Cabot Explorer 744

U.S. stocks struggle a bit to regain momentum as Hong Kong’s Hang Seng and China’s Shanghai Composite contract. Investors seem to be taking a close look at valuations as markets from Japan to Europe trade at lower valuations. The big $3.5 trillion spending bill is spooking U.S. markets and splitting U.S. Senators. Today our new recommendation is a play on the aging baby boomer generation, which will increasingly require more medical attention.

Cabot Explorer 744

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Will Market Cycles Repeat?
Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa or JetBlue. Tesla is worth more than the next six car manufacturers combined. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally

Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai while Airbnb is worth more than Marriott and Hilton combined. Some of you may recall the late 1980s when Japanese stock and property markets ruled the world much as America does today. The Tokyo Stock Exchange (TSE) listed companies represented more than half of the total value of world stock markets. In 1989, Tokyo real estate sold for as much as $139,000 a square foot – 350 times the value in Manhattan. At that price, Tokyo’s Imperial Palace was worth more than all the real estate in California.

Now the TSE’s 2,190 companies are worth less than the combined value of Alphabet, Apple, Facebook and Amazon. Amazon alone is worth more than the entire German (DAX) index. Apple and Facebook alone are now worth more than the top 100 firms listed on the London Stock Exchange (LSE). Meanwhile, China’s stock markets have been hit hard by policy crackdowns leading to sharp pullbacks in the e-commerce, education, fintech, ride-hailing and gaming industries.

New Explorer Recommendation
Glaukos (GKOS)
With more than 10,000 baby boomers reaching 65 each day in America, you can bet that medical services aimed at this giant group are growth markets. My daughter taking a year off between college and medical school to work with an ophthalmologist underscored this opportunity. Suffice it to say that she has a hard time getting a day off.

Specifically, many aging boomers, including me, don’t regularly get their eyes checked until they have an issue, as I did last week with some unexpected blurry vision.

This brings us to Glaukos. Based in Laguna Hills, California, Glaukos is a medical technology company focused on innovative therapies for the treatment of glaucoma, corneal disorders and retinal diseases.

Glaucoma is both serious and common. It can develop in one or both eyes – it’s actually a group of diseases that damage the eye’s optic nerve, causing loss of vision or blindness. The disease creates pressure inside the eye. Symptoms move incrementally and, without treatment, people with glaucoma first lose their peripheral vision and can become blind.

There is no cure for glaucoma and patients usually begin treatment with eye drops. But many eventually opt for cataract surgery. Glaucoma currently impacts 3 million Americans and the usual surgery is invasive and can have serious side effects, including bleeding and retinal detachment.

In contrast, Glaukos’ revolutionary product is the iStent, a tiny L-shaped titanium implant that has helped thousands of people with glaucoma successfully manage intraocular pressure. The device received regulatory approval from the FDA in 2012. Glaukos launched its next-generation iStent inject device in 2018 and during its second-quarter earnings call, Glaukos announced that it expects the new iteration – the iStent infinite – to receive regulatory approval before the end of this year, though it has already been approved in Australia and India.

Before the pandemic, cataract procedures were performed on 4 million eyes annually in the U.S. with about half of those related to glaucoma.

Over the past two years, however, many medical procedures were postponed, as prospective patients were afraid of contracting COVID-19. This of course has also led to a pullback in Glaukos’ revenue growth.

That trend reversing, as the company’s second-quarter revenue soared 148%.

Glaukos has the most comprehensive pipeline in ophthalmology. New product launches will broaden its market opportunities, including acquisitions and expansion into international markets.

The timing to invest in the stock is logical since its share price is down more than 49% from its 52-week high. Its balance sheet is solid with more than $400 million in cash.

Let’s begin with a full position.

BUY A FULL POSITION

Model Portfolio

Portfolio Changes
Altimeter Growth (AGC) MOVES FROM HOLD TO SELL
Pershing Square Holdings (PSHZF) MOVES FROM HOLD TO SELL

Updates
Explorer Trading Stocks
Altimeter Growth Corp. (AGC) shares are not acting well prior to merging into Grab, Southeast Asia’s leading digital platform with over nine million users. The super-app includes delivery, mobile payments, and financial services. The lack of updates on getting financial information needed to complete the merger makes me a bit nervous and any further delay in closing its SPAC deal would raise a red flag. I think it makes sense to sell the stock now due to high uncertainty. MOVE FROM HOLD A HALF TO SELL

ChargePoint Holdings (CHPT) shares, despite the company reporting that quarterly revenue grew 61% year over year and raising its full-year revenue guidance by 15%, have been quiet, trading at a bit less than half their January 2021 share price. ChargePoint has developed an EV-charging network that offers drivers in North America and Europe more than 118,000 places to power up their EVs. The company projects revenue will grow from $145 million in 2019 to $2.1 billion in 2026.

This lead is a huge advantage because of network effects as the company already has partnerships with more than roughly 60% of the Fortune 50 companies. Therefore, while competition is intense, I believe that the stock can be accumulated at its current levels. BUY A HALF

Cloudflare (NET) shares are up 72% this year, surging past the S&P 500’s 20% gain. This is one my favorite stocks given its aggressive sales strategy, and the company is protected by several moats, including network effects and high switching costs, and the co-founders are still heavily involved.

