April 4, 2024

Portfolio Change: Exscientia (EXAI) – Move from Buy a Half to Hold

Tesla Tumbles as Hyundai Gains Market Share

The first week in April was quiet for Explorer stocks. Looking at what sectors are doing particularly well through the MSCI World index, technology and other cyclical sectors such as energy have outperformed.

Where are the bargains? Consumer staples, Europe, and perhaps even electric vehicle stocks. The EV slowdown can’t be denied – their first-quarter growth rate was a weak 2.7% vs. last year’s 47%. Hybrids vehicles are clearly preferred by many, and on the rise.

As I warned, Tesla delivered a disappointing 386,810 vehicles worldwide in the first quarter, down 8.5% from the same period a year earlier and way below expectations. Its stock pulled back closer to my potential buy point of 150. Tesla’s Models Y and 3 account for 90% of its total sales.

Tesla is facing soft demand, particularly in China, as the former EV mania turns into EV meltdown and EV makers cut prices. However, this pullback in stock prices is creating opportunities that I’m following closely.

Elsewhere, European stocks are cheaper than U.S. equities but overall produce lower growth in part due to tech being a smaller portion of the market. The stocks in the Stoxx Europe 600 are valued at 14 times earnings, while the S&P 500 index is trading at 25 times earnings. This is the biggest gap in two decades. There is plenty of room for catch-up as since 2000, U.S. markets have posted a 256% increase, while the Stoxx Europe 600 has only risen by 42%.

European multinationals also provide investors with more international exposure since about 60% of European companies’ sales occur outside Europe, versus 30% for S&P 500 American companies, according to a study by Wellington Management.

Meanwhile, Hyundai, Kia, and Genesis, three brands of the Hyundai Motor Group, are gaining momentum in America. It is now the fourth-largest automaker in the U.S., behind GM, Toyota, and Ford.

Explorer Weekly Stock Commentary

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 Disrupter Recommendations – need to watch more closely and have 20% trailing stop loss in place

Cloudflare (NET) shares are up 14% in 2024 and analysts polled by FactSet forecast 28% revenue growth in 2024 to $1.7 billion. Other news this week is that the company hired away a longtime banker at Goldman Sachs, Stephanie Cohen, to become its chief strategy officer. Take this opportunity to buy more shares. Buy a Half

Exscientia (EXAI) shares dipped from 5.7 to 5 this past week. I’m moving this stock to a hold until we see a renewed uptrend develop. AI models should shorten the development of successful pre-clinical drug candidates from as much as five years down to as little as 18 months. The company has sufficient cash to fund its operations and capital expenditure requirements well into 2026. Move from Buy a Half to Hold

Franco-Nevada (FNV) shares jumped from 115 to 120 this week as the gold uptrend continues with central banks leading the charge. This gold-focused royalty and streaming company offers us exposure to precious metals without the operational risks associated with traditional mining. In addition to gold, it offers exposure to platinum, silver, and oil and natural gas. Buy a Half

IperionX (IPX) shares were up slightly in their first week as an Explorer recommendation. This company aims to become a leading American titanium metal and critical materials company using patented metal technologies to produce high performance titanium alloys. In addition, it is trying to do it at lower energy costs and lower carbon emissions. Buy a Half

Novo Nordisk (NVO) shares were unchanged and in the last month have lost some momentum. The company and industry are coming under some scrutiny regarding the spread between its cost of production and price. There are an estimated 800 million people with obesity worldwide and only 2% of these patients are being treated. Hold a Half

PayPal (PYPL) shares were up 11% in March and payments volume increased 15% year over year in the fourth quarter of 2023. Its 400 million-plus users leads to PayPal wallets being accepted by 80% of retailers in North America and Europe. Buy a Half

Sea Limited (SE) shares were up 6% in March as the company invested more in logistics in its home turf of Southeast Asia, where it has an edge. Sea Limited generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment with revenue growth of 24%. Digital payments revenue was up 44% but its gaming group, Garena, pulled back sharply, and its recovery is key to unlocking this stock’s potential. Buy a Half

Super Micro Computer (SMCI) shares stayed above the 1,000 level as the stock slowed its torrid ascent from early this year. For the full fiscal year, Super Micro is estimating revenue of $14.3 billion to $14.7 billion and consensus estimates suggest that Super Micro’s earnings could increase at 48% compounded over the next five years. The company reports its next earnings on May 2 as this aggressive AI momentum stock remains a hold. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were steady this week as tech stocks as a group are off to a slower start in April. IBM is the world’s sixth-largest cloud infrastructure provider, and the cloud computing industry is expected to grow at a compound annual growth rate of 14% through 2030. The stock remains a long-term buy. Buy a Half

Visa (V) shares were steady this week as the company profits from a simple and powerful business model as it gains fee revenue each time a cardholder uses a card. Its net profit margins reached 57% in its last reported quarterly earnings. Visa has than 4.3 billion cards in circulation and more than 130 merchants in its network. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)

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%. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Buy a Full

Morgan Stanley China A Share Fund (CAF) offers exposure to a basket of the largest Chinese-listed stocks. Buy a Half

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’s Japan Hedged Equity ETF (DXJ) offers exposure to a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Half

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Watch List: 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.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields: cloud computing, AI, cybersecurity, and edge computing. its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data – from where it is located to where it is needed (edge computing) – is a massive business opportunity in which Cloudflare already excels.

Watch List: 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. The company is using AI to develop new medicines and is attracting high quality partners. Exscientia (EXAI) stock is trading way off its high at 4.89. 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 $616 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 yet profitable.

Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

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.

IperionX (IPX) aims to become a leading American titanium metal and critical materials company. It is using patented metal technologies to produce high performance titanium alloys, from titanium minerals or scrap titanium. And it is trying to do it at lower energy costs and lower carbon emissions. The company also has backward integration to titanium minerals via control of the largest U.S. titanium resource in Tennessee. Installation and commissioning of the HAMR titanium furnace is expected during the second quarter, before producing its first titanium metal in mid-year 2024.

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 popular 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.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia. Some of you may recall this stock when it was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

Super Micro Computer (SMCI), commonly known as supermicro, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro stock looks relatively inexpensive right now for the growth that it has been delivering. The company trades at just two times sales. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. Furthermore, both Dell and HPE have relatively high debt whereas Super Micro has a net positive cash position. This is an aggressive pick in a sector experiencing extraordinary growth.

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 $14.8 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.

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