August 11, 2022

Portfolio Changes:
None

What’s Going on with Semiconductors and Electric Vehicles?
Our nuclear energy play, Centrus (LEU), continues to roll, up 18% this past week, while Cloudflare (NET) surged 37% on strong revenue growth and recent recommendation MP Materials (MP) was up 12% in its first week. The Explorer’s play on semiconductors – Infineon Technologies (IFNNY) – is also doing well because it is focused on the auto industry.

Also this week, President Biden signed the $280 billion CHIPs and Science Act. American companies such as Intel and Micron Technology have announced substantial investments in chip manufacturing in an effort to lobby for these subsidies but now announce that they are pulling back as demand for chips used in electronics such as laptops and cell phones is weakening.

Semiconductor stocks are struggling, as Micron became the latest chipmaker this week to fret over a slowdown in demand. Still, Micron announced that it will use “anticipated” government grants and credits to help it invest $40 billion by the end of the decade to build out U.S. semiconductor manufacturing capacity. Most of Micron’s production (chip fabrication) is now done in Japan, Singapore and Taiwan.

Investors have been shunning the sector on concerns that chipmakers are heading into what could be a lengthy sales slump after pandemic years of strong demand. This is also impacting high-margin semiconductor chip designers like Nvidia and AMD and even the stocks of makers of the equipment critical to the production of chips such as Lam Research (LRCX) have been hit hard.

Summing up, of the 10 worst-performing stocks in the Nasdaq 100 this month, at least seven are chip stocks, and the semiconductor index has fallen about 27% this year.

All this just goes to show one why timing is so important to investing in volatile, complex sectors like semiconductors and why government efforts to help them thrive need to be carefully executed, if at all. The same goes for electric vehicles (EV), which is an ecosystem of its own with a lot of moving parts, from batteries to rare earths to charger infrastructure. Here, China is eating the lunch of America, with Europe not all that far behind.

My favorite EV pick, Ford (F), is raising the price of the F-150 Lightning electric pickup due to higher input prices by about $6,000-$8,500, depending on the model, to a starting price of about $47,000–$97,000. Tesla, GM, and Rivian are also boosting prices so that the median regular (gas-powered) car is still about 50% cheaper than a comparable EV. In China, the price gap between a regular car and EV is only about 10%.

EV raw material costs are more than double the average of internal combustion engine vehicle costs, according to AlixPartners. Again, this is a big advantage to China due to its domestic production of tech metals and lower labor costs.

The below image, courtesy of Elements, captures the amazing growth of EVs in the last decade:

In 2011, only around 55,000 electric vehicles were sold around the world and by 2021, that figure had grown to about 7 million vehicles.

Until 2014, the U.S. was the EV leader, but in 2015 China’s EV sales grew by 238% and it grabbed the leading position. China now accounts for about half of global EV sales. China has more than a 100 EV automakers and nearly 300 EV models available for purchase, more than any other country, and it’s also home to four of the world’s 10 largest battery manufacturers.

America and Germany are next, each with sales of around 700,000 EVs in 2021, with Tesla accounting for about half of American sales. Germany hosts some of the biggest EV factories in Europe, with Tesla, Volkswagen, and Chinese battery giant CATL either planning or operating “gigafactories” there.

Portfolio Updates
Centrus Energy (LEU) was up another 18% this week after the company announced quarterly earnings of $2.51 per share, easily beating the Zacks Consensus Estimate of $0.80 per share. This compares to earnings of $0.79 per share a year ago. Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry.

The nuclear power industry is rapidly changing, with a new generation of advanced reactors under development. Centrus provides an integrated solution for meeting the industry’s engineering, manufacturing and fuel needs. The United States has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years. Centrus stock is still trading way off its 52-week high and at just under four times earnings. My original six-month target of 50 looks conservative now. BUY A HALF

Cloudflare (NET) shares were up 37% this week after the previous week’s 20%-plus rise. This week it zoomed from 57 to 79 as the company posted its second-quarter earnings report. Its revenue rose 54% year over year to $234.5 million, beating analysts’ estimates by $7.1 million. Its adjusted net income of $0.3 million and its break-even earnings per share (EPS) also exceeded analysts’ expectations.

Cloudflare consistently delivers impressive revenue results and the correction in this stock in 2022 seems way overdone relative to the company’s track record, market, and potential for growth. I still believe this is a buy since it is still down 40% from its high although some holders may wish to take some partial profits given its recent jump. BUY A HALF

CVS Health Corporation (CVS) shares were steady at 104 as the company raised its outlook for the year after reporting an 11% increase in second-quarter sales. Retail sales were driven by higher prices and increased prescription sales. Overall revenue came in at $80.6 billion, ahead of average analyst expectations for $76.4 billion, according to FactSet.

