Cabot Explorer 741

Explorer stocks had an unusually quiet week as the Delta variant and weaker-than-expected job growth gave markets something to worry about. Meanwhile, the economy moves ahead. In particular, the pace of U.S. electric vehicle sales doubled in the first half of 2021 as we try to catch up to other parts of the world. Today’s recommendation is an indirect but powerful way to play this accelerating trend.

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Cabot Explorer 741

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The Paradox of Climate Change Clean Tech
The paradox of clean tech is that the critical materials needed to produce cleaner electricity – such as cobalt, gallium, lithium, germanium, and rare-earth elements – are far more scarce than petroleum, suggesting that global shortages and strife over vital resources is inevitable.

This risk is growing amidst historic levels of turmoil and tension in Asia that threatens stability and supply chains for critical materials, from rare earths to semiconductors.

Giant wind turbines and electric vehicles (EVs) require zinc, cobalt, lithium, and rare earths for their motors and batteries. Even now, with wind and solar power accounting for only about 7% of global electricity generation and EVs making up about 2% of the cars on the road, shortages are emerging and prices are rising. If the world moves toward a green-energy future, the demand for them will skyrocket and global output will fall far short of anticipated needs.

According to a recent study by the International Energy Agency (IEA) titled, “The Role of Critical Minerals in Clean Energy Transitions,” the demand for lithium in two decades could be 50 times greater than today, and for cobalt, 30 times greater if the world moves as expected to shift from oil-driven vehicles to EVs.

In addition, most critical and strategic materials production is highly concentrated in just a few countries, leading to the sort of geopolitical struggle over oil we’ve seen over the last century. According to the IEA, just one country, the Democratic Republic of the Congo (DRC), currently supplies more than 80% of the world’s cobalt, and China supplies 90% of rare earth oxides. Argentina and Chile jointly account for nearly 80% of the world’s lithium supply, while four countries, Argentina, Chile, the DRC, and Peru, supply most of our copper.

China is the dominant processor of rare earths and accounts for approximately 65% of the world’s processed cobalt, 35% of its processed nickel, and nearly 60% of processed lithium. The same goes for gallium for semiconductors and germanium for fiber optics.

And here is the killer punch: China has been on a spending spree over the last decade, acquiring mines all over the world and keeping more of all these critical materials at home to fuel its drive for dominance of the global clean tech ecosystem.

The only practical solution for the west is to develop new technologies in the areas of synthetics, recycling and cleaner processing of these materials.

This brings me to our new Explorer recommendation.

New Explorer Recommendation
Novonix (NVNXF)

Novonix is an Australian technology and advanced materials supplier to the electric vehicle and storage battery industry. Founded by members of a research team at Canada’s Dalhousie University, the company has become an integrated developer and supplier of high-performance materials, equipment, and services for the global lithium-ion battery industry with a focus on North America.

Novonix is an unusual blend, exploring and mining graphite and developing synthetic graphite, a key lithium-ion battery material.

Lithium-ion batteries initially were developed in the 1970s and were commercialized in the early 1990s driven by the growth of consumer electronics including mobile phones and other electronic devices.

The focus now is on electric vehicles, which are projected to go from global sales of 3.1 million in 2020 to 15 million in 2025 to about 40 million in 2030. China’s annual growth rate alone for electric vehicles is expected to be 24%, according to Bloomberg NEP. Europe is actually leading the EV revolution with America lagging behind especially in terms of the supply chain from rare earths and other materials to the crucial batteries.

Novonix estimates the global market for its products will grow from about $10 billion today to between $50 billion and $100 billion in the next five to 10 years.

The company is ramping up production capacity of synthetic graphite in the United States to 2,000 tons per annum by the end of 2021. The increased production capacity will enable the company to advance its goal of becoming a meaningful supplier and gaining market share. Currently, manufacturers in China control a roughly 80% share of the market for artificial graphite, according to Avicenne Energy, a consulting firm.

Synthetic graphite generally is more costly than natural graphite but the greater stability of synthetic graphite makes it the preferred material, despite its higher cost. Novonix is the only manufacturer of synthetic graphite in North America.

Wood Mackenzie, a research and consultancy firm focused on the natural resources and energy sectors, forecasts rapid growth for graphite in the battery sector. Demand is expected to grow from 165,000 tons in 2018 to almost one million tons by 2030 – and the higher purity of synthetic graphite “makes it preferable for use in premium batteries.”

Importantly, Novonix and Samsung SDI forged an agreement for Novonix to supply Samsung SDI with synthetic graphite for lithium-ion batteries. Novonix also signed a non-binding agreement with Sanyo to explore a partnership with its Tennessee production facility. Sanyo is a subsidiary of Panasonic Corporation. Sanyo is a leading battery producer and supplier to Tesla.

Together, Samsung SDI and Sanyo account for a combined estimated 30% of the global lithium-ion market. Below is an overview of Novonix’s partnerships with American companies as well as some of the companies that it does business with around the world.

Since the company is not profitable and is still in a developmental stage of growth, this is an aggressive idea. The stock has been in an uptrend since May and is a play on an important clean tech technology. Let’s begin with a half position.

