Cabot Explorer 734

Explorer positions have a good week on the back of a market moving up on broadly upbeat first-quarter earnings, rising consumer confidence and, of course, stimulus and spending from Washington. The cash and liquidity has definitely buoyed the market but how it is put to work long term is critical.

This week’s recommendation is a rather aggressive small Canadian player in the commercial drone business.

Cabot Explorer 734

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Drowning in Cash
Major corporations are sitting on a pile of cash. Wouldn’t that be a nice problem for all of us? This has been a decade-long cash buildup but it has gotten quite a boost from the pandemic. And the trend is even starker outside America.

Nonfinancial corporations in the Euro area, Japan and the U.S. now sit on nearly $10 trillion of currency and deposits, about twice the level of a decade ago. Cash holdings are largest relative to the size of the economy in Japan, roughly equal to 60% of its GDP. Japan’s cash buildup began in the 1990s, during the country’s famous lost decade. In the Euro zone, corporate cash makes up 30% of GDP, and just 10% for America. This is a good sign if it’s due to U.S. companies investing more in future growth.

Incredibly, the S&P 500 has risen 87% since its low on March 23, 2020, adding $50 trillion worth of value to the index in just over a year, the best 12-month rally since the 1930s. As of the beginning of April, the amount of money that had flowed to stocks globally over the past five months was larger than the inflow seen over the prior 12 years by well over $100 billion, according to data from Bank of America Global Research.

Somewhat concerning is that investors have borrowed a record $823 billion against their portfolios as of March, according to data from FINRA. That’s a more than 72% year-over-year increase.

This week’s new recommendation is a change of pace from recent large multinational companies that have joined the Explorer portfolio. It is an exciting young company in the high growth but competitive drone sector.

New Explorer Recommendation
Drones in Demand
Draganfly (DFLYF)
When you think of drones, the ones that come to mind are probably those buzzing around your house from time to time – or perhaps large military drones delivering devastating strikes in the Middle East.

Draganfly Inc. manufactures and sells commercial drones, also known as unmanned aerial vehicles (UAVs), worldwide. Its products include quad-copters, fixed wing aircraft, ground based robots, and handheld controllers, as well as software used for tracking, live streaming, and data collection.

The company also offers custom engineering and training, simulation consulting, and flight training services, as well as wireless video systems. The consulting and software services are high margin, the products less so but with a sizable market that will only grow with time.

Draganfly serves public safety, agriculture, industrial inspections, health, large companies, public sector companies including law enforcement and defense and mapping and surveying markets. The company, incorporated in 2018, is headquartered in Saskatoon, Canada and has roots going back to 1998.

Though still a small company, it has steadily expanded its products and services. Military and government contractors partner with Draganfly to improve personnel and infrastructure safety. The company works with clients to collect high-quality data, 3D modeling, and a suite of sophisticated sensor technology. Farmers also use its flight and data collection services.

Draganfly has scored a number of industry firsts such as the development of the first quadcopter drone, the first drone to save a life, and the first drone to be inducted into the Smithsonian National Air & Space Museum.

Below is a chart of some of the company’s clients.

In the last six months, Draganfly has made progress on a number of fronts.

• Secured $1 million flight services contract to deploy EagleEye^™ AI flight services with Windfall Geotek Inc. Windfall Geotek flies mining prospectors with magnetometers with data placed into EagleEye^™ and provides recommended targets for mining companies to drill.
• Raised $16,450,000 million in capital.
• Signed a preliminary agreement with Steve Wozniak’s K-12 program Woz ED to be the exclusive supplier of drones to Woz ED’s drone program across its ?national K-12 curriculum and received orders for the sale of 2,000 drones.

Total revenue for the year ended December 31, 2020 increased by 216.1% to $4.36 million, compared to $1.38 million in 2019. The company’s gross profit increased by $597,973, or 51.5%. Revenue for the fourth quarter of 2020 increased by 202.3% to $1.49 million and the substantial increase in revenue is largely due to the company’s acquisition of Dronelogics.

It is important to note that Draganfly is an aggressive, speculative idea as a small company with an annual revenue run of $5 million and a cash position of $2 million. Draganfly has started the process of preparing for listing of its common shares on the Nasdaq and has engaged a New York-based investment bank to begin the listing process.

BUY A HALF

Model Portfolio

Portfolio Changes
None.

Updates
Altimeter Growth Corp. (AGC) shares moved a bit from 12.8 to 13.3 and seem to be forming a foundation as the stock looks ahead to begin trading as GRAB on the Nasdaq. Grab Holdings, Southeast Asia’s ride hailing and food-delivery giant, is the first Southeast Asian tech unicorn to go public through a SPAC. Altimeter Capital, which organized the initial public offering of Altimeter Growth in September 2020, is putting $750 million into the deal.

