August 25, 2022

Portfolio Changes:
CVS (CVS) from Buy to Sell

The U.S. Dollar is King
This rise of the U.S. dollar against the yen, euro and pound as well as most other currencies in the world is a mixed blessing for investors. You can take your capital gains and head to Europe or Japan for a trip and imported goods will be cheaper. On the other hand, American companies and stocks will be hurt by their exports being more expensive to overseas buyers and their overseas earnings will be worth less in U.S. dollars when brought back to America.

A former hedge fund king – Julian Robertson of Tiger Management – passed away this week. He was a big deal and was a client of mine in the early 1990s. Robertson was a great stock picker with Kidder Peabody before forming Tiger and had a big personality and extensive network of advisers.

I recall that he managed holdings aggressively, removing good companies to make room for better ones, not risking more than 5% of capital on one bet, and not overreacting to bumps in the market. Unfortunately, Robertson did not understand tech and started making bets in bonds and foreign exchange in the late 1990s. A bet on the yen in 1998 went bad and hit his fund hard, especially when the tech bubble burst in 2000, with Tiger’s assets plummeting from $21 billion to $6 billion because of losses and investor withdrawals. He later sponsored a number of “Tiger Cub” start-up funds and over his life contributed more than $2 billion to charity.

As for the Explorer portfolio, we are selling CVS (CVS) this week given its potential opioid lawsuit liability and that Amazon has emerged as a stiff competitor to its strategic plan to widen its footprint in healthcare. Amazon already grabbed One Medical and is now moving in on Signify Health (SGFY), an $8 billion deal that CVS thought it had in the bag. CVS is still a great company but will either grow a little slower or pay more for acquisitions.

Portfolio Updates

Centrus Energy (LEU) shares were up 15% yesterday and for the week regained its price of 46 after recent strong earnings beat expectations. Net income of $37.4 million tripled year over year on revenue of $99.1 million in Q2 2022. In addition, its long-term order book is approximately $1.0 billion and the company secured more than $135 million in new sales contracts and commitments so far in 2022.

Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry and 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. Nuclear power provides more than 50% of U.S. emission-free energy, and more than all other sources such as wind, solar and hydroelectric, combined, according to the Department of Energy. Centrus stock is still trading way off its 52-week high and at less than four times earnings. BUY A HALF

Cloudflare (NET) shares were off again this week following their recent 39% surge as the company recently posted a strong second-quarter earnings report. Its revenue rose 54% year over year to $234.5 million. Cloudflare offers free services to anyone, but it makes around 60% of its revenue from large customers that spend at least $100,000 annually. Cloudflare gained a record 212 new large customers in the second quarter. I still believe this is a buy since it is still down 48% from its high. BUY A HALF

CVS Health Corporation (CVS) shares were fairly steady this week but I’m selling CVS (CVS) given its potential opioid lawsuit liability and the fact that Amazon has emerged as a stiff competitor to its strategic plan to widen its footprint in healthcare.

Amazon already grabbed One Medical and is now moving in on to Signify Health, an $8 billion deal that CVS thought it had in the bag. CVS is still a great company but will either grow a little slower or pay more for acquisitions. MOVE FROM BUY A HALF TO SELL

Fanuc (FANUY) shares drifted down one point this week on no news.

Fanuc is a sleep-well-at-night stock as 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. FANUY 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 as the company announced that it would downsize its workforce by 3,000 employees as part of an intensive cost reduction and restructuring plan. Most of the reduction will be in the United States, Canada and the Ford Business Services operation in India. Of the 3,000 employees, 2,000 are salaried.

Last week, Ford issued $1.75 billion in green bond financing that would fund clean-transportation projects, including the design, development and manufacturing of electric vehicles in North America. July U.S. sales climbed 37% and Ford had a 70% bounce in SUV sales while U.S. sales of trucks climbed about 20%. 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

Freeport-McMoRan (FCX) shares were up marginally in their first week as an Explorer recommendation. The Phoenix-based global mining giant operates seven open-pit copper mines in North America, many of which also produce molybdenum, gold, and silver. All but one of its North American copper mines is wholly owned, and Freeport-McMoRan holds 72% of the joint venture on the last one. Freeport-McMoRan also owns two copper mines in South America and one of the world’s largest copper and gold mines in Indonesia (Grasberg).

Freeport’s current share price presents an opportunity because the stock has pulled back a bit with the price of copper and concern about global growth. Freeport is a well-run company with a return on equity of 27%, return on assets of 12%, and has an ample cash reserve of $9.5 billion.

With a valuation of just under 10X earnings, I think we have upside potential to about 40 so I recommend building a half position in the stock. BUY A HALF

Infineon Technologies (IFNNY) shares were down two points to 25 this past week after the company recently posted its latest quarterly results, with 33% revenue growth and an increased revenue forecast thanks to auto-industry demand. This is in contrast to other semiconductor companies focused on markets such as computer laptops and cell phones. 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. BUY A HALF

MP Materials (MP) shares edged up in their first week as an Explorer recommendation. The company recently reported 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 is a way to play clean tech, defense, semiconductors and other advanced and emerging technologies through some of their basic inputs – rare earths. Unfortunately, as of now MP ships its concentrate to refineries in China but the company plans to develop domestic refining capability. Earlier this year the Department of Defense gave MP a $35 million contract to refine heavy rare earth elements at the company’s site in Mountain Pass, California. BUY A HALF

Oracle Corporation (ORCL) shares were off 2% this week as the tech sector was down overall. Oracle and Microsoft recently announced a deeper cooperation of their clouds, allowing customers to more easily run projects across both platforms. Oracle is a conservative company with a decent dividend and has historically been one of the safest stocks in software. Will keep it a hold for now. HOLD A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares were up 6% this week to recover to over 100 and move ahead of their 200-day moving average. SQM’s earnings for the second quarter were $3.01 per share, an increase of 857% compared to 0.31 per share for the second quarter of 2021. Revenues totaled US$2,598.8 million for the second quarter 2022, an increase of approximately 342% compared to US$588.0 million for the second quarter of 2021. It will be tough to maintain this blistering pace in the next quarter considering the company posted revenues more than four times the comparison with the previous year as lithium prices jumped. Keep in mind that SQM is a double play as the company is also the largest producer of potassium nitrate used for fertilizer. HOLD A HALF