October 12, 2023

Portfolio Changes: None

America Slips and Brazil Soars as a Food Superpower

I will be out next week but will be watching Explorer stocks and will send updates as necessary with third-quarter earnings season getting underway.

This was an encouraging week for Explorer stocks with almost all making gains and Novo Nordisk (NVO) shares up 10%. Chile’s lithium and food fertilizer play, Sociedad Química y Minera de Chile S.A. (SQM), also got off to a nice start in its first week as an Explorer recommendation.

America has been the world’s top exporter of corn, soy, and wheat for the past seven decades and has been justifiably proud of being the breadbasket of the world. So, for many Americans, it will come as a bit of a surprise that America is now facing a future of agricultural trade deficits as it imports more food than it exports.

The shortfall for this year is estimated at $19 billion and is expected to jump to almost $28 billion in 2024, according to Agriculture Department forecasts.

Why? You can pick from the following menu: a strong dollar that makes exports more expensive and imports cheaper, a more diverse food diet with America’s taste growing for imported food and beverages from avocados to wine, and, finally, greater availability of fertilizer and plant nutrients.

What does America lose when it stops being the world’s leading food supplier? A bit of its self-identity and its superpower food brand.

It also impacts America’s global influence and soft power since agricultural exports can be a tool in dealing with foreign governments that are reliant on U.S. commodity crops. Countries tend to want to keep the food supplies flowing so as America’s grip on vital agricultural supply chains has slipped, our power is displaced as other nations with different agendas take its place.

If you check where Russia exports its grain, you can see what countries didn’t sign the U.N. resolution against Russia for its invasion of Ukraine.

Here is how the United States now stacks up against the global competition:

· 1/3 of global soybean exports, now moving only half the volume of Brazil;

· the U.S. is in fourth place as a wheat exporter, far behind #1 Russia;

· U.S. agricultural exports to China have gone down from 27% of their total food imports in 2009 to about 17% in 2022.

Brazil has become an agricultural superpower driven by lots of arable land, a good climate, and better export infrastructure such as railways, port terminals, and barge fleets.

Believe it or not, it now costs roughly the same to ship a ton of soybeans to China from Brazil as it does from Iowa.

Weekly Explorer Stock Updates

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 jumped to 87 from 83 this week as Beijing considers increasing fiscal stimulus to boost consumer spending. Over the last 10 years, Alibaba grew revenue 36% per year on average, but post-pandemic Alibaba’s revenue slowed to an increase of just 2% year over year. The good news is that a recovery in consumer spending may be underway and shares trade at a cheap valuation of less than 10 times this year’s consensus earnings estimate. But a Half.

BYD (BYDDY) shares reached 62 this week as the company battles Tesla, which still leads BYD in EV sales globally. This could change in the fourth quarter as BYD ramps up exports and takes advantage of its greater range of EV offerings, ranging from $10,700 to $150,600. Buy a Half.

Novo Nordisk (NVO) shares continued their bull run, up 10% this week after the company indicated one of its diabetes treatments could also be used to treat chronic kidney disease. This is great news for Novo Nordisk as it would expand the potential treatment applications for its diabetes and weight loss drugs into a massive incremental total addressable market in kidney disease. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares were up three points in their first week as an Explorer recommendation. SQM’s 14.6% forward dividend yield is a big bonus, and the stock is also trading about five times forward earnings estimates. SQM’s balance sheet is also in solid shape. Buy a Half.

Tesla (TSLA) shares followed last week’s 20-point gain with a four-point pullback this week. Tesla announced plans to build an EV plant in northeastern Mexico that will make the next generation vehicle, and a huge selling point for a made-in-Mexico cheap Tesla is that it could benefit from the $7,500 IRA tax credit. This is on top of plans to build a new EV factory in India that would produce an EV priced around $24,000. The base Tesla Model 3 sedan now costs $38,990 – $8,700 less than the average amount paid for a car or truck in the U.S. Buy a Half

Explorer Multinational Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares soared this week on higher oil prices in part driven by the turmoil in the Middle East. Feel free to take some partial profits but I’m keeping a buy rating on this stock which is among the lowest-cost oil producers and delivers a relatively strong cash flow. Buy a Half.

International Business Machines (IBM) shares added three points to reach 143 this week. IBM’s hybrid cloud-computing effort is anchored by Red Hat’s software platform with the goal to help companies save money and simplify operations. IBM’s consulting provides guidance and know-how, and its software arm provides the underlying platform. The stock is not particularly expensive, trading at just 12 times free-cash-flow guidance. Buy a Half.

Pfizer (PFE) shares were steady at 33 this past week. Post-pandemic, Pfizer will likely use its $40 billion cash stockpile to continue to make strategic biotech acquisitions. Pfizer’s goal is to add $25 billion in revenue by the end of the decade. Hold a Half.

Visa (V) shares were up three points this week after the company recently reported net revenue of $8.1 billion with 62% operating margins. Over the last five years, Visa has invested over $10 billion in cutting-edge technology to keep payments safe for consumers and businesses around the world. The company claims to have helped to prevent $30 billion in fraud in the first six months of 2023 alone. 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.

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.

Pfizer (PFE) served more than a quarter of a billion patients that 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.

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.

Tesla (TSLA) has always confused investors and Wall Street analysts alike. One reason is that it often has valuations that are, many times higher than its auto industry peers. What many miss is that it is not an auto stock but rather a tech stock and platform stock. Tesla’s value is really in its ever-expanding platform, AI capabilities, charging infrastructure, battery manufacturing, autonomous driving capability, and other areas ripe for disruption that nobody even knows Tesla is working on. Revenues have scaled from $32 billion in 2020 to $54 billion in 2021, to $81 billion in 2022, and are set to move past $100 billion in 2023.

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.