It was reported that CVS plans on submitting a bid for Signify, which through its software and services aims to help clients like health plans, government programs and other employers shift to value-based payment plans. CVS Health is by revenue the 10th largest company in the world, and its earnings per share has grown 26% each year, compounded, over the past three years. BUY A HALF

Fanuc (FANUY) shares were steady this week. Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. Fanuc is a high quality stock that should be firm with its strong balance sheet with plenty of cash. Fanuc is a play on a clear industrial robotics growth trend and my six-month price target for this low-risk stock remains 25. BUY A HALF

Ford (F) shares were steady this week after last week’s 15% gain on the back of a July report showing U.S. sales climbing 37%. Ford had a 70% bounce in SUV sales while U.S. sales of trucks, which made up just over half of Ford’s U.S. monthly sales, climbed about 20%.

Ford said its electric-car business grew more than three times the rate of the overall EV segment in July – powered by Mustang Mach-E and F-150 Lightning sales.

However, The Wall Street Journal on Tuesday said that Ford plans to reopen its F-150 Lightning electric truck for new orders this week, but will charge significantly higher prices on the vehicle in order to offset increased input costs caused by inflation. Some configurations of the F-150 Lightning are expected to rise between 7% and 18% in price – leading to a base price of $47,000.

Ford is planning to add electric vehicles to its lineup as it seeks output of 2 million electric vehicles globally by 2026. Ford stock still stands out for its value as it trades at just over five times trailing earnings. I encourage you to buy if you have not already done so. BUY A HALF

Infineon Technologies (IFNNY) shares were flat this week after jumping last week after the company reported its latest quarter with 33% revenue growth and increased its revenue forecast thanks to auto-industry demand.

This is in contrast to AMD and other semiconductor companies focused on markets such as the personal-computer business, which have struggled. Global semiconductor revenue, which jumped by more than 26% last year, will increase 7.4% in 2022 and drop 2.5% next year, according to research firm Gartner. This is why it’s better to focus on the areas of the semiconductor industry that are seeing faster growth, like data centers, while auto-focused chips should also continue to be a good market despite supply shortages.

Infineon is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon was founded when the company was divided from its Siemens parent in 1999. The stock is still trading at a discount to its intrinsic value. BUY A HALF

MP Materials (MP) shares were up 12% in their first week as an Explorer recommendation. The company reported adjusted earnings per share (EPS) surging 139% from the prior-year quarter’s levels and generated revenues of $144 million in the second quarter of 2022, reflecting a year-over-year jump of 96%. MP Materials (named after its mining and processing center in Mountain Pass, CA) is the only producing rare earths mine and processor in the United States. At one time in the 1990s it was producing upwards of 40% of the world’s rare earths.

MP has made some interesting news this year. Its first-quarter revenues of $166.3 million represented 50% of revenues from all of 2021. Gross margins in Q1 2022 were 88%, up from 81% in 2021.

The U.S. Department of Defense (DOD) granted MP Materials $35 million to build a heavy rare earths refinery at Mountain Pass. Given the strategic importance of MP Materials, it should continue to have strong government support and an allocation to this stock offers you the following:

• MP is a fundamental way to play clean tech, defense, semiconductors and other advanced and emerging technologies through some of their basic inputs – rare earths.
• As a real asset commodity, MP is a hedge on inflation, and..
• MP can be seen as a strategic hedge on rising tensions in Asia and between the U.S. and China with flashpoints in Asia including Taiwan since China could disrupt rare earth supplies, sending prices sharply higher. BUY A HALF

Oracle Corporation (ORCL) shares were steady as the company renewed a strategic agreement with AT&T that will help give new capacity and capabilities for the company’s database and application workloads running in Oracle Cloud. Oracle and Microsoft (MSFT) recently announced a deeper interoperability of their clouds, allowing customers to more easily run projects across both platforms. My expectations for Oracle are somewhat muted since it is a conservative company with a decent dividend and historically been one of the safest stocks in software. HOLD A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares were up 6% this week to break 100 as lithium is now considered by some as a precious metal.

The challenge will be for the next quarter to keep pace with the company’s last quarter that posted revenues more than four times the comparison with the previous year. Revenue from the lithium segment surged more than tenfold. I suggest you take partial (up to 30%) profits off the table now. The company is also the largest producer of potassium nitrate, used for fertilizer, so SQM is viewed as a fertilizer and lithium play. HOLD A HALF