November 30, 2023

Portfolio Changes: None

Toyota (TM) Emerges as a Big EV Competitor

Many analysts now expect a “Goldilocks scenario,” with the economy growing nicely but not too fast. This would mean that the Fed does not need to worry about raising interest rates further to combat inflation. Good news for stocks.

I would like to clarify there are two reasons that I remove a stock as an Explorer recommendation. When I recommend a stock, I expect that it will deliver appreciation and dividends over the long haul unless I highlight that it is a more of a short-term trading opportunity.

The first reason I recommend selling is that the story is not working or that I perceive that the stock has run ahead of itself and is likely to be close to peaking.

The second reason is simply because I recommend about 25 stocks each year, sometimes I just need to make room for new ideas. This is especially so for blue-chip ideas that many will want to hold for the long term. I try to make this clear, but going forward, I’m going to double my efforts in this regard.

One reason I bring this up today is my previous recommendation of Toyota Motors (TM), which is a company and stock that I have long admired and discussed in the Cabot Explorer. While China is on its way to replacing Japan as the world’s largest auto exporter this year as it builds roughly 60% of all electric vehicles, Japanese leader Toyota is also gaining attention as an EV and hybrid powerhouse.

Between its Toyota and Lexus brands, the company, even in just America, sells 26 electrified-vehicle options—including hybrid, EV, and other technologies—and saw U.S. deliveries of those offerings together rise 20% so far this year. Meanwhile, Tesla (TSLA) sold more all-electric vehicles this year, but only on a global basis, according to an estimate by data firm Motor Intelligence. Toyota also seems ahead of the pack on the technology front, working on sodium, solid state, and hydrogen projects.

The market is in flux, but to me it sure looks like the EV race is being led by BYD (BYDDY), Tesla (TLSA), and Toyota (TM

Explorer Stock Update

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 Trading Recommendations - need to watch more closely

BYD (BYDDY) shares had a rough week, falling from 62 to 55 despite solid sales and revenue numbers and higher market share in China. Founded in 1995 as a rechargeable battery maker, BYD had a 34% share of Chinese EV sales in October, according to Bernstein’s analysis of insurance data. Scale, particularly in the battery business, has made it solidly profitable, with $4.2 billion in expected net earnings this year, according to consensus analyst estimates on FactSet. Buy a Half.

Exscientia (EXAI) shares have broken above 6 this month as the company seeks to create a patient-first artificial intelligence (AI) model to yield medicines with improved probability of success. In the third quarter, the company beat sales and earnings expectations. Exscientia has the first AI platform aimed at improving treatment outcomes for cancer patients and the world’s first AI-designed drugs to enter clinical trials. This is an aggressive idea. Buy a Half.

Lithium Americas (LAC) shares slipped from 7 to 6.6 in their first week as a recommendation. The company focuses on the Thacker Pass lithium site in Nevada that has tremendous potential, with 16.1 million tons of battery-grade lithium carbonate equivalent available for extraction. Buy a Half.

Novo Nordisk (NVO) shares held steady this week despite the release of a study by Truveta that indicated Eli Lilly’s (LLY) competitor drug sold under the Zepbound brand for treating type 2 diabetes and weight loss may be more effective. Demand for the Novo drug remains quite robust, but this study highlights that competition is out there, so I encourage you to take some profits here if you have not already done so. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares are performing better lately but are flat over the last month. The 10% dividend yield helps total return. Lithium prices are relatively weak though essential for a variety of EV battery technologies. Hold a Half.

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares have done well considering the volatility of energy prices. Considering production and reserves, ConocoPhillips is among the leading upstream energy players in the world and is strongly focused on returning capital to shareholders. Conoco is also among the lowest-cost oil producers. Buy a Half.

International Business Machines (IBM) shares were up a bit this week and over 10% in the last month. IBM represents a conservative way to gain exposure to AI, the cloud, and cybersecurity. It also provides a high and safe yield. Almost 75% of IBM’s revenue comes from software and consulting. Buy a Half.

Visa (V) shares reached 254 this week, up from 229 exactly a month ago. Visa’s network spans over 200 countries. Its dominant entrenched global base is a key advantage over Mastercard. The company’s advanced network is often referred to as VisaNet, which can handle more than 650,000 transaction messages per second. Visa also has a $25 billion share repurchase plan and bought back more than $4 billion worth of common stock in the last quarter. Buy a Half.

Explorer ETF/Fund Positions

Global X Lithium & Battery Tech ETF (LIT) offers solid exposure to other beaten-down lithium names at a low cost. With an expense ratio of 0.75%, some of its top holdings include Albemarle (ALB), Tesla (TSLA), BYD (BYDDY), Panasonic Holdings (PCRFY), and Livent (LTHM), to name a few of the fund’s 46 holdings. 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. Current yield is about 10%. 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 China ex-State-Owned Enterprises Fund (CXSE) is a way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half

Explorer Stocks Summary

Brief company summaries that will not change week to week.

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.

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.

Exscientia (EXAI) was founded in 2012 and based in Oxford, England, Exscientia is using AI to develop new medicines and is attracting high quality partners. Exscientia (EXAI) stock is trading way off its high in an uptrend at 6.20. It went public at 22 a share so the company has about $500 million in cash on the books – a big number for a company with a market capitalization of just $725 million. Finally, keep in mind that this is an attractive speculative stock which may have a bumpy ride. It is a young company that is not profitable and will not be profitable next year.

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.

Lithium Americas (LAC) focuses on the Thacker Pass lithium site in Nevada that has tremendous potential, with 16.1 million tons of battery-grade lithium carbonate equivalent available for extraction. The Thacker project has received a $650 million investment from General Motors (GM), highlighting the project’s future role in supplying battery materials to power electric vehicles. Though Lithium Americas is still pre-revenue and permitting is challenging, the company predicts the Thacker Pass project will generate $1.2 billion in annual cash flow when fully operational.

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 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.

Sociedad Química y Minera de Chile S.A. (SQM) produces specialty plant nutrients, iodine, lithium, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers which together account for about 30% of SQM’s annual revenue. SQM is generally considered the world’s second-largest lithium producer, behind U.S.-based Albemarle (ALB), and in recent years, demand for the “white gold” has been strong. Demand for lithium is strong due to electric vehicle growth and lithium contributes about 40% of the company’s gross profits. Fertilizer ingredients supply another 40%, and iodine contributes the rest.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa has the largest card network in the U.S., processing $14.5 trillion of payment volume in the last 12 months. 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.