

Veeco (VECO) shares fell from 31 to 28 this past week, holding up fairly well considering the environment. This company makes the equipment and technology essential for staying ahead in the chip fabrication game. Veeco is a steady performer with a strong balance sheet. Revenue growth for 2021 is expected to be up 30% and even better for earnings (due out in early February). I recommend that you acquire shares if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares have made a remarkable full circle again. Like Sea Limited, this highlights the importance of my calls to take some profits off the table along the way as a stock soars. Sentiment has changed, management has bungled execution, and new competition like Blue Origin has jumped ahead. The result is that Galactic stock has gone from 63 in February 2020 to a mere 9 and change today.

We still have a profit since the Explorer recommended this stock at 7. The company announced that it recently raised $500 million in debt capital and had $1 billion in cash at the end of the third quarter. It also planned for less than $100 million in cash burn in the fourth quarter, so it should have the time to get to revenue-generating flights in 2022 or 2023. It has always been an aggressive concept stock and speculators may want to incrementally buy shares. BUY A HALF

The next Cabot Explorer issue will be published on February 3, 2022.