Portfolio Changes:
None
Is More Industrial Policy a Good Idea for U.S. Stocks?
There are a lot of high-quality stocks trading at value prices out there. For next week’s recommendation, I’m looking at semiconductor companies worldwide and will try to pick the stock with the most upside and lowest downside risk. This is as Congress wrangles over the $52 billion CHIPS act to support the domestic semiconductor supply chain.
The United States has a long history of industrial policy going back to our first Treasury Secretary Alexander Hamilton, who promoted using subsidies and tariffs to launch America’s frontier economy.
Federal spending has been critical to many U.S. industries beyond defense and aerospace including Silicon Valley, biotech, big pharma, oil and gas, and most recently electric vehicles. $16 billion was spent on Operation Warp Speed, the push to develop the Covid vaccine, and $6 billion was allocated in funding for the Infrastructure bill to develop the domestic battery industry.
Many argue that this is a waste of taxpayer money and it isn’t the government’s job to pick winners and losers. It seems, though, industrial policy is back primarily due to the U.S.-China rivalry and it is estimated that China spends about five times more on industrial policy than America.
An excellent example of this approach was the founding of Taiwan Semiconductor (TSM), now the world’s leader in producing microchips with complete domination specifically in high-performance microchips.
The founding CEO of Taiwan Semiconductor, Morris Chang, was born in China and earned his bachelor’s and master’s degrees in mechanical engineering from the Massachusetts Institute of Technology, became a U.S. citizen, and then spent a quarter century working at Texas Instruments, with responsibility for its worldwide semiconductor business. Texas Instruments also sent him to Stanford University, where he was awarded his doctorate in electrical engineering
TSM was formed when the Taiwanese government persuaded the Dutch multinational conglomerate Philips to partner alongside several local private firms to start a chip foundry in 1987 while providing half of the start-up costs. The Taiwanese government invested 21% of the start-up capital, Philips contributed 28%, and other private investors provided the rest.
Both Intel and Texas Instruments were invited to invest in TSM at its founding but declined to participate. What a blunder.
In 1997, Taiwan Semiconductor listed its stock on the New York Stock Exchange and now makes 12 million semiconductor wafers a year and has over 50,000 employees and 90% of the global market for advanced semiconductor chips.
And now Intel (INTC) maneuvers for federal money to subsidize new fabrication technology, from the CHIPS Act legislation for $52 billion in subsidies that’s now advancing through the U.S. Congress.
Portfolio Updates
Centrus Energy (LEU) was flat in its first week as an Explorer recommendation. Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, and Belgium. America has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years.
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.
One near-term catalyst for this stock is that the Biden administration is pushing lawmakers to support a $4.3 billion plan to buy enriched uranium directly from domestic producers to wean the U.S. off Russian imports of the nuclear-reactor fuel. In addition, the stock is trading way off its 52-week high of 88 and at just 2.8 times earnings. Centrus also has an operating margin of 23%. I believe downside risk is low and upside significant and I have a six-month target of 50—nearly 100% upside to the current price. BUY A HALF
Cloudflare (NET) shares dipped from 50 to 46 this week. It will report its financial results for the second quarter after the U.S. market closes on August 4. Cloudflare provides content delivery and security services to more than 19% of websites on the internet; the next best is at 2%. Cloudflare consistently delivers impressive financial results. Revenue soared 53% to $731 million in the past year.
Cloudflare also routinely outperforms public clouds including Google and about 95% of its internet users are within 50 milliseconds of their data centers. This stock is still a buy given that the stock is trading at its lowest valuation in the past two years. BUY A HALF
CVS Health Corporation (CVS) shares were largely unchanged this past week and the only news is that Tilak Mandadi will step into the newly created role of chief of data, digital and technology. This is a good value stock for this sort of market because its first-quarter revenue was up nicely and CVS Health’s earnings per share have grown 26% each year, compounded, over the past three years.
CVS Health is one of the nation’s leading healthcare companies with almost 10,000 stores and its core markets grow each year even in a weak economy. CVS stock is still a buy trading at just 11 times forward earnings. 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’s is a high-quality stock that should be firm with its strong balance sheet with a huge stockpile of cash. The Japanese company is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25. BUY A HALF
Ford (F) shares ended even this week as an AAA survey indicated that about 25% of Americans would likely buy an EV for their next car purchase with millennials leading the way at 30%. The major factor in that decision is fuel costs, with 77% of respondents citing that as the top reason. Electric vehicles (EVs) now make up 5.6% of the car market, a strong showing versus the 2.7% it made up a year ago.
Recently, the Mustang Mach-E replaced Tesla‘s Model 3 as Consumer Reports’ top EV for 2022. Earnings per share are projected to grow to $2.15 next year so the stock is trading at just five times forward earnings. Ford’s overall EV sales rose 76.6% from a year ago, making it the second-best seller of plug-in models behind Tesla.
Furthermore, the much anticipated F-150 Lightning EV truck should be hitting markets later this summer. I encourage you to buy if you have not already done so. BUY A FULL
Nio (NIO) shares lost a point this week as Covid restrictions persist where Nio has a factory. Nio reported its second-quarter vehicle deliveries late last week, with quarterly vehicle deliveries up 14% year over year and June deliveries increasing 60%. Some Nio models offer battery upgrades with ranges of 621 miles on a single charge. Nio now has 1,000 battery swap stations that handle 30,000 battery exchanges every day.
There are short sellers out there and the SEC and China are still squabbling about Chinese companies like NIO complying with American financial disclosure requirements. I would have a 20% stop-loss in place for this stock while I monitor the situation. HOLD A HALF
Oracle Corporation (ORCL) shares added another point this week to reach 70 and while it may not be the dominant cloud player, it may be one of the most defensive. Unlike many cloud stocks, most of the company’s earnings come from recurring software and cloud infrastructure revenue. As the world’s leading database management software company, Oracle is a conservative company and has historically been one of the safest stocks in software. HOLD A HALF
Rio Tinto (RIO) fell from 60 to 58 this week and the shares now trade at just five times the 2022 earnings estimate and seven times next year’s despite the clean tech, EV story of increased demand for copper and other key metals. Rio also now offers a dividend yield of a whopping 13.7%. BUY A HALF
Sociedad Química y Minera de Chile S.A. (SQM) shares held their own this week as I recently moved this stock to a hold after encouraging you to sell about half your shares to lock in some profits.
I’m looking for an uptrend to re-develop but it will be hard to beat the company’s last quarter, with revenues more than four times the comparison with the previous year. Revenue from the lithium segment surged more than tenfold. The company is also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine so SQM is seen as a fertilizer and lithium play. HOLD A HALF
| Stock | Price Bought | Date Bought | Price 7/13/22 | Profit | Rating |
| Centrus Energy (LEU) | 27 | 7/8/22 | 27 | 0% | Buy a Half |
| Cloudflare (NET) | 50 | 6/24/22 | 47 | -7% | Buy a Half |
| CVS Health Corporation (CVS) | 104 | 4/18/21 | 93 | -10% | Buy a Half |
| Fanuc (FANUY) | 15 | 5/13/22 | 15 | 0% | Buy a Half |
| Ford (F) | 20 | 11/23/21 | 12 | -43% | Buy a Full |
| Nio (NIO) | 18.50 | 6/10/22 | 21 | 14% | Hold |
| Oracle Corporation (ORCL) | 94 | 11/11/21 | 70 | -25% | Hold |
| Rio Tinto (RIO) | 72 | 5/26/22 | 58 | -19% | Buy a Half |
| Sociedad Química y Minera de Chile S.A. (SQM) | 75 | 4/29/22 | 83 | 10% | Hold |