August 17, 2023

Portfolio Changes: None

China’s Woes Impact Markets

Beginning on a positive note, I’d like to remind you of the power of compounding returns when you stay in the stock market over time. For example, $100 invested in three-month Treasury bills in 1928 grew to only $2,141 by the end of last year while it became $46,379 invested in medium-grade corporate bonds and a stunning $624,534 if invested in a broad basket of stocks, according to data from New York University finance professor Aswath Damodaran.

China’s continued economic woes took center stage globally this week, as the country’s central bank unexpectedly cut key interest rates in a bid to spur economic growth, manage high debt in the property sector, and lower its 20% youth unemployment rate. An index of Chinese stocks traded in Hong Kong has fallen more than 9% this month.

America also has its debt problem, which is one reason we have higher interest rates. The Congressional Budget Office (CBO) projects that U.S. debt held by the public will surpass gross domestic product this fiscal year. In addition, interest on that debt could be equal to discretionary, nondefense spending by the end of the decade. No wonder the federal government is often described as “an insurance company with an army.”

Chinese tech giants Baidu, ByteDance, Tencent and Alibaba have ordered $5 billion in high-performance chips (much of it likely from Nvidia) used in generative AI as they anticipate further restrictions from the U.S.

Taiwan’s current vice president, William Lai, a frontrunner to be elected Taiwan’s next president in early 2024, arrived in New York this week. It was officially a transit stop on his way to Paraguay for the inauguration of its president. China’s foreign ministry earlier criticized Lai, saying he was a separatist and “troublemaker through and through.”

You might think America has an inflation problem but many small business owners in Argentina woke up on Monday to find suppliers had hiked prices 20% overnight as the country is facing a crisis and is running out of hard-currency reserves.

Finally, Vietnam’s electric vehicle maker VinFast (VFS), controlled by the conglomerate Vingroup, surged in its opening day on the Nasdaq on Tuesday, moving from 17 to 37 to before retreating to 28 in after-hours trading yesterday. The stock’s rapid rise reflects investor enthusiasm for EV startups as well as the limitations of the blank-check company structure through which it was taken public. I would be careful with this one since it has a market valuation out of step with its stage of development.

VinFast is not profitable and delivered just 11,300 vehicles in the first half of the year. The company lost $2.1 billion in 2022 and reported first-quarter revenue down 49% year over year. More importantly, with only about 1% of the shares outstanding available to trade, VinFast shares are likely to be highly volatile.

Weekly Explorer Stock Updates

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 and will be followed by a new recommendation every other week.

Explorer Trading Recommendations – need to watch more closely

BYD (BYDDY) shares pulled back to 57 this week due to a price cuts and overall negative news about the Chinese economy. BYD is the world’s leading manufacturer of new energy vehicles and power batteries. Buy a Half.

Geely Automobile Holdings Limited (GELYF) shares went from 1.3 to 1.2 this week as it faces the same twin challenges as BYD. Last quarter sales were up 59% and net profit was up 50%. Buy a Half.

Neo Performance (NOPMF) shares jumped from 6.0 to 6.4 following the release of second-quarter financials. Revenue was slightly higher and adjusted net income was $2.5 million in the quarter, or $0.05 per share. Its cash position was about $126 million. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and critical metals. Buy a Half.

Novo Nordisk (NVO) shares were steady this week after last week’s 19% surge. The company recently announced strong results for the first half of 2023, with net sales climbing 30% year over year and a 43% increase in net profit, or around $1.61 per share. Novo Nordisk raised its full-year 2023 outlook to call for sales growth of 27% to 33%. New data from a five-year trial from its drug Wegovy showed that users had 20% fewer heart attacks, strokes, and cardiovascular deaths. Hold a Half.

Solid Power (SLDP) shares pulled back to 2.2 this past week despite a strong second-quarter reported last week. Revenue was $4.9 million, and first-half 2023 revenue was $8.7 million, up $3.9 million from the first half of 2022. Second-quarter operating net loss (as expected) was about $12 million, or $0.07 per share. Solid Power’s liquidity position totaled $443 million. Solid Power seeks to develop breakthrough high density solid-state battery technology and is an aggressive Explorer recommendation. Buy a Half.

