September 14, 2023

Portfolio Changes: Umicore SA (UMICY) – Move from Hold to Sell

Tesla up 10% as Musk and Tech Titans Meet to Discuss Artificial Intelligence

This was an interesting week with news ranging from inflation to AI, tech struggles between the U.S. and China, and Tesla’s edge in terms of labor costs.

On Capitol Hill in Washington, Elon Musk, Mark Zuckerberg and Bill Gates and others worth an estimated $500 billion, according to Forbes, met for a closed-door Senate summit on AI.

Consumer prices rose 0.6% in August, the largest increase since June of 2022. An 11% jump in gasoline prices was the main problem, which led to a fall in average real earnings.

The Chinese government is using a carrot of “integrated development zone” linking Fujian province and Taiwan, including encouraging Taiwanese companies to list on Chinese stock exchanges.

While the vast majority of iPhone 15s still come from China, Apple plans to make the India-built iPhone 15 available in some other regions on the global sales debut day. The Chinese government is banning the iPhone and other foreign-branded devices from use by workers at government agencies and perhaps other state-owned enterprises and other government-backed entities. Meanwhile, Chinese tech giant Huawei surprised markets with a new mobile phone reportedly delivering 5G-like speed, despite a U.S. ban on the type of advanced chips typically necessary for such devices.

Trade data suggests that China will become the world’s largest car-exporting nation this year, passing Japan. China’s dominance in electric vehicle sales (60%) and manufacturing is leading the trend.

Lastly, not to be a killjoy, but the U.S. Federal government will run a deficit of around $2 trillion for the fiscal year that ends in just over three weeks…

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 were off two points in the stock’s first week back as an Explorer recommendation. Alibaba stock is trading about 10 times forward earnings estimates and might be on the verge of a long stretch of profitable growth. This is a contrarian recommendation in a high-quality company selling way off its high. Buy a Half.

BYD (BYDDY) shares gave back the point they earned last week as Europe tries to push back a bit on a surge of imports of Chinese EVs. BYD remains confident of selling 3 million EVs this year despite economic challenges and an intense EV price war. Buy a Half.

Neo Performance (NOPMF) shares were flat this week as some of the company’s resource product prices are under pressure. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys. Buy a Half.

Novo Nordisk (NVO) shares were off 2% after announcing a two-for-one split for the first time in a decade. The company announced a share repurchase program as well. As Europe’s most valuable company, this pharmaceutical giant reported last month that profits surged 43% in the first half of 2023. Hold a Half.

Tesla (TSLA) seems to be winning the global EV price war as shares were up 10% this week. Tesla currently makes vehicles at an estimated labor cost of $45 to $50 per hour, whereas the Detroit Big Three make vehicles for about $64 to $67 per hour making ongoing UAW (United Auto Workers) labor negotiations critical. In further news, Tesla’s Dojo supercomputer could add up to $500 billion to its market value, according to Morgan Stanley, which raised their price target to $400 a share – thus, the 10% bump in the share price. Buy a Half.

Umicore SA (UMICY) shares were flat again this week so following last week’s downgrade, I’m moving this to a sell. The chart does not inspire confidence and given current weak commodity markets, we will move on to a new idea next week rather than wait for a turnaround in prices. Sell.

Explorer Multinational Blue-Chip Recommendations – More Buy and Hold

ConocoPhillips (COP) shares are up 20% over the last six months. The company is among the lowest-cost producers and delivers a relatively strong cash flow. Buy a Half.

International Business Machines (IBM) shares were off one point at 147 on no news. IBM’s target cloud markets are expected to reach $262 billion by 2027. Last week, IBM unveiled Watsonx, a cutting-edge enterprise-focused AI and data platform designed to harness the power of advanced AI capabilities for businesses. Free cash flow is expected to exceed $10 billion in 2023. Buy a Half.

Pfizer (PFE) shares were unchanged as the FDA approved its updated Covid shot. It is spending $43 billion to acquire cancer treatment specialist Seagen (SGEN). Hold a Half.

Visa (V) shares again gained a couple of points this week as an internal report showed trends toward a higher proportion of digital, cross border, and paperless transactions. The global payments industry has promising growth prospects as the Boston Consulting Group predicts the industry will experience 8% annual revenue growth to reach $3.3 trillion in annual revenue by 2031. 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. Alibaba might be on the verge of a long stretch of profitable growth over the next decade. Investors are getting a bargain on one of the world’s leading technology firms.

This is a contrarian recommendation in a high-quality company selling way behind its high and presents us with attractive upside potential despite all the concern regarding Chinese economic growth.

BYD (BYDDY): In 2022, China auto giant BYD (for Build Your Dreams) 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.

Neo Performance (NOPMF) manufactures the building blocks of many modern technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to the performance of many important products and emerging technologies. Based in Toronto with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

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.

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