The company grew revenue by 53% in its most recent quarter – an acceleration compared to the 48% revenue growth it posted in the second quarter of 2020. 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, after a sharp rise peaking at 26 in February, are now trading at half that price as investors take a wait-and-see attitude toward the stock amid expectations that it will begin delivering product by the end of next year. Fisker’s Ocean EV has a sub-$40,000 retail price point, making it a more affordable EV option. But we have to accept that the company will have little or no sales revenue in 2021 and that the company’s first product won’t be launched until 2022. This is an aggressive stock but I confirm a buy rating on Fisker. BUY A HALF

Marvell Technology Group (MRVL) shares have been trading in the low 60s even as the company recently reported a strong quarter. On a year-over-year basis, Marvell earnings jumped 62% while sales surged 48%. The stock is up about 45% since May.

Credit Suisse upgraded the stock to a 70 price target, calling Marvell “one of the most strategic assets in semiconductors.” Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of new 5G capabilities, plus the majority of those products are proprietary and made in-house. I recommend buying at current prices if you have not already done so. BUY A HALF

Novonix (NVNXF) shares are up 82%% in the last month of trading.

Novonix is an Australian technology and advanced materials supplier focused on synthetic graphite for the electric vehicle and storage battery industry. Novonix stands out as a non-Chinese synthetic graphite producer, making it effectively immune to any potential disruptions caused by either Chinese politics or its international trade disputes.

Novonix is a technology-first company that traces its corporate lineage directly to a Tesla-sponsored battery research lab at Dalhousie University in Nova Scotia. Novonix expects to manufacture 20 million tons of graphite anodes in 2025, and projects its annual output will grow to 100 million tons – resulting in approximately $1 billion in revenue – in 2030. This is an aggressive idea but this stock has been in an uptrend since May and is a play on an important clean technology. BUY A HALF

Palantir Technologies (PLTR) shares broke through their trading range to reach 27 this week. The “big data” market opportunity is massive and should lead to growth in the years ahead. Palantir is growing its government business in the short term while taking a long-term approach with commercial clients, plus investing in start-up type companies. This data and software company looks to expand its commercial client base and its non-government commercial revenue is growing 90% year-over-year. The stock is a bit expensive but not unreasonable, considering the expected long-term revenue growth and accelerating free cash flow generation. I encourage you to consider buying shares with a medium-term outlook if you have not already done so. BUY A HALF

Sea Limited (SE) shares jumped from 322 to 337 this past week.

Garena’s popular hit game Free Fire continued to be the highest-grossing game in Southeast Asia, Latin America, and India and achieved a record of over 150 million peak daily active users in the latest quarter. Total revenue in the quarter was $2.3 billion, up 159% year-on-year, and total gross profit was $930.9 million, up 363% year-on-year. I would be an incremental buyer of this stock but long-time holders should definitely take partial profits from time to time. BUY A HALF

Taiwan Semiconductor (TSM) shares were flat this past week but are up 12 points over the last three weeks to reach 121 in the wake of the company announcing plans to raise prices in line with increased demand. Consensus expectations are for TSMC to post $56 billion in revenue this year and it could generate $75 billion in revenue in 2025. A potential headwind is that the company plans to boost its capital expenditures roughly $100 billion over the next three years. I encourage you buy this dominant, strategic semiconductor stock if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares drifted a bit lower this week. The likely reason is a report that the Federal Aviation Administration grounded Virgin Galactic pending an investigation of the company’s previous spaceflight. Virgin Galactic announced last Friday that it would delay its first commercial research flight by several weeks. I believe a hold rating is appropriate and for the time being. HOLD A HALF

Explorer Core Stocks
International Business Machines (IBM) shares were flat this week, and after having a pretty good first half in 2021 have since cooled a bit, prompting the age-old question: Is this dead money or a potential turnaround play? The positives are pretty clear. IBM has a new CEO and ambitious plans for the future. Big Blue will split into two companies by the end of the year and the stock’s valuation is cheap, trading at just 11 times prospective earnings – less than half the level of the S&P 500. Plus, it yields 4.8% while sitting on $8 billion in cash. This is an ultra-conservative income play that should probably find a home in any global portfolio. BUY A HALF

Pershing Square Holdings (PSHZF) shares have not done much since we added the stock, and I believe the gap between the fund’s net asset value and its share price shows no indication of closing. Pershing Square Holdings shares trade at around a 27% discount to their net asset value. In addition, Bill Ackman, who runs the fund, has become mired in some SPAC controversies. I’m moving this to a sell to make room for new ideas. MOVE FROM HOLD TO SELL

Veeco Instruments Inc. (VECO) shares dipped from 23 to 21 in their first week in the Explorer portfolio. Veeco is an American high-quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading-edge technology to U.S.-based and international high-end chip makers, some of which are 100% reliant on Veeco technology to deliver the next-generation chips. Analysts expect revenue to pick up nicely in 2021, with revenue growth close to 30% and with up to 50% earnings growth, from 86 cents per share to $1.29, and then to grow further in 2022. If this comes to pass, Veeco is growing earnings at a solid 20%-plus rate but is valued at about 18X current-year earnings and about 15X forward earnings estimates. I encourage you to start with a half position, especially after this past week’s mini-pullback. BUY A HALF

The next Cabot Explorer issue will be published on September 30, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.

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Chief Investment Strategist: Timothy Lutts
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