June 27, 2024

Portfolio Changes: None

The Unstoppable Dollar

Please note that next Thursday is July 4^th and therefore there will not be a Cabot Explorer issue though I will send out an alert if there is any significant news on our stocks.

For Explorer stocks this week, Neo Performance (NOPMF) shares were up 12%, and Super Micro (SMCI) gave back half of last week’s 20% gain.

The dollar rose to its highest level since last year as the Federal Reserve breaks with other central banks by keeping interest rates elevated, giving global investors an incentive to move cash to the U.S. to capture higher bond yields.

You may be tired of hearing that the S&P 500’s 14% gain in 2024 is being driven by a handful of mega-cap tech stocks. The top 10 stocks now represent a staggering 36.8% of the index’s total value. That’s the highest concentration since September 2000.

Less noticed is that the Magnificent Seven also spent $208 billion on buybacks last year. However, Amazon and Tesla are not buying back much stock. Rather, Amazon is paying off debt and building for AI, and Tesla is focused on financing growth.

In contrast to the U.S., China’s financial markets are anemic. When e-commerce giant Alibaba went public in 2014, the company raised $25 billion, the biggest listing ever at the time. So far this year, there has been only one Chinese IPO in the U.S. – by the electric vehicle maker Zeekr. IPOs in China have also been weak with less than $3 billion being raised this year, according to data from Dealogic.

Now a just few more thoughts to support last week’s nuclear energy-focused issue.

Studies show that when countries add more renewable energy, it does little to replace coal, natural gas, or oil. Rather, it just adds to energy consumption. In the past 50 years, oil and coal energy use has doubled, hydro power has tripled, and natural gas has quadrupled. The use of nuclear, solar and wind power has also surged right along with these developments.

On the other side of the world, China has nearly tripled its nuclear energy capacity over the last decade, an amount it took the U.S. four decades to build. In addition, China intends to build 150 new nuclear reactors through 2035, with 27 currently under construction. They can build each reactor much faster than the U.S. and other Western nations. Plus, about 70% of the cost of Chinese reactors are funded by low-rate loans from state-backed banks so China can build plants for about one-third of the cost of recent projects in the United States.

Finally, China has begun operation of the world’s first fourth-generation nuclear reactor and is leading in the development and launch of more cost-competitive small modular reactors (SMRs).

Turning to EVs, one trend is an increasing number of non-Chinese EV makers using the country as a base for its global exports. Nissan said it would start shipping vehicles from China in 2025 while Ford and Tesla are also ramping up exports from the country.

Europe was the biggest recipient of China-made electric vehicles in 2023, accounting for about 40% of the $34 billion exported, according to the Atlantic Council. Tesla has been exporting its Shanghai-made cars to the Asia-Pacific region for some time and shipped about 344,000 vehicles overseas last year, up 27% from a year earlier, according to data from the China Passenger Car Association.

Explorer Weekly Stock Commentary

ASML Holdings (ASML) shares gave back 4% this week as the company continues to invest heavily during this industry down cycle so it can be ready when the cycle swings back upward. I met with a Dutch diplomat this week to get a different perspective on ASML which makes the lithography equipment that manufacturers use to make advanced chips. By 2026, ASML revenue could reach at least $40 billion. This is an aggressive stock so we can expect some volatility. Buy a Half

Centrus Energy (LEU) shares were up more than 5% in their first week as an Explorer recommendation. Based in Bethesda, Maryland, this company supplies essential nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. Buy a Half

Cloudflare (NET) shares were up slightly this week following last week’s 9% gain. This cybersecurity stock has an expansive client base coupled with impressive network speed that beats competitors such as Amazon and Google. It also delivers strong cash flow and is trading below its intrinsic value in my opinion, so feel free to buy shares at this level. Buy a Half

Neo Performance (NOPMF) shares continued their momentum, up 12% this week on the heels of an upgrade by leading mining and metals broker Stifel and the announcement of a strategic board review to maximize shareholder value. Neo remains a value buy due to its strategic importance, dividend, and a strong cash position coupled with low debt. Buy a Half

