October 26, 2023

Portfolio Changes: Pfizer (PFE) and Tesla (TLSA) – Move to Sell

Tesla Struggles as China Pushes Back

Over the past month Tesla (TSLA) has struggled as continued price cuts have boosted sales but narrowed profit margins. It is also failing to live up to its brand as more than just a maker of electric cars (EVs).

Higher interest rates are eating into EV demand. Competition is catching up as Tesla last launched a new passenger vehicle in 2020.

In October, BYD (BYDDY) outsold Tesla for the first time.

Elon Musk recently revealed that the much-awaited Cybertruck won’t make a “significant” contribution to Tesla’s bottom line until 2025.

In short, Tesla’s dominance is no longer guaranteed. Tesla’s stock has roughly doubled in 2023 but has pulled back sharply of late, especially after earnings. Its market cap of $675 billion still makes it the equivalent of roughly the top 9 global carmakers combined.

Based on the above, while I’m going to continue to follow the company closely, we need to remove it from the Explorer’s recommended list.

Meanwhile, Novo Nordisk (NVO), the manufacturer of Wegovy, continues its strength and expects to earn $4 billion in revenue this year. The company’s other drug, Ozempic, is expected to bring in $11 billion. The drugs are driving such a bonanza that they together account for almost all the latest economic growth in Denmark, their home country.

On the U.S.-China rivalry front this past week, a Chinese coast guard ship collided with a Philippine boat on international waters in the contested South China Sea. The U.S. and Philippines have been mutual defense treaty allies since 1951, so this is significant.

China’s Ministry of Commerce also announced it would require foreign companies to apply for permits to receive shipments of raw and synthetic graphite, citing national security concerns. Chinese officials also recently limited the export of two minerals, gallium and germanium.

Chinese authorities also launched tax and land-use investigations into Taiwan’s Foxconn, the world’s largest contract electronics maker. Foxconn factories assemble about 70% of Apple iPhones. This is another shot across the bow and a warning that if relations between China and the U.S. get worse, U.S. companies like Apple might be caught in the crossfire.

Complicating matters is that Foxconn founder Terry Gou is currently running for president in Taiwan.

Finally, I had planned to put forward Dole Inc. (DOLE) as a recommendation this week but research over the past week makes me pause and I will instead put it on my watch list. It trades under book value, but I it has limited near-term upside growth and some regulatory issues.

Dole is an Irish-American agricultural multinational corporation, which despite being headquartered in Dublin, was founded in Hawaii in 1851.

Last year, it reported an annual revenue of $9.2 billion, making it one of the biggest agricultural companies in the U.S. With 114,000 acres of farmland, the company also has more than 250 processing plants and distribution centers across the world.

Next week, I plan to recommend a play on artificial intelligence (AI), an emerging and exciting area of focus for the Explorer.

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 steady this week as the company launched its Singles’ Day campaign. Within an hour after its presales started, Alibaba’s Taobao and Tmall Group’s mainland platforms recorded a more than 200% year-on-year increase in turnover for 1,300 brands, while sales of nearly 700 brands grew better than five times, according to the company. The good news is that a recovery in consumer spending in China may be underway and shares trade at a cheap valuation of less than 10 times this year’s consensus earnings estimate. Buy a Half.

BYD (BYDDY) shares were off a couple of points this week to close at 61. At its first showing at the Tokyo Motor Show, its SEAL, a low-priced pure electric sporty sedan, was a focal point of the show. The Yangwang, BYD’s premium electric vehicle, showcased its inaugural model which sells for close to $150,000. Buy a Half.

Novo Nordisk (NVO) shares were quiet this week as the company continues to capture attention in the marketplace. The company indicated one of its diabetes treatments could also be used to treat chronic kidney disease. Novo’s Ozempic and another drug, Wegovy, both contain semaglutide, which regulates blood sugar and insulin. It also reduces appetite and causes the stomach to empty more slowly, so that a person feels fuller faster. Hold a Half.

Sociedad Química y Minera de Chile S.A. (SQM) shares gave back three points this week to finish at 51. It is the biggest producer of lithium chemicals followed by China’s Ganfeng Lithium. SQM has a 14.6% forward dividend yield, and its balance sheet is also in solid shape. Buy a Half.

Tesla (TSLA) shares have nose-dived from 246 to 212 in the last month. Based on the reasons explained at the beginning of this update, I’m going to continue to follow the company closely, but am removing it from the Explorer’s recommended list. Move From Buy a Half to Sell.

Explorer Multinational Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares, after some big gains, retraced from 125 to 120 this week as it could be the next U.S. energy company looking to make a big acquisition, according to KeyBanc analysts. 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 were up as the company recorded $6.3 billion in software sales, up 7.8% from the third quarter in 2022. The number edged past Wall Street estimates. Revenue from software provider Red Hat climbed 9%, the company said. IBM acquired Red Hat for $34 billion in 2019. The stock is not particularly expensive, trading at just 12 times free-cash-flow guidance. Buy a Half.

Pfizer (PFE) shares have been a disappointment and the market is not being patient with its efforts to rebuild post pandemic. While I think this idea will work out over the medium term, this stock has fallen through our stop-loss and so I’m moving this to a sell. Move from Hold a Half to Sell.

Visa (V) shares held their ground in the face of regulatory efforts to limit swipe fees as the world’s biggest credit card and payments company said consumer spending continues to hold up well amid an ongoing boom in domestic and international travel. Over the last five years, Visa has invested more than $10 billion in cutting-edge technology to keep payments safe. 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.

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 twelve 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 arch rival MasterCard. This leaves it much better poised to outperform the latter going forward.