October 20, 2022

While Corporate Earnings are Above Expectations, Chip Stocks Swoon

Explorer stocks were all up this week though it is not clear we are out of the woods yet. Sociedad Química y Minera de Chile S.A. (SQM) jumped from 83 to 90, Infineon Technologies (IFNNY) shares had double-digit gains, and Kraken (KRKNF) was up 8% yesterday and almost 20% over the last two weeks as smaller stocks are in favor.

Remain cautious but take advantage of high-quality stocks trading substantially off their recent highs. Corporate third-quarter earnings in general have beaten expectations thus far, buoying stocks highlighted by companies from United Airlines and Netflix to Johnson & Johnson and Goldman Sachs.

A strong dollar is pressuring riskier assets, inflation keeps hitting numbers on the upside, and the Fed continues to tighten. Stocks rallied a bit this week and so far this year, Tesla (TSLA), Apple (AAPL), and Advanced Micro Devices (AMD) have captured the most buying interest among individual investors even as they underperform. The latter company’s stock, AMD, is trading at about one-third of its 52-week high.

There are now three types of semiconductor chips: memory chips, logic chips and geopolitical chips. Since July, the 30 biggest chip firms have cut revenue forecasts for the third quarter, from $99 billion to $88 billion.

Laptops and smartphones account for about half the $600 billion worth of chips sold annually. So far this year more than $1.5 trillion has been wiped from the combined market value of American-listed semiconductor-related companies. Job losses are following. Bloomberg reports that Intel plans to lay off thousands of staff following a string of poor results that are likely to continue.

The reverse of the strong dollar are the travails of some other major currencies such as the Japanese yen and the British pound. American tourists are pouring into London to take advantage of the purchasing power of the strong greenback. Look at the below chart from The Economist, of the British pound’s long decline—and plan your trip soon.

Despite the headwinds the U.S. market is currently battling, many overseas markets have grossly underperformed on a relative basis over the last decade. Take Hong Kong’s Hang Seng index, which has broadened its holdings with 77% of its holdings now mainland Chinese companies.

Finally, the Chinese Communist Party’s 20th National Congress began on Sunday and based on Xi Jinping’s two-hour speech at the opening, we’ve learned that Mr. Xi doesn’t intend to change course. In short, repressive at home and more aggressive abroad. Xi has concentrated more power in his hands than any Chinese leader since Mao Zedong.

It appears that the Chinese people and the 96 million that are members of the CCP are supportive primarily due to tremendous economic progress over the last four decades.

According to a World Bank report, 800 million Chinese were pulled out of poverty over the past 40 some years. At age 69, Xi is a lock to be appointed to a third five-year term by a unanimous vote.

Portfolio Updates

Portfolio Changes:None

Centrus Energy (LEU) shares got back over 40 this week on relatively low volume. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins that are above 50% so far this year with 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 is still trading way off its 52-week high and at less than four times earnings so this stock remains a strong buy. BUY A HALF

Ford (F) shares picked up a point this week but the stock still has a forward price-to-earnings valuation of just over 4 with a dividend yield of 5%. Therefore, Ford remains my favorite conservative stock despite a challenging market and economy.

Ford continues to see rising demand for its electric vehicles which tripled (+197.3%) from last year, as the automaker looks to hit its goal of a 600,000 run rate by the end of 2023, according to Eletrek. The company is working on its Blue Oval EV manufacturing hub in Tennessee. It’s also planning to build a new facility in Kentucky, which will include EV vehicles and battery assembly. Ford stock will benefit from big $7,500 EV subsidies and is still a buy. BUY A HALF

Infineon Technologies (IFNNY) shares had double-digit gains this week to get back on track.

Infineon 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 11, compared with 16 for the semiconductor industry. The company’s earnings per share are 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) shares were up 8% yesterday and 12% for the week after the company made a presentation at an investment conference. Kraken’s COO made this statement at the conference:

“Over the past few months, Kraken has seen continued momentum in orders across all its product and service offerings including a $9 million mine hunting contract from a NATO navy; $6 million of synthetic aperture sonar sensor orders; more than $3 million for sub bottom cable imaging; and a $1 million follow on subsea battery order.”

This is probably the most speculative of Explorer stocks but small caps and micro-caps are outperforming their big brothers. Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software-centric sensors and underwater robotic systems. Though a micro-cap stock, Kraken is a well-run company and a prime takeover candidate in the growth defense sector with a strong management team. BUY A HALF

MP Materials (MP) shares gained some ground this week and probably won’t do much until rare earth prices recover their momentum or China responds to advanced semiconductor export restrictions with tit-for-tat restriction on American companies’ access to rare earths. This stock 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 at a current price of 30 is sharply down from the 56 it traded at in early April of this year. HOLD A HALF

Oracle (ORCL) shares gained four points this week and the company’s recent relative outperformance is based on the growth in cloud computing and its impressive recent earnings, with cloud infrastructure revenue increasing 58% year over year. Oracle may be offering a better product than Amazon’s cloud product and one advantage for Oracle is that its cost structure is fairly fixed, so each additional dollar of revenue earns more profit than the last. Despite all these positives, Oracle’s shares are still a hold until market sentiment improves. HOLD A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares jumped from 83 to 90 this past week. Lithium prices are quite high, up about 500% over the past year – unlike many other commodities. Demand is also strong, but I would put in place a stop-loss around 80 to be on the safe side. SQM offers us a dividend yielding 12.5% and an impressive 12% five-year annualized dividend growth rate. In addition, SQM is also one of the largest producers of potassium nitrate used for fertilizer, so the stock has two drivers of revenue and profits. HOLD A HALF

Toyota Motors (TM) shares were steady in their first week as an Explorer recommendation.

Hybrid sales jumped 73% last year, according to research firm Motor Intelligence. Toyota pioneered hybrid cars in the late 1990s with the Prius, which quickly became a strong seller allowing auto makers to meet tightening regulations on emissions in the U.S. and abroad.

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.

Toyota has an edge in this global market where one size does not fit all consumers. Hybrids, including plug-in cars, accounted for around 20% of Toyota’s U.S. sales in September but the company said that rate could have been double if not for supply chain issues. For example, Longo Toyota in El Monte, California, has around 1,500 orders for the hybrid RAV4, a backlog of more than a year. Besides the hybrid edge, the second reason to look at Toyota right now is that the yen’s sharp fall is boosting sales and profits at top Japanese companies. In this sort of volatile market, putting some cash in high quality Toyota seems right as it trades at just 10 times earnings at about 133 – down from a 52-week high of 213. I have a price target in the next six months of about 175, which is doable if the market stabilizes. BUY A HALF

Explorer ETF/Fund Update

WisdomTree Emerging Markets High Dividend Fund (DEM) was up marginally this week and sports a 10% dividend yield. 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. In addition, it holds some of the cheapest quality stocks in the world with an average price-to-earnings ratio of just 5. BUY A HALF