August 3, 2023

Portfolio Changes: None

Market Weathers Fitch’s Lowering America’s Credit Rating

The S&P 500 is up about 20% this year, roughly equal to what it posted in the first half of 2019. But stocks are headed lower this week with stronger-than-expected ADP employment data and the announcement yesterday that Fitch downgraded the U.S.'s credit rating.

With Tuesday’s decision, Fitch joins S&P in rating the U.S. long-term credit rating one notch below the strongest grade, though Moody’s still gives the U.S. its highest rating.

U.S. debt now stands at a staggering $32.7 trillion, and the cost of servicing Government debt jumped by 25% in the first nine months of the fiscal year, reaching $652 billion, thanks to growing totals and higher interest rates.

According to the Congressional Budget Office (CBO), gross federal interest payments are on track to reach close to $1 trillion and net payments $745 billion in the 2024 fiscal year (ending next September). This represents about 75% of all discretionary spending excluding defense. Federal interest payments alone will probably be more than total defense spending.

China also needs to come to grips with debt issues which are especially acute at the local level, and better manage a shaky property sector.

China is a bit of a riddle as looking both strong and brittle at the same time.

But don’t underestimate America’s or China’s ability to turn things around.

While Huawei’s access to 5G chips was cut off following U.S. sanctions,
it ramped up R&D spending (see below chart) as well as capital expenditures, and built new revenue streams to make up for the collapse in smartphone sales.

Huawei’s R&D Expenditure as Share of Revenue

Source: Huawei annual reports

On the electric vehicle (EV) front, there are a few news items, maybe the biggest of which is that Volkswagen is investing $700 million in China’s Xpeng. Elsewhere, Japan’s auto sales in China are down sharply and Ford has come out with a slower ramp plan on its EV production as losses are growing (though it remains optimistic it will be a leader in the new field). Tesla’s market value is $805 billion, versus just $52 billion for Ford.

Finally, to follow up on our recommendation last week of Brussels based Umicore SA (UMICY), European stocks are largely on sale. German stocks trade at more than a 40% discount to U.S. stocks in terms of price-to-earnings ratios, and they’ve underperformed the S&P 500 significantly over the past five years.

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) have pulled back the past couple of days but remain in a solid uptrend. BYD has an ever-growing lineup, with EVs from $11,000 to $160,000 and expects to sell 3.6 million, nearly doubling vs. 2022. June sales surged 88% vs. a year earlier. Buy a Half.

Geely Automobile Holdings Limited (GELYF) shares treaded water this week after the stock was up 7% last week. Last quarter sales were up 59% and net profit was up 50%. Buy a Half.

Neo Performance (NOPMF) shares slid from 6.5 to 6.0 this week as the company will report earnings on Friday, August 11^th. This is the second week Neo has been not performing well so we need to watch it closely. Neo manufactures advanced tech and industrial metals and materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and critical metals. Neo stock is also an excellent hedge on rising U.S.-China tensions. Buy a Half.

Novo Nordisk (NVO) shares retraced to 157 this week as we await earnings on August 11^nd. I expect sales to remain strong for this Danish drugmaker but have been over the past several weeks have been advising take some profits. There are more competitors coming into the market so I will leave this a hold for now. Hold a Half.

Polestar (PSNY) shares were up 23% in July but largely unchanged this week. The Danish designer of luxury high-performance electric vehicles is targeting 60,000 to 70,000 customer deliveries for 2023. Polestar will soon have access to Tesla’s expansive Supercharger network for all Polestar drivers in the United States and Canada. Hold a Half.

Solid Power (SLDP) slipped a bit this week, but are still above their 50-day line as investors await the quarterly report on August 8^th. Solid Power seeks to develop breakthrough high density solid-state battery technology. This is an aggressive Explorer recommendation. Buy a Half.

Umicore SA (UMICY) shares went from 7.5 to 7.3 in its first week as an Explorer recommendation. During the first six months of 2023, group revenues were in line with that of 2022, which is a good performance in the context of a challenging market conditions since end 2022. Buy a Half

Explorer Multinational Blue-Chip Recommendations - More Buy and Hold

ConocoPhillips (COP) shares were steady this week after it added another 5 points last week. This morning the firm reported a solid quarter (earnings of $1.84 per share were a bit weaker than estimates), with the top brass increasing full-year production guidance for the second straight quarter; the shareholder returns (1.8% dividend yield; the firm bought back about 1% of the company in Q2) remain strong and should get stronger if oil prices continue to firm up. Conoco is a quality core energy holding. Buy a Half.

International Business Machines (IBM) shares rose to 144 this week. While IBM’s legacy businesses such as software and mainframe systems are still important, three-quarters of revenue now comes from software and consulting, and half of all revenue is now recurring in nature. IBM is a play on data, software, cloud computing and artificial intelligence (AI) while shares trade at just 15 times forward earnings and pay a whopping 4.6% yielding dividend. Buy a Half.

Pfizer (PFE) shares went from 37 to 35 this week. The stock delivers a 4.6% dividend yield and trade roughly 11 times projected earnings. This leading drugmaker plans to launch 19 new drugs within the next 18 months, which should stabilize the bottom line and lead to growth in 2024 and beyond. Buy a Full Position.

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 10%. 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), and it’s perked up nicely since early July. 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 (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.

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.

Polestar (PSNY) is a Swedish premium electric vehicle manufacturer. Founded by Volvo and Zhejiang Geely Holding Group in 2017, Polestar enjoys technological and engineering synergies with Volvo. Polestar cars are currently manufactured in China, with 2024 manufacturing planned in America. Polestar has an edge on much of the competition because it has an “asset light” strategy through access to world class owner/partner Volvo’s factories. For 2023, Polestar anticipates global volumes to increase by nearly 60% to approximately 80,000 cars.

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.

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.