January 11, 2024

Portfolio Changes: None

Beware the AI Hype

A major challenge in 2024 for investors and analysts alike will be separating the artificial intelligence (AI) “pretenders” from the “contenders.” Super Micro Computer (SMCI), a recent Explorer recommendation, was up 23% this week, and Exscientia (EXAI) shares were up 13% yesterday.

Many are projecting jumps in both growth and productivity in sectors as varied as health and pharma to software and gaming. I’ll do my best to avoid the hype and follow the AI thread to find companies perhaps missed by the mass financial media. Last year, investments of more than $18 billion by Microsoft, Google and Amazon invested $18 billion representing almost 70% of the global venture investment into AI startups, according to PitchBook data.

This will be the year of elections, from Taiwan and Russia to South Africa and the U.S., as more than 70 countries will hold elections in 2024. Taiwan votes this Saturday to pick a new president.

For the first time, the U.S. takes the Liquefied Natural Gas (LNG) crown as the world’s largest exporter as Europe continues to be the main buyer of U.S. LNG and Russia sells what it can to China. In turn, China’s overseas auto sales surged to a record last year to pass Japan as the world’s biggest car exporter due to a spike in sales to Russia.

Nvidia is a great company, but I caution that that the leading chip designer is going to have difficulty threading the needle between the demands of U.S. regulators and supplying chips that Chinese clients want. Chinese cloud companies currently source around 80% of high-end AI chips from Nvidia.

Finally, the legendary MIT economist Robert M. Solow recently died at his home. He won a Nobel prize in economic science in 1987 for his theory that advances in technology, rather than increases in capital and labor, have been the primary drivers of economic growth in the United States. “I discovered to my great surprise that the main source of growth was not capital investment but technological change,” Professor Solow said in an interview in 2009.

Explorer Stock Update

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 Trading Recommendations – need to watch more closely

10x Genomics (TXG) shares were steady around 50 as the company announced unaudited preliminary revenue of approximately $184 million for the three months ended December 31, 2023, representing 18% growth year over year. 10x is a leader in the emerging field of “spatial biology” which is a cutting-edge life science for making new discoveries about human health and disease. This is a relatively new Explorer recommendation so consider adding 10x to your portfolio for 2024 realizing that it is an aggressive idea. Buy a Half.

Exscientia (EXAI) shares were up 13% yesterday as the Investor’s Business Daily (IBD) mentioned it as a potential takeover target. It highlighted that by acquiring EXAI, a major drug maker could get immediate access to the firm’s potent AI platform, as well as its drug candidates and partnerships. It also noted that Exscientia has a low market value of just over $800 MM. Exscientia has ongoing agreements to co-develop drugs with Bristol-Myers Squibb and Sanofi. This is an aggressive idea in a promising field. Buy a Half.

Novo Nordisk (NVO) shares resumed their rise as the obesity drug market remains a focus for investors and was one of the most talked about topics at the annual JPMorgan Healthcare Conference in San Francisco this week. Novo is carving out a huge market for diabetes and obesity that Goldman Sachs estimates will reach $100 billion market by 2030. Hold a Half.

SK Telecom (SKM) shares were quiet in their first week as an Explorer stock.

By 2028, SK Telecom will triple the proportion of its AI-related investments and become a global AI company. SK Telecom is trading at below book value and also offers us a 6.8% dividend yield. Buy a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares had another disappointing week and if it were not for the 9.9% dividend yield I would be downgrading it to a Sell. Lithium prices have fallen sharply from lofty levels, and many believe a turn is imminent because producers are now selling close to or below their cost of production, but we need to be careful and if weakness continues into next week, I will need to sell. Hold a Half.

Super Micro Computer (SMCI), a recent Explorer recommendation, was up 23% this week after reporting a surge in demand for its Nvidia, AMD, and Intel AI platforms. The company manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. This is an aggressive pick in a high-growth sector. BUY A HALF

Explorer Dominator Blue-Chip Recommendations - More Buy and Hold

ConocoPhillips (COP) shares were down with most oil stocks since bad news on oil demand coming out of Saudi Arabia, driving down oil prices. This could change quickly given the uncertainty in the Mideast so we will stay with this stock but monitor it closely as it will report its next earnings on February 8. By market cap, this company ranks as the 7th largest oil and gas company in the world. Conoco is also among the lowest-cost oil producers. Hold a Half.

International Business Machines (IBM) shares were steady this week as IBM’s next earnings report is expected on January 24. The company has $11 billion worth of cash and generated $10.3 billion of free cash flow over the last four quarters. Those funds are aimed at the AI opportunity right now. Buy a Half.

Visa (V) shares popped from 259 to 265 this week. The company sees developing countries as a clear growth opportunity as economies, spending, and consumption grow. As I mentioned last week, over the 15 years since its initial public offering (IPO) in 2008, Visa shares have recorded a compound annual growth rate (CAGR) of 21%. That means $10,000 invested in Visa shares at its IPO would now be worth over $204,000. Buy a Half.

Watch List

BYD (BYDDY)

Global EV sales in 2023 are now expected to reach 14 million, with about 63% in China, according to Bloomberg NEF, an energy-focused research service. BYD’s EV sales exceeded Tesla’s in the fourth quarter for the first time.

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%, some of its top holdings include Albemarle (ALB), Tesla (TSLA), BYD (BYDDY), Panasonic Holdings (PCRFY), and Livent (LTHM) to name a few of the fund’s 46 holdings. Buy a Half.

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 8%. 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.

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.

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, Exscientia is using AI to develop new medicines and is attracting high quality partners. Exscientia (EXAI) stock is trading way off its high in an uptrend at 7.00. 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 $875 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 and will not be profitable next year.

10x Genomics (TXG) is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease. Founded in 2012 and based in Pleasanton, California, 10x builds tools for scientific research to advance human health. Its instruments, reagents and software allow researchers to examine cells and molecules at a resolution and scale never imagined or experienced before. 10x helps researchers look at the roots of biology.

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.

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.

SK Telecom (SKM) is one of the largest telecommunications companies in South Korea and is placing AI at the core of its business. SK Telecom is rapidly transforming into an artificial intelligence (AI) company.

Its affiliate, SK Hynix, is already the world’s second largest memory chipmaker. SK Telecom’s stock was flat in 2023 but importantly, it is the parent of Sapeon, an artificial intelligence (AI) chip startup. Backed by South Korea’s telecom-to-chip conglomerate SK Group, it has launched its latest chip for data centers, joining the global race to develop AI chips with bigger rivals like Nvidia (NVDA).

Sociedad Química y Minera de Chile S.A. (SQM) produces specialty plant nutrients, iodine, lithium, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers which together account for about 30% of SQM’s annual revenue. SQM is generally considered the world’s second-largest lithium producer, behind U.S.-based Albemarle (ALB), and in recent years, demand for the “white gold” has been strong. Demand for lithium is strong due to electric vehicle growth and lithium contributes about 40% of the company’s gross profits. Fertilizer ingredients supply another 40%, and iodine contributes the rest.

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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