March 30, 2023

Portfolio Changes: None

The Return of Jack Ma and the Overhaul of Alibaba

BYD (BYDDY) reported great earnings, and Novo Nordisk (NVO) got a lift from the World Health organization this past week – but the big news is that Alibaba (BABA) surprised markets by announcing on Tuesday a plan to split the $220 billion goliath into six standalone units.

Each one will individually be responsible to raise capital and explore initial public offerings. This is consistent with Beijing’s aim of carving up the country’s tech titans to diminish their power while potentially unlocking billions of dollars in shareholder value to spur economic growth.

Alibaba (BABA) shares reacted positively to the news as investors welcomed a respite from the years-long regulatory crackdown from the mandarins in Beijing.

Over the last decade and more, Alibaba and Tencent have invested in hundreds of startups, from consumer internet to transportation to grocery delivery. This has given these companies great market power akin to Amazon or Google.

The return of Jack Ma might be one of Beijing’s best chances at repairing its reputation with the private sector in China and beyond. But will Mr. Ma play along or stay silent after virtually disappearing from public life after critiquing Chinese regulators in a 2020 public speech in Shanghai?

The Chinese government has since cracked down on key sectors from real estate to education while the global business community has grown deeply skeptical of Beijing’s interference. And the Xi Jinping-led crackdown on the internet sector has wiped out more than $500 billion of its value. For example, the Chinese government recently exerted control over Alibaba by taking a so-called “golden share” in its media business unit. Mistrust will linger and will need to be earned back.

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) lost a little ground this past week and is down over the last month. While not profitable, the company has reached gross margins of 50% and expects revenue growth of about 20% this year so we will give this idea a bit more time to develop. One issue I’m looking into is the quality of the image of its core product produces. Hold a Half.

BYD (BYDDY) shares jumped from 53 to 56 this week as it reported a strong quarter yesterday with quarterly profit for the fourth quarter of $1.06 billion equivalent, up from $87.4 million (yes, million) a year earlier. That represents better than an 11-fold increase, year over year. Gross margins for BYD increased to 20.3%, up from the 3.7% it notched a year ago. For all of 2022, BYD delivered 1.86 million EVs (electric and plug-in hybrids) in China for a nearly 30% of all new-energy vehicle sales in the country. Buy a Half.

Corteva (CTVA) shares added a point again this week to close just under 60. The company announced that it is collaborating with Chevron Corp. and Bunge Ltd. to produce renewable fuels from canola crops. Corteva is a product of the DowDuPont merger and its subsequent breakup. Hold a Half.

Kimberly-Clark de México (KCDMY) shares were up marginally in their first week as an Explorer recommendation. Kimberly-Clark de México was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB), was founded in as a paper company in Neenah, Wisconsin in 1872. Buy a Half.

Kraken Robotics (KRKNF) shares were basically unchanged again this week. Incoming management needs to unlock the value of this small maritime and defense company and make a better effort on the investor relations front to get this story on the radar screen of more investors. It remains a buy for aggressive investors. Buy a Half.

Novo Nordisk (NVO) shares added another 5 points this week to follow the 10-point gain last week. The World Health Organization (WHO) will consider adding obesity treatments to its “essential medicines list,” in a decision that could boost the stock. Novo Nordisk’s revenue in 2022 jumped by 26% year over year and it plans to increase production of the weight loss drug Wegovy. Hold a Half.

Polestar (PSNY) shares were up a bit this week to 3.6 after last week’s disappointing performance. Certainly, a lot is riding on the Swedish EV-maker’s release of the Polestar 3 SUV backed by Volvo and China’s Geely. The company has high expectations that sales volume will increase by 60% this year to 80,000 units. For 2022, total revenue increased of 84% year on year. Buy a Half.

Explorer ETF/Fund Positions

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 smart ETF play and 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.

However, if your doctor has the Butterfly iQ+ in their pocket, he (or she) just connects it to an iPhone, it scans your body and has a digital image right in front of him. Plus, 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 in the U.S., European, and Asian 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.

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 French drug giant, Germany’s Bayer, and Japan’s Sumitomo Dainippon.

Kimberly-Clark de México (KCDMY) was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB), was founded as a paper company in Neenah, Wisconsin in 1872. According to consultant Alix Partners, Mexico has surpassed China as the lowest cost country in the world for companies looking to manufacture products for North American markets. Mexico’s wages are now about 25% lower than in China and coupled with lower taxes and tariffs, this all adds up to a competitive edge.

Kraken Robotics (KRKNF) is probably the most speculative of Explorer stocks, but it is a well-run company and a prime takeover candidate in the growth defense sector, coupled with a strong management team. Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software-centric sensors, and underwater robotic systems.

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.

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. By the end of this year, the company plans that its cars will be available in 30 markets. Polestar cars are currently manufactured in China, with 2024 manufacturing planned in America. Polestar has an edge on much of the competition for two reasons. 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.

Explorer ETF/Fund Positions

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).