Portfolio Changes:
SEA (SE) MOVE FROM BUY A HALF POSITION TO HOLD
Fluctuations and the Fed
Legendary investor J.P. Morgan was often asked what the stock market would do. “It will fluctuate,” replied the taciturn Morgan.
The psychology of the markets can be puzzling. On Wednesday, the Federal Reserve, America’s Central Bank, raised its benchmark interest rates 75 basis points, the most since 1994. And the market liked it because it was way overdue and will hopefully help stem inflationary pressures in the economy. Will it slow growth, housing sales, consumer spending, and raise the carrying cost of U.S. debt? Yes, of course.
As an aside, while many economists believe that the Federal Reserve has the tools to control inflation today by raising interest rates, we need to face the fact that the sheer amount of America’s debt will make fighting inflation harder than in the past.
Why? Federal debt held by the public is now more than 100% of GDP, and a large share of that debt is short term (30% has a maturity of a year and over 60% a maturity of four years). Therefore, any ramp-up of interest rates sufficient to fight inflation would quickly lead to large increases in interest payments.
What is driving huge federal budget deficits and monster growth in America’s national debt? George Mason University’s Mercatus Center has confirmed that it is spending growth in three budgetary areas: 47% from Medicare, 22% from Medicaid and the 2010 Affordable Care Act (ACA), and 15% from Social Security. In a healthy economy, there will always be modest inflation since it serves as a lubricant to the wheels of commerce and keeps economic momentum moving forward. But very high inflation discourages investment and savings – the fuel for growth and productivity.
Meanwhile, the Japanese yen keeps sinking as its central bank avoids interest rate hikes. With Japanese government debt now above 250% of GDP, higher interest rates would hammer its national budget but a weaker yen has raised import prices. Japanese stocks should be on sale and exports should rise.
What can you do with this market? Keep investing in high quality companies. Diversify your portfolio around the world, including value and real assets. Take advantage of some companies being punished unfairly.
Portfolio Updates
CVS Health Corporation (CVS) shares were pretty flat this week, dipping from 94 to 92. This is an excellent stock for this sort of market because its first-quarter revenue was up over 11% year over year but it has a decent dividend and represents great value, trading at just over 11 times forward earnings.
CVS Health is one of the nation’s leading healthcare companies with 300,000 employees including more than 40,000 physicians, pharmacists, nurses, and nurse practitioners. It has almost 10,000 stores and is viewed in a different category than retail companies such as Target. Nearly 70% of Americans live within three miles of a CVS. CVS stock is still a buy and my price target is 100. BUY A HALF
Fanuc (FANUY) shares were off about a point this week despite the fact that since exports represent about 90% of sales, it should get a big boost from the Japanese yen trading at a 24-year low against the U.S. dollar.
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. CSLA estimates U.S. market share at 50% and China’s about 20%.
Fanuc’s stock offers investors a great balance sheet, zero debt and $7 billion in cash. Fanuc is a high quality, profitable play on a clear growth trend and my six-month price target for this conservative stock remains 25 (stock currently at 15). BUY A HALF
Ford (F) shares fell from 13 to 12 this week as the company announced a speed bump. Ford temporarily paused deliveries of its hit Mustang Mach-E electric SUV amid safety concerns about a software-related battery issue, but stated they should have a fix available by next month. Tesla enjoys a clear cost advantage so Ford is considering reducing or eliminating dealer inventories and following Tesla in selling some vehicles directly to customers. Where Ford stock stands out is its value as it trades at about four times trailing earnings. I encourage you to buy if you have not already done so. BUY A FULL
Nio (NIO) shares were on a bit of a rollercoaster this week but managed to finish up for the week after the company announced an upgrade to existing models with an advanced in-vehicle intelligence digital system called Alder. This includes a digital cockpit controller and better sensing capabilities and hardware.
