June 8, 2023

Portfolio Changes: None

U.S. CEOs Head to China as Power Rivals Clash in Singapore

Explorer stocks gained or held their ground this week as the so-called “Mega-Cap 8” stocks dominate a narrow market for now.

China has become the 20% market – 20% of world GDP and 20% of multinational total revenue. This explains the steady stream of CEOs to China while Washington and Beijing top officials traded insults at a Singapore defense forum.

For example, Tesla CEO Elon Musk visited Beijing last week and was quoted as saying that the U.S. and China are “intertwined like conjoined twins.” JPMorgan CEO Jamie Dimon was in Shanghai after doubling the bank’s China head count over the past four years.

Apple’s Tim Cook spoke this March to an audience in Beijing that being in China “means the world to me” given the “symbiotic relationship” his company has with the country which represents about 20% of Apple’s revenue and product content and 80% of production.

China is the largest or second-largest market for many U.S. multinationals including GM, Starbucks, McDonald’s, and Nike. Meanwhile, according to the Financial Times, less than half of U.S. low-cost imports from Asia will come from China by the end of this year, representing a 10-year low.

And China, while playing catch-up in semiconductors, continues to power ahead in the electric vehicle (EV) market, led by the Explorer recommendation BYD (BYDDY).

While America still leads in innovation, like Japan before it, China has a system, scale, and a knack for turning ideas into products on the factory floor.

More than a decade ago, Pony Ma, the founder of Tencent, explained to Fast Company a point that used to be made about the Japanese.

“In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”

Here is a graph of world EV sales in the first quarter.

Weekly Explorer Stock News

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.

Butterfly Network (BFLY) shares were steady this week after about a 20% rise the previous two weeks after recently reporting better quarterly revenue and a smaller loss than expected. Hold a Half.

BYD (BYDDY) shares recovered this week, vaulting from 60 to 64. BYD offers an EV lineup ranging from $11,000 to $160,000 in price and has started supplying batteries to Tesla. In 2022, BYD’s total vehicle sales jumped ahead of Tesla as sales including hybrids tripled. Buy a Half.

ChargePoint (CHPT) shares were up marginally this week and are approaching a resistance level around 10 after surging 17% last week after Bank of America upgraded the stock. JPMorgan analysts predict the company’s revenue will increase to $704 million this year and $1.1 billion in 2024, up from $468 million in 2022. Buy a Half.

ConocoPhillips (COP) shares went from 99 to 105 this week as it was disclosed that 19 institutional investors own most of the company’s outstanding stock and institutions overall own about 80%. Conoco delivers 20% net profit margins, a return on assets of almost 17%, and a return on equity of 32%. If you have not yet done so, Buy a Half.

Corteva (CTVA) shares had a good week, zooming from 52 to 58 as Corteva and the U.S. Agency for International Development (USAID) announced a new collaboration to support Ukrainian farmers. This stock needs a catalyst to get it moving. Hold a Half.

Novo Nordisk (NVO) shares were again unchanged this week and, while up about 19% so far in 2023, in the last month they have pulled back from 170 to 158. The company announced phase 3 trial results for an oral version of Wegovy to match Pfizer and the company expects $40 billion of revenue in 2024 across its drugs for diabetes, obesity, rare diseases, and cardiovascular disease so we will keep this a hold as Pfizer and other competitors encroach on this lucrative market. Hold a Half.

Pfizer (PFE) is a new recommendation, and the stock was up a point in its first week. It is trading at a discount to the market at just 11 times forward earnings with a dividend yield of 4.3%. The company has raised that dividend every year now for 14 consecutive years. On top of this, it delivers a profit margin over 30%, an 11.6% return on assets, and a 31% return on equity. Buy a Full.

Polestar (PSNY) shares were flat this week as Volvo introduced the EX30 that will start at $34,950 when it goes on sale next year. This means customers get a compact electric SUV for the price of a similar gas-powered car. Polestar still projects 2023 global volumes of 60,000 - 70,000 vehicles following record deliveries last year. Hold a Half.

Solid Power (SLDP) shares had a good week going from 2.1 to 2.4 following the appointment of John Van Scoter as CEO and positive first-quarter earnings. Solid Power is a developer of solid-state batteries and sulfide-based electrolyte technology. This is an aggressive Explorer recommendation that comes with both risk and high upside potential. 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 11%. 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 overviews that will not change week to week.

Butterfly Network (BFLY): Butterfly’s breakthrough software can be tied into a medical network to provide instantaneous images and improve both the speed and quality of healthcare. This is so much better than scheduling a test in a week and then having the patient come back and must pay for another appointment.

While an MRI machine can cost more than a million bucks, the Butterfly iQ+ costs a little over $2,000. Since it also requires a subscription service, it’s a steady source of recurring revenue for the company. The top 100 hospitals in the country already use Butterfly iQ devices.

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). BYD sold more than 1.85 million electric cars in 2022, including hybrids. In both 2021 and 2022, BYD more than tripled sales from the previous year. Most of BYD’s sales are still in China but it has a big international expansion underway, including the U.S., Europe, and Asia markets.

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.

ChargePoint (CHPT) is an industry leader in electric vehicle charging. ChargePoint operates in both North America and Europe, with more than 225,000 charging points on its networks. ChargePoint has more than 5000 fleet and commercial customers worldwide. The company has a 70% market share in the level 2 charging market in North America, giving it a powerful advantage over even its closest competitor.

ChargePoint has posted seven quarters in a row of increasing revenue with full-year revenue for fiscal ’23 showing a year-over-year gain of 94%. We need to accept the company’s heavy investments in growth; profits will appear as the company monetizes and leverages its charging network.

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.

Follow Warren Buffett into big oil and take a stake in the Arctic by purchasing a half position in Conoco which is trading at just eight times trailing earnings. The company also delivers 20% net profit margins, a return on assets of almost 17%, and a return on equity of 32%.

Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. Stocks like Corteva are recession-resistant and outperforming the market on a relative basis. In terms of partnerships, a year ago it signed a $5.2 billion collaboration with French drug giant Sanofi (SNY). It has expanded a Bristol-Myers Squibb (BMY) collaboration to include drug targets in both immunology and oncology. This is on top of a design partnership with the French drug giant, Germany’s Bayer, and Japan’s Sumitomo Dainippon.

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 who 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. Annual revenue topped $92 billion in 2022 as the company closes in on annual revenue of $100 billion. Over the next 18 months it expects to launch at least 19 new products.

Key launches this year include vaccines for respiratory syncytial virus (RSV) and meningitis, as well as drugs to treat atopic dermatitis and multiple myeloma – a blood cancer. Pfizer is also pushing ahead with a diabetes and weight-loss product that will be taken orally that is now in clinical trials and could generate annual sales of $10 billion.

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 and spread across a broader temperature range, offering an increase in energy density compared to the best available rechargeable battery cells, and enabling 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 to continue its development of nickel- and cobalt-free solid-state battery cells.

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.

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. This ETF gives broad exposure with an emphasis on income and value.

WisdomTree China ex-State-Owned Enterprises Fund (CXSE) is a smart ETF play and way to gain China exposure without any state-owned enterprises (SOEs).