Cabot Explorer 745

Novonix (NVNXF) shares broke above 5 this week and have more than doubled since early August even as the market is under pressure due to the slowing of federal stimulus, China’s property debt issues, and some increase in interest rates and inflation.

Cabot Explorer 745

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China Under Property Debt Cloud
Xu Jiayin was China’s richest man, a symbol of the country’s economic growth who helped move poor villages into cities for the rising middle class. His company, China Evergrande Group, became one of the country’s largest property developers, and he enjoyed hobnobbing with the elite, trips to Paris to taste rare French wines, a million-dollar yacht, and private jets.

Now the company has nearly $300 billion in debt, has missed interest payments on loans, and has 800 unfinished projects in more than 200 cities across China. Xu is counting on Beijing and state-owned banks to keep him afloat but many are wondering if this is a Lehman Brothers moment.

China’s banks have about 40% of their banking assets tied to property and have negotiated opaque deals with Evergrande for months. China also strictly controls the movement of money across its borders. Chinese and global investors can’t head for the exits if they get worried and the construction companies have no place to go. In addition, the Communist Party firmly controls the courts, so any effort to force Evergrande into bankruptcy and reorganize it would need approval from top leaders.

The big picture is that economic growth and retail sales were much weaker than expected last month in China, led by slow car sales. Industrial production has slowed, particularly for large freight trucks. And developers sharply reduced new housing projects over the summer, while rushing to finish the projects they had already started.

Meanwhile, some other global economies and markets are sizzling. Israel recently has seen a surge of “Unicorns” — technology startup companies valued at $1 billion dollars or more. The number of these companies has jumped from just one in 2013 to 71 in September 2021, as companies are hitting the $1 billion milestone faster than before. Not surprisingly, this success has heightened investor interest.

New Explorer Recommendation
Else Nutrition Holdings (BABYF)
Else is a young, Israeli-headquartered, plant-based food and nutritional company aimed at babies and toddlers. Trading at a market value of only $180 MM, this stock is speculative but it has a number of characteristics that could be framed as conservative.

First, it is riding a powerful trend for parents who want more of a plant-based food for their kids. You know how it goes: “Nothing is too good for my kids.” Else bypasses all the hormones, pesticides, chemicals, dairy and soy issues since it is made from almonds, buckwheat and tapioca. There is a demand push behind Else’s high profit margin products since about 50% of kids are somewhat allergic to cow milk and roughly 25% are allergic to soy milk.

I’m also impressed by its growth trajectory, huge markets, top executives with experience at companies such has Abbott and Mead Johnson, and strong scientific and advisory boards. It has already secured patents in key markets, which are estimated at $80 billion and growing at a 4-5% clip.

Another reason I think there is upside in the stock is the discovery potential. Institutional investors have a very small proportion of issued stock and management owns 41% so they are plenty motivated.

In addition, I’m impressed with the marketing and distribution efforts thus far.

It is already the top seller in the baby and toddler nutrition category at Amazon, it has an in-store at Sprouts, and by the fourth quarter will be up at Kroger.com and Walmart.com. In 2022, they will move into Europe and China and, looking forward, about 25% of sales will be online and 75% through offline retail. In its most recent quarter, revenue was up 570% year over year but of course this will slow down, as the company projects a 40% quarter-to-quarter growth rate.

Finally, Else has opportunities to expand the brand to cereal and post-toddler nutrition and nutritional drinks. It’s a good story so let’s begin with incrementally building a half position.

BUY A HALF

Model Portfolio

Portfolio Changes
None.

Updates
ChargePoint Holdings (CHPT) shares are struggling a bit in the low 20s, way below their 52-week high of 46 even though the company reported 61% year-over-year revenue growth in its most recent quarter. 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.