It also unveiled this week the ES7, a five-seater electric SUV based on an updated, highly autonomous driving platform. Nio expects to start deliveries in late August and the ES7 will compete against Tesla’s Model Y and BMW’s X5 L SUV in China. Nio’s ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S. Furthermore, Nio offers consumers its battery-as-a-subscription service, whereby buyers can swap batteries rather than wait for recharging.
Nio is one of the top premium EV makers with massive growth potential and my target is for this stock to go from its current 20 per share to 40 over the next year. BUY A HALF
Oracle Corporation (ORCL) shares were steady this week. 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. Oracle is a solid tech stock for an uncertain market. The company is expanding its cloud business for higher growth and margins. In addition, it has expanded its own cloud infrastructure platform to widen its moat against cloud giants such as Amazon and Microsoft. BUY A HALF
Rio Tinto (RIO) shares pulled back from 75 to just under 70 this week and then stock now offers a dividend yield of 11.7%. Based in London, Rio has a cash position of $15.3 billion and operates across 35 countries on six continents, delivering gold, diamonds, aluminum, copper, titanium, iron ore and other industrial metals. One of the largest mines is the Oyu Tolgoi gold and copper mining project in Mongolia. Rio controls 66% but announced last week it is planning to acquire the rest from the government.
Over the past five years, Rio has generated cash flow of $5.78 per share according to Morningstar and the stock trades at only five times trailing earnings, which is about half of its historical valuation. Finally, It takes four or five times as much copper to make an electric vehicle as a regular car. So annual cleantech demand is increasing. Goldman Sachs thinks this could go up 5X by 2030. BUY A HALF POSITION
Sea Limited (SE) shares declined this week to 75 and I’m going to move this long-held Explorer stock to a hold as I reassess its prospects amidst its expansion beyond Southeast Asia. It needs to regain momentum and reverse the decline in its valuation relative to its growth rates. Sea’s e-commerce business Shopee is looking better as its losses are declining while revenue growth remains strong.
Fortunately, Sea raised $6 billion in equity and convertible debt a little over a year ago, when the stock was in the 300s. With more than $8 billion in cash now on its balance sheet, it appears Sea can easily make it through the next few years without cutting back on investing in growth.
In addition, Sea plans to let employees go across its e-commerce division Shopee. The cuts will also extend across its Mexico, Argentina, and Chile teams. The dismissals come after Sea revised its full-year outlook for e-commerce sales, its main source of revenue, to $8.5 billion-$9.1 billion from its previous guidance of $8.9 billion-$9.1 billion MOVE FROM BUY A HALF TO HOLD
Sociedad Química y Minera de Chile S.A. (SQM) shares were relatively firm this past week, going from 96 to 94 with a current dividend yield of 12%. The company reported first-quarter revenues of more than $2 billion, four times the previous year. Revenue from the lithium segment surged more than tenfold. SQM’s lithium output is almost 20% of global lithium output and lithium demand, sales, and prices have been going in the right direction. This stock has clear momentum and remains a buy. BUY A HALF
| Stock | Price Bought | Date Bought | Price 6/15/22 | Profit | Rating |
| CVS Health Corporation (CVS) | 104 | 4/18/21 | 91 | -12% | Buy a Half |
| Fanuc (FANUY) | 15 | 5/13/22 | 15 | -1% | Buy a Half |
| Ford (F) | 20 | 11/23/21 | 12 | -40% | Buy a Full |
| Nio (NIO) | 18.50 | 6/10/22 | 20 | 9% | Buy a Half |
| Novonix (NVNXF) | -- | 8/6/21 | -- | -- | Sold |
| Oracle Corporation (ORCL) | 94 | 11/11/21 | 70 | -26% | Buy a Half |
| Rio Tinto (RIO) | 72 | 5/26/22 | 70 | -3% | Buy a Half |
| Sea Limited (SE) | 15 | 2/8/19 | 76 | 409% | Hold |
| Sociedad Química y Minera de Chile S.A. (SQM) | 75 | 4/29/22 | 94 | 25% | Buy a Half |