BUY A HALF

Model Portfolio

Portfolio Changes
None

Updates
Altimeter Growth Corp.’s (AGC) SPAC target Grab reported first-quarter financials as gross merchandise value (GMV) grew 5% year on year to reach $3.6 billion. Deliveries demonstrated strong year-on-year growth of 49%, offset by weakness in mobility as a result of the lockdowns and other restrictions imposed by governments on the back of the COVID-19 pandemic. Revenue achieved a record $216 million. Grab is Southeast Asia’s leading super-app platform with over nine million users in Southeast Asia, offering them a wide range of delivery, mobile payments and financial services. I suggest you buy a half position here if you have not already done so. BUY A HALF

Cloudflare (NET) shares were quiet this week ahead of the release of second-quarter 2021 earnings results today. This company provides network security, performance and reliability services to a growing portion of global web traffic. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF

Fisker Inc. (FSR) shares pulled back two points this week on no significant news. Last week it announced that it plans to make a $10 million private investment supporting the charging network, Allego. Fisker will have a strategic partnership to deliver a range of charging options for its customers in Europe. Fisker’s Ocean EV has a sub-$40,000 retail price point, making it a more affordable EV option. We have to accept that the company will have little or no sales revenue in 2021 and the company’s first product will not be launched until 2022. This is an aggressive stock but I believe the EV market has room for a limited number of custom EV players like Fisker. BUY A HALF

International Business Machines (IBM) shares have been quiet over the past two weeks but cloud service and quantum computing capabilities are moving ahead. Two years ago, IBM bought Red Hat, the world’s leading provider of enterprise open-source solutions. The company already has almost four times the number of hybrid cloud users it had before the buyout. Total cloud revenue was $7 billion in the latest quarter, up 13% from a year earlier. IBM stock now trades at just over 13 times prospective earnings – half the level of the S&P 500 – and yields 4.7% while sitting on $8 billion in cash. I encourage you to buy this stock as a long-term conservative play on key technology markets. BUY A HALF

Marvell Technology Group (MRVL) shares were up this week as the company announced it plans to acquire networking-chip startup Innovium for $1.1 billion of stock to further build its cloud business. This is Marvell’s second major cloud acquisition in recent months following its $10 billion purchase of Inphi last year. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G networks. Marvell’s outlook for the second quarter is $1.06 billion in revenue, up 46% year over year, and I recommend buying at current prices if you have not already done so. BUY A HALF

Palantir Technologies (PLTR) shares were steady this week as this data and software company looks to expand its commercial client base. The company’s software and data platform is primarily used by government agencies in a wide range of applications and in its most recent quarter the company’s U.S. government revenue jumped 83% year over year. Palantir offers highly secure data compared to most competitors. This is a competitive advantage for Palantir. I encourage you to buy shares if you have not already done so. BUY A HALF

Pershing Square Holdings (PSHZF) shares were quiet in their second week as an Explorer recommendation. Pershing Square Holdings shares trade at around a 27% discount to their net asset value. The company has a concentrated portfolio of about 10 stocks. One major positive is that highly respected value investor Bill Ackman is the largest holder of Pershing Square Holdings, with a 21% stake worth $1.5 billion. This fund offers you access to Ackman’s stock selections and his judgment in hedging markets. BUY A HALF

Porsche (POAHY) shares were firm this week and this company offers a broader range of vehicles than you might think. This includes motorcycles, small cars, and luxury vehicles, as well as commercial vehicles such as pick-ups, buses, and heavy trucks under the Volkswagen, Audi, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Scania, and MAN brand names. Porsche stock trades at less than seven times consensus forecast earnings for 2021. The stock trades at about 70% of book value and has only $37 million in debt. I encourage you to buy a half position. BUY A HALF

Sea Limited (SE) shares tacked on five points this week. Being based in Singapore, Sea has escaped all the fallout from Chinese regulators that are now going after gaming companies. I see further upside potential to Sea’s share price from: (1) strong momentum in its gaming portfolio; (2) the ramp-up of e-commerce revenues; (3) opportunity of growth through Sea Money fintech operations and geographically in India. I would be an incremental buyer of this stock but long-time holders should take partial profits from time to time. BUY A HALF

Taiwan Semiconductor (TSM) shares were up marginally this week as many top chipmakers and analysts expect the ongoing supply crisis to last through 2023. TSM dominates the premium, big-profit part of the microchip business. A potential headwind is that the company plans to boost its capital expenditures from $17.2 billion in 2020 to approximately $30 billion this year, then collectively spend roughly $100 billion on its expansion over the next three years. Still, I encourage you buy this dominant, strategic semiconductor stock if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) will report earnings today but don’t expect much as it is just getting up and running. The media forgets just what a breakthrough it is for private citizens to journey into space. Blue Origin will be a spectacular IPO when it gets to this stage of development. We are still about 4X higher than where we got into Virgin so given that this space is getting increasingly more crowded and competitive, I suggest you consider taking some partial profits.. HOLD A HALF

The next Cabot Explorer issue will be published on August 19, 2021.
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Chief Investment Strategist: Timothy Lutts
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