Novo Nordisk (NVO) shares ticked up this week as the U.S. House Ways and Means Committee may soon vote on whether Medicare will cover the costs of anti-obesity drugs. A Wegovy prescription costs about $1,349 per month in the U.S., while it costs just $140 in Germany and $92 in the U.K. Novo Nordisk’s Ozempic product carries similar markups. Novo also announced plans to invest $4.1 billion in another U.S. factory to meet the demand of its biggest market. Hold a Half

PayPal (PYPL) shares were down 2% this week and this stock is testing our patience. There are signs of strength. At the end of 2019, the company had 305 million active accounts and now has 427 million. And revenue and earnings have done nothing but march higher, despite the stock’s performance. More importantly, the company just launched a digital advertising business which is a higher-margin business, so we’ll give this stock a bit more time. Hold a Half

Sea Limited (SE) shares held their own this week as JP Morgan highlighted more competition for the company in the e-commerce space. Its Garena gaming group properties, including its leading mobile title, Free Fire, have a massive user base of almost 600 million. Plus, its Shopee e-commerce platform is still dominant in Southeast Asia while the stock is demonstrating relative strength. Buy a Half

Super Micro Computer (SMCI) shares followed last week’s 20% gain by pulling back 10% this week. The company is expected to boost revenue this quarter by 142%, according to Investor’s Business Daily analysis of data from S&P Global Market Intelligence. Meanwhile, the company recently announced it was adding three new manufacturing facilities to meet increased demand from its clients. This aggressive stock is at the heart of the AI boom. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares may not represent a high-flyer tech stock but will likely deliver steady results. Its stock looks cheap at less than 17 times forward earnings and a forward dividend yield of 3.9% should limit downside risk. Over the long term, the stock has upside as its hybrid cloud and AI businesses accelerate. Buy a Half

Unilever (UL) shares treaded water again this week and are up about 16% so far this year. This is a reliable, long-term global consumer play with significant exposure to emerging consumer growth markets. The company is constantly consolidating brands to optimize growth. Buy a Half

Visa (V) shares were flat this week as a federal judge rejected a $30 billion antitrust settlement under which Visa and Mastercard agreed to limit fees they charge merchants. The decision could force Visa and Mastercard to negotiate a new agreement that’s more favorable to merchants or go to trial and face an uncertain outcome. There are over 4.3 billion Visa-branded cards in circulation and about 60% of all credit card transactions in the U.S. were done with Visa cards last year. 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

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

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 broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Full

Explorer Stocks Summary

Brief company summaries that will not change week to week.

ASML Holdings (ASML) makes the lithography equipment that use to make advanced chips. It is currently the only company that makes cutting-edge extreme ultraviolet lithography (EUV) machines that are used to make the world’s most advanced and expensive semiconductor chips. That is at the seven nanometer (nm) and below size and standard. I would argue that this company has a stronger competitive position than even Nvidia does given its highly prized specialty. This gives ASML significant pricing power and a wide economic moat, making it highly profitable as it sells some of these machines for close to $400 million apiece.

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: cloud computing, AI, cybersecurity, and edge computing. 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.

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 28 consecutive years of dividend increases.

Neo Performance (NOPMF) manufactures the building blocks of permanent magnets and powers many modern of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to permanent magnets. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 4.8% dividend, and incentives are aligned with about 20% of the outstanding stock held by management.

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 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.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

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. Some of you may recall this stock was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

Super Micro Computer (SMCI), commonly known as Supermicro, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro stock looks relatively inexpensive right now for the growth that it has been delivering. The company trades at just two times sales. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. Furthermore, both Dell and HPE have relatively high debt whereas Super Micro has a net positive cash position. This is an aggressive pick in a sector experiencing extraordinary growth.

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 - down about 25% from all-time highs and at less than 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. This leaves it much better poised to outperform the latter going forward.

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