Grab is present in eight countries offering food delivery, mobile payments, insurance, investments and health advice. Last year it won the right to set up a digital bank in Singapore. I suggest you buy a half position here if you have not already done so. BUY A HALF

Anglo American (NGLOY) shares were up 5% this past week after I moved this stock to a hold last week due to the stock’s lack of momentum. This play on infrastructure basic materials is also the largest producer of platinum, with about 40% of world output, and explores for diamonds, copper, platinum group metals, coal, iron, nickel, and manganese ores. HOLD A HALF

Cloudflare (NET) was up 15% this week from 76 to 86 in the wake of announcing a partnership with chipmaker Nvidia (NVDA) that will enable customers to build artificial intelligence-based apps that run on its security network. Cloudflare’s ability to speed up web applications and provide security on its global network will be enhanced by its partnership with Nvidia. I’m going to keep this a hold. Cyber is still a strong power trend and Cloudflare has built a global cloud platform that delivers a broad range of network services making them more secure, and eliminating the cost and complexity. We have already taken some profits but aggressive investors can purchase additional shares on dips. HOLD A HALF

Fisker Inc. (FSR) shares are showing some strength even though they are down sharply from a high of 32. A key element to the Fisker story is that it won’t manufacture its own vehicles, at least not from the beginning. Rather, it will use large contractors, such as Foxconn, to build Fisker’s vehicles. This will allow the company to focus on design and marketing rather than getting trapped in manufacturing quagmires.

Electric vehicle stocks have come back a bit in the last month or two after a good run. The company will have little or no sales revenue in 2021 and its first product will be the custom Ocean, a mid-priced SUV. If you have not yet purchased shares, I encourage you to do so at these levels. BUY A HALF

International Business Machines (IBM) announced another increase to its quarterly dividend on Tuesday, the 26th year in a row it has done so. That means it is a Dividend Aristocrat – one of the S&P 500’s handful of stocks that have lifted their payout at least once annually for a minimum of 25 years consecutively.

Another reason to be bullish on IBM is quantum technology. IBM already has more than 20 quantum computers connected to the cloud and is offering free access to half of them so that researchers and the general public can experiment. IBM will continue to build supercomputers and operate IT systems but the key emerging growth driver in the company has become the hybrid cloud. This is a great core holding and is performing well with a dividend yield of 4.6%. BUY A HALF

Marvell Technology Group (MRVL) shares were flat this week after the company announced last week the completion of its acquisition of Inphi Corporation. The combination creates a U.S. semiconductor powerhouse positioned for end-to-end technology leadership in data infrastructure. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capabable networks. The company’s processors and products are cutting-edge and already generate $3 billion in annual sales.

Marvell’s markets include drones, data integration and consumer and industrial robotics. These are all huge markets giving Marvell an opportunity to post double-digit growth in both sales and net profit in 2021. Despite these high-growth markets, the stock is trading at a reasonable 22 times earnings. I suggest we take advantage of the pullback in tech stocks to begin with a half position. BUY A HALF

Paysafe (PSFE) shares were up 6% this week and will announce first-quarter 2021 financial results on May 11 prior to market open. Its core business is to enable businesses and consumers to connect and transact seamlessly through payment processing, digital wallets, and online cash solutions. With more than 20 years of online payment experience, Paysafe connects businesses and consumers across 70 payment types in over 40 currencies around the world. If you have not already done so, I recommend you purchase shares. BUY A HALF

Sea Limited (SE) shares continue to rise, jumping from 245 to 265 this past week. Sea is led by its gaming group, Garena, which in the fourth quarter of 2020 grew bookings 111% year over year while the number of quarterly users grew 72% year over year to 610 million. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in the world’s fastest growth markets of Southeast Asia. BUY A HALF

Taiwan Semiconductor (TSM) shares moved from 116 to 120 this week. The company plans to increase its capital expenditures by up to 63% this year to upgrade its equipment and maintain its lead in the race to produce smaller and more powerful chips.

The company controls 84% of the market of chips with the smallest, most efficient circuits used by some of the world’s biggest technology brands, including Apple and Alibaba. Last year TSMC made an operating profit of $20 billion on revenues of $48 billion. In 2020 62% of TSMC’s revenue came from customers with headquarters in North America and 17% from those domiciled in China. BUY A HALF

Virgin Galactic (SPCE) shares held steady this week. The company announced last week that it is resuming testing next month. It will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing. We have taken profits several times, and the share price is more than three times our entry point but 60% off its all-time high so I’m keeping this stock a hold for now. HOLD A HALF

The next Cabot Explorer issue will be published on May 13, 2021.

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