It is the leading North American Level 2 charging network using 240-volt power. It also has more than 2,000 public fast-charging stations and is rapidly expanding its network in Europe. 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 with a medium-term outlook. BUY A HALF

Cloudflare (NET) shares have had a couple of tough weeks and are trading below their 50-day moving average. The price has pulled back from 136 to 113. Still, this is one my favorite stocks given its aggressive sales strategy; plus, 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 53% in its most recent quarter. Cloudflare 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 acted better this week, reaching 16 before pulling back to 14.7 with the weaker market. Still, Fisker offers investors a compelling risk/reward relative even to an established EV maker like Tesla. Its 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 that the company’s first product will be launched in the latter part of 2022. This is an aggressive stock but I confirm a buy rating on Fisker. BUY A HALF

Glaukos (GKOS) recently joined the Explorer portfolio and was down a bit this week as Covid continues to keep some patients from handling their eye issues. 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 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. 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 many patients eventually opt for cataract surgery. Glaucoma currently impacts 3 million Americans.

Glaukos’ revolutionary product is the iStent, a tiny L-shaped titanium implant. Glaukos has the most comprehensive pipeline in ophthalmology. New product launches will expand 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 50% from its 52-week high and yet its balance sheet is solid, with more than $400 million in cash. The baby boomers are coming. BUY A FULL

International Business Machines (IBM) shares rebounded three points this week. The positives are pretty clear: IBM has a new CEO (Arvind Krishna) and ambitious plans. In 2020, IBM completed seven acquisitions at an aggregate cost of $723 million. It reported three more acquisitions in the first quarter of 2021 for an aggregate cost of $987 million. In total, since Krishna became CEO in April 2020, IBM has announced more than 11 acquisitions. All are hybrid cloud and AI-focused. Big Blue will split into two companies by the end of the year and the stock’s valuation is at half the level of the S&P 500 on a price-to-earnings basis. This is an ultra-conservative income play that should probably find a home in any global portfolio. BUY A HALF

Marvell Technology Group (MRVL) shares have lost a bit of momentum over the last few weeks though it is getting a lot of press as an inexpensive semiconductor idea. The key question is when will its recent acquisitions pay off. Marvell earnings in its recent quarter jumped 62% while sales surged 48%. The stock is up about 45% since May, 2021. Credit Suisse upgraded the stock 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 5G capabilities. I recommend buying at current prices if you have not already done so. BUY A HALF

Novonix (NVNXF) shares broke above 5 this week and have more than doubled since early August. It is an Australian technology and advanced materials supplier focused on synthetic graphite for the electric vehicle and storage battery industry. Novonix is 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 and has quite a bit of technical brainpower behind it. 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 were pressured by some option activity this week as the stock price fell from 28 to 24. The “big data” market opportunity is massive and should lead to growth in the years ahead. Palantir’s revenue rose 47% to $1.1 billion in 2020, and it expects its revenue to rise more than 30% annually from 2021 to 2025, which implies it will generate at least $4 billion in revenue in 2025. Palantir’s stock currently trades at 38 times this year’s sales.

If it maintains that premium ratio, it could be worth $148 billion by the beginning of 2025, which would make it more valuable than today’s IBM. Palantir expects that growth to be driven by its two core platforms: Gotham, which serves government clients; and Foundry, which provides lighter versions of those services for enterprise clients. Its third platform, Apollo, provides cloud-based updates to both platforms.

The stock is bit expensive but not when taking into account its potential 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 were down this week after it was reported that Ark Invest sold some its holdings in Sea. The company expects that its e-commerce revenue will grow 121% in 2021. 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 outperformed the market this week. This is despite 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 headwind is that the company plans to spend 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

Veeco (VECO) shares have held firm in a tough market. The company 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’s technology to deliver the next generation chips.

On the numbers side, 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. Veeco represents a backdoor play on semiconductors. I recommend that you acquire shares if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares were weak over the last couple of days but futures indicate that it will open up about 7% on Thursday after the FAA completed its investigation that the company deviated from its flight path on the descent of its first space flight. It seems that the stock will likely trade mostly in the range of 25-30 despite uncertainty concerning the timing of progress and future revenue expectations. I believe a hold rating is appropriate for the time being. HOLD A HALF

The next Cabot Explorer issue will be published on October 14, 2021.
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