Tesla (TSLA) shares in their first week as an Explorer recommendation dipped from 230 to 225. Price cuts and weaker Chinese consumer demand were the likely causes in addition to a an overall weak market in the U.S. this week. I still believe that this is a good entry point to invest in Tesla though you may want to incrementally build a position. Buy a Half.

Umicore SA (UMICY) shares tumbled from 7.2 to 6.5 this past week on no news. This is a quality company and a good value stock that has considerable upside when commodity market pricing conditions improve. The company produces very critical metals and resources important to technology and clean energy. Buy a Half.

Explorer Multinational Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares were a little soft this week in line with crude oil prices. Oil prices recently hit a nine-month high on concern that a possible escalation of the conflict between Russia and Ukraine may choke off more supplies. The company is among the lowest-cost producers and delivers a relatively strong cash flow. Buy a Half.

International Business Machines (IBM) shares went from 143 to 140 this past week as CEO Arvind Krishna stated the company plans to replace nearly 8,000 jobs with Artificial Intelligence (AI). IBM is a play on data, software, cloud computing, and artificial intelligence. Buy a Half.

Pfizer (PFE) shares held steady this week. Pfizer’s revenue and stock price is down from pandemic highs but the company projects that its adjusted earnings per share for the year will be between $3.25 and $3.45, so if it reaches this range, the stock looks inexpensive. The stock delivers a 4.5% dividend yield. Buy a Full.

Explorer ETF/Fund Positions

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Current yield is about 11%. Buy a Full.

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 China ex-State-Owned Enterprises Fund (CXSE) is a way to gain China exposure without any state-owned enterprises (SOEs). Buy a Half.

Explorer Stocks Summary

Brief company summaries that will not change week to week.

BYD (BYDDY): In 2022, China auto giant BYD (for Build Your Dreams) 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.

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.

Geely Automobile Holdings Limited (GELYF), headquartered in Wan Chai, Hong Kong, is a nice complement to Explorer recommendation BYD (BYDDY), China’s electric vehicle (EV) leader. It also owns the London Electric Vehicle Company, which produces electric black cabs. Volvo is majority-owned by Geely.

International Business Machines (IBM) is a blue-chip artificial intelligence 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.

Neo Performance (NOPMF) manufactures the building blocks of many modern technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to the performance of many important products and emerging technologies. Based in Toronto with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals.

Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

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 this weight-loss drug, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

Pfizer (PFE) served more than a quarter of a billion patients that were treated with its medicines and vaccines in the first quarter of this year. Pfizer has 10 products with sales greater than $1 billion a year.

Solid Power (SLDP) is a Colorado-based developer of all-solid-state battery and sulfide-based electrolyte technology. Solid Power replaces the flammable liquid electrolyte in a conventional lithium-ion battery with a proprietary sulfide-based solid electrolyte.

Solid Power’s all-solid-state battery cells are expected to be safer, offer an increase in energy density compared to the best available rechargeable battery cells, and enable less expensive, more energy-dense battery pack designs. The company has a partnership with BMW and Ford and received a $5.6 MM U.S. Department of Energy (DOE) award.

Tesla (TSLA) has always confused investors and Wall Street analysts alike. One reason is that it often has valuations that are many times higher than its auto industry peers. What many miss is that it is not an auto stock but rather a tech stock and platform stock. Tesla’s value is really in its ever-expanding platform, AI capabilities, charging infrastructure, battery manufacturing, autonomous driving capability, and other areas ripe for disruption that nobody even knows Tesla is working on. Revenues have scaled from $32 billion in 2020 to $54 billion in 2021, to $81 billion in 2022, and are set to move past $100 billion in 2023.

Umicore SA (UMICY) is a materials technology company based in Brussels. The venture is set to begin production in 2025 and is slated to process materials for enough batteries to power 2.2 million fully electric cars a year. The company has a long history in mining and has evolved into more of a processing and recycling company.

Umicore’s leading battery materials technology portfolio consists of nickel, manganese, cobalt technologies, manganese rich lithium and solid-state battery technologies. The company delivers a 17% return on equity and is a rather conservative way to play critical metals on the refining rather than mining side.