August 31, 2023

Portfolio Changes: None

Follow the Money

This week, markets took slower economic growth numbers to mean no more interest rate hikes and higher stocks. That’s the logic of Wall Street today.

Laszlo Birinyi (pronounced BUH-ree-nee), an investor who “listened” to the market rather than corporate or financial news, passed away this week. He was someone who thought differently. His theory about the flow of money that made him one of the nation’s foremost stock pickers in the 1990s will endure.

From 1993 to 1998, his average annual return was 44%, against a 19.8% average annual rise by the Dow Jones industrials. His gain in 1997 was a whopping 74%.

Mr. Birinyi often described his philosophy of the market in the phrase, “follow the money,” and developed a system for determining whether a stock trade was initiated by buyers or sellers. He focused on investor interest to evaluate whether money was likely to flow into or out of a stock. “I try and see where savvy investors are putting their money,” he stated in 1998.

His study of market history taught him, he said, that long bull markets have four stages: reluctance, consolidation, grudging acceptance and exuberance. I don’t think we are at exuberance except in terms of the run of the “Magnificent Seven” stocks. It would, however, take a lot of guts to bet against them, but I think some profit taking might be in order.

The Wall Street Journal reports that gains (including dividends) in just 72 stocks have accounted for half of all net wealth creation from stocks, relative to Treasury bills, since 1926. The frequently highlighted narrowness of the markets – with a handful of stocks dominating the index – is not all unusual; it is a frequent feature of investing. The reason is skewness, a term that means there are always big outliers in any distribution of outcomes. Picking the right countries to invest in has been easy for world investors given U.S. dominance in terms of stock performance. But picking and then holding on to the outperformers takes skill, discipline, and some luck as well.

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 recovered nicely to 63 this week as the company reported a 145% increase in second-quarter profit and a 67% surge in revenue. BYD’s chairman also told analysts that he remains confident the Chinese automaker will sell 3 million EVs this year despite economic challenges and an intense EV price war. Buy a Half.

Neo Performance (NOPMF) shares were up marginally this week following a recent financial report showing revenue up slightly and adjusted net income of $2.5 million and a cash position of $126 million. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys. Buy a Half.

Novo Nordisk (NVO) shares were flat this week as the Biden Administration released a list of drugs that could be subject to Medicare price negotiation. The list included two Novo drugs (Fiasp, NovoLog) that could be impacted as early as 2026. On the good news front, Novo’s highly popular drug Wegovy was found by a late-stage trial to reduce heart failure symptoms in patients with obesity. Hold a Half.

Tesla (TSLA) shares had another good week, up 10%. Tesla expects to grow deliveries 50% annually. In 2022, its vehicle sales jumped 40% year over year and production increased 47% to 1.37 million. Buy a Half.

Umicore SA (UMICY) shares were up this week to 6.5. Umicore is one of the world’s largest producers of battery materials and is an important supplier and partner for European carmakers such as Volkswagen. It is also working to develop materials for solid-state batteries. Buy a Half

Explorer Multinational Blue-Chip Recommendations - More Buy and Hold

ConocoPhillips (COP) had another encouraging week as this global oil giant advanced from 115 to 119. The company is among the lowest-cost producers and delivers a relatively strong cash flow. Buy a Half.

International Business Machines (IBM) shares moved forward a couple of points as the company unveiled Watsonx, a cutting-edge enterprise-focused AI and data platform designed to harness the power of advanced AI capabilities for businesses. IBM plans to focus more on its core hybrid cloud and artificial intelligence businesses. Buy a Half.

Pfizer (PFE) shares gave back a point over the last week with only one drug – Eliquis – on the Medicar- negotiated drug list that was released this week. Pfizer projects that its adjusted earnings per share for the year will be between $3.25 and $3.45. The stock delivers a 4.5% dividend yield. Buy a Full.

Visa (V) shares added four points in the stock’s first week as an Explorer recommendation to reach 246 as the company announced plans along with MasterCard (MA) to raise fees for merchants. Visa 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 $14.5 trillion of payment volume in the last 12 months. Buy a Half.

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). 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.

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.

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.

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 $14.5 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.