June 13, 2024

Portfolio Changes: None

Managing Risk, Uncertainty, and Opportunity

Inflation cooled for the second straight month in May, the U.S. labor market seems back to pre-pandemic levels, and the economy is expanding at a low but steady pace.

Therefore, the Fed is holding back on interest rate cuts. Probably the right move. Keep the ammo dry for when it is really needed. This was a solid week for Explorer stocks with all making gains except for a small pullback in Super Micro (SMCI).

A wall of active and passive money flows still supports the stock market, though the narrowness of the rally bothers me a bit.

The 10 largest stocks represent about 34% of the value of the S&P 500 versus 27% in 2000 – right before the dotcom-era sharp pullback. Volatility is also picking up with more stocks experiencing sharp swings even on days that the overall market moves very little.

This ought to be a great set-up for stock picking.

My goal is to help you navigate the risk and uncertainty that is out there but not at the expense of missing out on opportunities.

This is why we start with a solid ETF base, add some dominating blue-chip stocks, and then add a layer of disruptive, aggressive stocks that offer us more upside potential for taking on more risk and volatility.

The key is to have some balance – to avoid going overboard in any sector or chasing any trend since the future is unknowable.

The current artificial intelligence (AI) mania is just one example.

The opportunities seem endless but so far, for all the hype, most of AI’s inroads have been limited. Pricing all this over several years or longer can easily lead to pure speculation.

Also, we’ll try to stay ahead of changes in the global marketplace. I have long been keen on Southeast Asia which is now a bigger destination for China’s exports than the U.S., or the European Union (EU). Southeast Asia and Latin America together have made up nearly 25% of China’s exports so far this year, way up but still smaller than the combined 29% share of the U.S. and the EU.

The electric vehicle (EV) marketplace is changing as well. While American EV sales in the first quarter were up only 4%, sales in China were up 37% and India’s increased 39%. Meanwhile, EV sales in Japan and Germany were down year over year.

Explorer Weekly Stock Commentary

ASML Holdings (ASML) shares popped from 1,045 to 1,069 in their first week as an Explorer recommendation. ASML makes the lithography equipment that manufacturers use to make advanced chips. By 2026, ASML’s revenue could reach at least $40 billion as the market for AI chips is projected to grow at an annual rate of 36% through 2030. This is an aggressive stock trading at a high multiple to earnings and sales so you may want to move incrementally in building a position. Buy a Half

Cloudflare (NET) shares thankfully rebounded to 75 this week to essentially keep their position in the portfolio. This cybersecurity stock has more than 300 data centers and its network speed beats competitors such as Amazon and Google. It is also being seen as a leading metaverse stock as it rolls out more content products. Buy a Half

Franco-Nevada (FNV) shares finished the week largely unchanged at 119 as gold prices have lost a bit of their luster, trading in a narrow range as the Fed has gone quiet. The company provides funding to hundreds of mining companies to develop new gold, silver, copper, platinum, and other mining projects. Buy a Full

Neo Performance (NOPMF) shares were up 4% this week to 5.4 and Neo remains a buy due to its strategic importance; it also trades at a 50% discount to book value, pays a nice dividend, and maintains a strong cash position coupled with low debt. Some rare earth prices are in an uptrend though trading at price levels far from their recent highs. Buy a Half

Novo Nordisk (NVO) shares were up a couple of points at 143 as the company faces political pressures on two fronts. One is the high pricing of its products which are in heavy demand, and the second is whether private health insurance and public plans such as Medicare will cover the cost of the weight-loss drugs. Novo is in a strong position in this huge and growing market. Hold a Half

PayPal (PYPL) shares were flat this week as the company continues to see solid growth across its top line. However, its “take rate,” or the total revenue retained from each transaction, has been declining and this needs to be reversed. The stock represents good value trading at 16 times earnings and 2.3 times sales. The scale is impressive as PayPal processed 6.5 billion payments by about 400 million customers in the first quarter alone. Hold a Half

Sea Limited (SE) shares were up again this week gaining 4% to reach 74. The beginning of a turnaround in its crucial Garena gaming arm is encouraging. Its Shopee e-commerce platform has also become the largest live-streaming e-commerce platform in Indonesia, a key market with 265 million people. Buy a Half

Super Micro Computer (SMCI) shares were a bit volatile this week, reaching 800 and then ending at 774. Keep in mind that Supermicro benefits not only when Nvidia releases new advanced chips but other leading chipmakers do as well. Supermicro’s strategy of working closely with these companies means it can build equipment fast. Supermicro stock is trading about 33x forward earnings estimates. Perhaps there’s more room to grow, considering the company’s long-term growth prospects. This is an aggressive stock at the heart of the AI boom. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares finished the week at 169 and are up 30% over the last year. IBM is growing a bit faster on both the software and cloud consulting sides of their business and is a smart, conservative AI play. Buy a Half

Unilever (UL) shares were steady this week and this highlights its value as Unilever continually adjusts and improves its consumer product offerings across international and emerging consumer growth markets. This is a classic, reliable, long-term holding. Buy a Half

Visa (V) shares ended the week at 270 as Visa gains a bit of revenue every time a cardholder swipes their plastic. Except for the pandemic year, its revenue hasn’t failed to grow in any quarter going back more than a decade. In 2023, 61% of all credit card transactions in the U.S. were done with Visa cards. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a close ended fixed income mutual fund launched and managed by Aberdeen Standard Investments (Asia) Limited in Singapore. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

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) offers exposure to a basket of the largest Chinese-listed stocks. Buy a Half

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’s Japan Hedged Equity ETF (DXJ) offers exposure to a broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Full

Explorer Stocks Summary

Brief company summaries that will not change week to week.

ASML Holdings (ASML) makes the lithography equipment used to make advanced chips. It is currently the only company that makes cutting-edge extreme ultraviolet lithography (EUV) machines that are used to make the world’s most advanced and expensive semiconductor chips. That is at the seven nanometer (nm) and below size and standard. I would argue that this company has a stronger competitive position than even Nvidia does given its highly prized specialty. This gives ASML significant pricing power and a wide economic moat, making it highly profitable as it sells some of these machines for close to $400 million apiece.

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.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields: cloud computing, AI, cybersecurity, and edge computing. its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data – from where it is located to where it is needed (edge computing) – is a massive business opportunity in which Cloudflare already excels.

Watch List: 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.

Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

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 permanent magnets and powers many modern of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to permanent magnets. 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.

Neo stock is down 8% this year as rare earth stocks have pulled back due to weak prices, and trades at just 18 times forward earnings and 40% of book value. Neo also has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 5.5% dividend yield, and incentives are aligned with about 20% of the outstanding stock held by management.

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 its weight-loss drugs, 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.

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia. Some of you may recall this stock when it was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

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 under four 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.

Unilever (UL) is a dominant consumer goods giant with a trove of 400 recognizable brands in its diversified portfolio – from Vaseline to Dove – that it sells in over 190 countries. However, 30 “power brands” account for almost 75% of Unilever’s total sales. It is a steady, stable stock for an uncertain environment and for a change, its stock is selling at a rare discount – down about 12% from all-time highs and at just over two times sales. Two other reasons I like Unilever are that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. 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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