November 3, 2022

Portfolio Changes:Oracle (ORCL) – MOVE FROM HOLD A HALF TO SELL

Centrus Energy (LEU) was steady this week as Congress seeks another $1.5 billion in a government funding bill to boost domestic supply of uranium to offset lost Russian fuel.

Ford (F) shares rose 7% this week as its October U.S. sales declined by 10% but electric vehicle (EV) sales rose nearly 120% year over year. It now claims to be the #2 EV seller in America behind Tesla.

Infineon Technologies (IFNNY) pulled back marginally but is still outperforming the semiconductor index due to its focus on auto rather than electronic markets.

Kraken Robotics (KRKNF) finished the week largely unchanged on no news.

Marvell Technology Group (MRVL) was off 4% in its first week as an Explorer stock as the company announced it was planning to lay off some of its research and development team in China.

MP Materials (MP) is scheduled to report third-quarter 2022 results today after the closing bell. The stock has been weak, consistent with my recent warnings that it will be a tough quarterly earnings comparison since rare earth prices have pulled back.

Oracle (ORCL) has come back strongly from its late-September low to close at 75 but I’m moving this to a sell as it now trades at 36 times earnings. A great company but we can find better value in this market.

Sociedad Química y Minera de Chile S.A. (SQM) was down five points to close about 91 despite strong lithium prices and shortages of fertilizer in global markets. Have a 20% trailing stop-loss on this one.

Toyota Motors (TM) was flat at 135 as the company reported a fiscal year 2023 second quarter operating profit of $4.1 billion and earnings per share of 23 cents – below expectations of $5.2 billion and 35 cents, respectively.

Market Brief

Market Rebounds 8% in October But Fed Raises Interest Rates Again

The Federal Reserve yesterday decided to raise interest rates by 0.75% for the fourth straight time since June. A key question for all of us is when will be the end of the Federal Reserve’s campaign to raise interest rates? While today the Fed hinted that a pivot is coming, I believe higher rates will be necessary to tame inflation.

Despite all the hand-wringing, the S&P 500 index was up about 8% in October, led by the energy sector. Also, we need to have some perspective about market performance so far in 2022 by keeping in mind 2020 and 2021, not to mention long-term trends and returns. For example, Harvard’s endowment, which is greatly diversified investing in private equity as well as stocks, lost 1.8% the fiscal year ended in June after a 33.6% gain a year earlier.

Look at how markets have fared since recovering from the painful global financial crisis.

China Stock Market Falters Under Xi Jinping

Another critical question is, Where are China and Chinese stocks are headed? In his speech to the recent Communist Party Congress, President Xi Jinping mentioned Karl Marx 15 times while the word “market” appeared only three times. This pretty much sums up the problem.

A European Union Chamber of Commerce 430-page report summarizes China as now being seen as less predictable, less reliable and less efficient – all leading to a loss of business confidence.

The Golden Dragon index of Chinese companies (PGJ) listed on the tech-heavy Nasdaq, which includes giants like Alibaba (BABA) and Baidu (BIDU), has plummeted to levels last seen before Xi took power 10 years ago. The offshore yuan, which fluctuates more freely than its onshore counterpart, weakened to its lowest value against the dollar since the market began in 2010, before recovering a bit.

Explorer Stocks in Brief

Centrus Energy (LEU) is a nuclear fuel supplier for utilities in the U.S. and abroad and so far this year has new nuclear fuel sales contracts and commitments worth an estimated value of $270 million.

Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. Centrus stock remains a strong buy. BUY A HALF

Ford (F) is making the transition to becoming a leader in both conventional and electric vehicles (EVs). Ford has a forward price-to-earnings ratio of just over 7 with a dividend yield of 4.5%. It continues to see rising demand for its electric vehicles and Ford stock will benefit from $7,500 EV subsidies. Ford remains my favorite conservative stock despite a challenging market and supply chain issues. BUY A HALF

Infineon Technologies (IFNNY) has an advantage on many other semiconductor stocks in that it is focused on auto and industrial markets where shortages and high demand persist, allowing it to raise prices. This stock seems undervalued to me with a price-to-earnings ratio of 12 while the company’s earnings per share is expected to grow 38% this year and cash flow growth is strong. This is still a buy on dips in the market. BUY A HALF

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. BUY A HALF

Marvell Technology, Inc. (MRVL) designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks, processors and devices as they partner with and transition to 5G. The company’s embedded processors and products are cutting edge and already generate $3 billion in annual sales. Marvell expects double-digit growth in both sales and net profit sfor 2022 and is also growing through acquisitions.

Looking ahead, I expect earnings at Marvell could reach more than $3 next year. The company is one of the world’s fastest-growing chipmakers and I expect its share price to recover its momentum. BUY A HALF

MP Materials (MP) is an effective way to play clean tech, defense, semiconductors, and other advanced and emerging technologies. Based on its valuation, MP is moving closer to being rated a buy and is America’s only active rare earth mining and processing site, producing approximately 15% of the rare earth content consumed in the global market in 2021. HOLD A HALF

Oracle (ORCL) is transitioning from a dominant role in software to being a major player in cloud computing. Its recent earnings were strong with cloud infrastructure revenue increasing 58% year over year. Oracle may be offering a better product than Amazon’s cloud and its cost structure is largely fixed, so each additional dollar of revenue earns more profit than the last. This stock has come back nicely from September but has become too expensive based on earnings so I’m moving it to a sell. MOVE FROM HOLD A HALF TO SELL

Sociedad Química y Minera de Chile S.A. (SQM) is a double play on growing demand for both lithium and fertilizer. SQM offers us a dividend yielding 8% and an impressive 12% five-year annualized dividend growth rate. I would keep a 20% trailing stop-loss in place as this stock and lithium prices have had a good run. SQM has a reasonable valuation based on earnings and an impressive 25% return on assets and 60% return on equity. I’m keeping this a hold and encouraging you to take some profits off the table based on your risk tolerance and time frame. HOLD A HALF

Toyota Motors’ (TM) hybrid EV sales jumped 73% last year according to research firm Motor Intelligence. Toyota pioneered hybrid cars in the late 1990s with the Prius, and hybrids, including plug-in cars, accounted for around 20% of Toyota’s U.S. sales in September.

Toyota remains the No. 1 hybrid seller in America, led by a gas-electric version of the RAV4 sport-utility vehicle, the nation’s top-selling hybrid. Toyota leader Akio Toyoda recently told reporters the company could make eight plug-in hybrids with the same number of batteries in a single 320-mile-range EV.

High quality Toyota trades at just 10 times earnings. BUY A HALF

Explorer/ETF Fund Positions

WisdomTree Emerging Markets High Dividend Fund (DEM) offers us a smart asset allocation play with both a high dividend yield and some of the highest quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF covers 17 different emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries with an emphasis on income and value. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends. BUY A HALF