November 9, 2023

Portfolio Changes: Alibaba (BABA) – Move from Buy a Half to Hold a Half

Smaller Stocks Can Offer Better Value and Higher Upside Potential

With a 29% average annual rate of return over 13 years at Fidelity, Peter Lynch certainly earned his status as a legendary investor.

Recently, Lynch revealed that indexes like the S&P 500 and Nasdaq have been propped up by a handful of high-flying tech stocks. “The truth is, we’ve been in a stealth bear market for a long while now if you don’t count those 10 or so darling mega-caps,” Lynch remarked with his trademark sarcasm.

This thinking can be applied to stocks all over the world and one smaller company I’m researching is Graphene Manufacturing Group (GMG.V), based in Brisbane, Australia.

The company is working on producing graphene from natural gas and hydrogen. This is exciting because graphene-aluminum-ion batteries for EVs and other applications could replace lithium-based batteries. Graphene could be described as a single, one-atom-thick layer of the commonly found mineral graphite. Graphene is the strongest material ever found; it is more than 40 times stronger than diamond and more than 300 times stronger than structural steel.

Next week, I will be at the Benchmark Minerals summit in Los Angeles and there will be many experts to talk to about this graphene technology. If needed, I will send an alert on Explorer stocks and, if I get some confirmation on the above graphene stock, I will be back the following week to write up a complete recommendation regarding this opportunity.

The main reason for the recent stock rally has been the sharp decline of long-term interest rates – the yield on the 10-year Treasury note plunged from almost 5% to 4.5%, a big move from bond markets.

Another news item caught my eye this week. A broad measure of foreign direct investment (FDI) published by China’s State Administration of Foreign Exchange showed a net outflow of $11.8 billion in the third quarter, the first negative quarter since the agency began compiling the data in 1998.

Explorer Stock Update

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.

Explorer Trading Recommendations – need to watch more closely

Alibaba (BABA) shares were again unchanged at 82 this week. Alibaba has many strengths and is still the largest e-commerce and cloud company in China by a big margin. However, I’m concerned that its stock continues to trade at a price-to-earnings multiple that’s only 25% of Amazon’s (AMZN) and only 50% of Microsoft’s (MSFT), so I’m moving it to a hold. Move from Buy a Half to Hold a Half.

BYD (BYDDY) shares went from 60 to 62 this week as China became the world’s leading exporter of EVs and is investing heavily in European production. BYD is also now the second largest producer of EV batteries in the world. Buy a Half.

Exscientia (EXAI) was up in its first week as an Explorer recommendation and is expected to report third-quarter earnings today. Exscientia has the first AI platform clinically validated to improve treatment outcomes for cancer patients and the world’s first AI-designed drugs to enter clinical trials. Buy a Half.

Novo Nordisk (NVO) shares were steady this week as the Food and Drug Administration (FDA) has approved Eli Lilly and Company’s (LLY) Mounjaro, under the name Zepbound, for the treatment of obesity. I have been expecting new competition for these fast-growing markets which is why I have advised taking some profits from time to time. The company reported last week that Ozempic sales rose 46% in the third quarter and that net profit in the quarter jumped 56%. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares were up nicely late last week but ended up unchanged for the week. The world’s largest lithium producer, SQM has a 15.6% forward dividend yield and is looking for a turnaround in lithium prices. Hold a Half.

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares retraced from 119 to 114 in the last week due to lower oil prices, but Conoco also continues to develop its global liquid national gas portfolio with 50% of Port Arthur now under contract. Cash provided by operating activities in the third quarter was $5.4 billion. I’m keeping a buy rating on this stock which is among the lowest-cost oil producers. Buy a Half.

International Business Machines (IBM) shares were up three points this week as it announced yesterday that it is launching a $500 million venture fund to invest in a range of AI companies – from early-stage to hyper-growth startups. Almost 75% of IBM’s revenue comes from software and consulting, and both of those segments produced robust growth during the third quarter. IBM also offers us a 4.5% dividend yield. Buy a Half.

Visa (V) shares were up four points this week as it announced yesterday the launch of a new consulting division to provide clients with insights for unlocking the potential of artificial intelligence (AI) in their businesses. In the last quarter, Visa handled 68.4 billion transactions worth a total of $3.2 trillion, providing net revenue of $8.6 billion. 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 10%. 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 summaries that will not change week to week.

Alibaba (BABA) is one of China’s most well-known brands and the country’s largest e-commerce company. The stock got knocked down over the last few years thanks to a heavy political hand by the Chinese government and a sluggish consumer economy. The shares are now selling at a cheap valuation that barely prices in any future growth, which seems to me unrealistic given all the opportunities for this tech giant to grow beyond its massive consumer platform. Cloud computing and artificial intelligence (AI) are just two examples. This is a contrarian recommendation in a high-quality company.

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 stock is trading way off its high but is in an uptrend – 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 around $700 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 next year.

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.

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.

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 $14.5 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.