January 25, 2024

Portfolio Changes: Morgan Stanley China A Share Fund (CAF) – BUY

IBM Surges and Super Micro Computer Jumps 45%

China Planning Financial Support for its Struggling Stock Market

In my view, the best strategy for overseas markets is to play the trends with a contrarian value approach. For example, the Hang Seng China Enterprises index, a closely followed gauge of large Chinese listings in Hong Kong, has fallen about 11% so far this month after losing 14% last year. Foreign investors have sold about 90% of the $33 billion worth of Chinese stocks that they had purchased earlier in 2023 and have continued selling this year.

There is, however, growing speculation that Chinese policymakers will mobilize about two trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link. Because of this and low relative valuations, I’m adding Morgan Stanley China A Share Fund (CAF) to our ETF/fund recommended list.

Some other overseas markets are also showing strength. Japan has weathered a long bear market and just recently reached its 1989 high. India’s stock market capitalization has overtaken Hong Kong’s for the first time, making it the fourth largest market in the world though valuations of its quality ADRs (American Depositary Receipts) are quite high.

In America, since its inception, the market has been in a long, though often interrupted, upward trend. There have been minor and major setbacks along the way but if market capitalism continues to function, the stock market is likely to always resume its upward trend.

Therefore, the amount of time you stay in the market – not whether you buy and sell at opportune moments – is likely to be what matters most. Since August 1976, the S&P 500 has risen so much that none of the many declines over that long period amount to much in comparison with the broad upward thrust of the market. The exception to the above was the 2007-2008 global financial crisis and this is a reminder to have a healthy cash balance to invest during sharp pullbacks.

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 a 20% trailing stop-loss in place

10x Genomics (TXG)-BUY and Exscientia (EXAI)-BUY were both largely unchanged this past week as 10x confirmed that it will release its next earnings on February 15.

Novo Nordisk (NVO)-HOLD shares dipped from 106 to 105 as the European Union’s drug regulator this week will review a possible wider use of Novo Nordisk’s weight-loss drug Wegovy to include reducing the risk of strokes and heart attacks.

SK Telecom (SKM)-BUY shares were steady as the company has embarked on an ‘AI Pyramid Strategy’ to accelerate innovation centered around three key areas — AI Infrastructure, AI Transformation and AI Service. The stock is trading at below book value and has a 6.8% dividend yield.

PayPal (PYPL)-BUY shares improved from 60 to 63 in their first week as an Explorer recommendation. PayPal is a digital payment company with 430 million active accounts generating over $1.5 trillion in payment volume annually. Capitalize on this blend of fintech value and innovation by buying PayPal shares while they remain on sale.

Sociedad Química y Minera de Chile S.A. (SQM)-HOLD shares were up slightly but continue to struggle with low lithium prices which contribute about 75% of total revenue. We remain patient as the stock is trading at roughly five times earnings, and the company has strong cash flow to support its 10% dividend yield.

Super Micro Computer (SMCI)-BUY shares surged 45% this week (!) in the wake of this AI play recently reporting a spike in demand for its Nvidia, AMD, and Intel AI platforms. Management increased its revenue guidance from $10 billion to $10.5 billion for the year ahead. Super Micro is piggybacking on demand for Nvidia chips for AI – they’re selling the servers and systems that incorporate and support those Nvidia chips in data centers.

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP)-HOLD shares were up 4 points to 109 as Middle Eastern tensions led to higher oil prices. The company will report its next earnings on February 8.

International Business Machines (IBM)-BUY shares were up about 10% in the last week and shares gained about another 8% in extended trading after the Wednesday close after reporting strong earnings and cash flow. The stock has increased 23% in the past 12 months.

Visa (V)-BUY shares were up 4 points this week to 272. Quarterly earnings are expected to be released today (Thursday, January 25).

Watch List – BYD (BYDDY): The story remains the same with China’s emerging EV powerhouse: The company’s fundamentals look great, and the growth is impressive. But the stock is stuck in the mud thanks to the aforementioned weakness among Chinese stocks at the moment. We will continue to keep an eye on it.

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.

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) – Buy a Half (see above).

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 5.89. 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 $733 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 this 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.

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.

SK Telecom (SKM) is one of the largest telecommunications companies in South Korea and is placing AI at the core of its business. 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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