June 2, 2022

Portfolio Changes:
None

The Market and the Ukraine Endgame
Explorer positions had an up week as the S&P 500 has begun a turnaround from bear market territory and is now down “only” about 13% for the year. This means it is up around 6% since hitting its recent low on May 19 as the Fed has softened its tone and China tries to get growth going.

Electric vehicle sales are set to more than triple to just over 20 million in 2025, according to BloombergNEF. This is up from a previous estimate of 15 million.

The national average price for a gallon of regular unleaded gas hit $4.67 as of yesterday, according to AAA, $1.63 higher than a year earlier and about 14% above the pre-2022 high of $4.11 set in 2008. But before you complain too much about gas prices at the pump, take a look at the below graph.

Now let’s turn to Ukraine, which no doubt is also weighing on markets.

In terms of timing, there are several reasons to move sometime over the next few months for Ukraine to begin negotiations with Russia, backed by a united front and aggressive military tactics.

First, if Russia is not responsive or does not demonstrate good faith in negotiations, it strengthens the case for further sustained Ukrainian military action.

Second, while European and American support of Ukraine is strong, the longer the conflict continues, so does the risk of support wavering as the world faces increasing economic challenges. The recent $40 billion for Ukraine approved by the U.S. Congress is unlikely to be followed by another.

Third, the cost of the war is increasing every day, including the severe damage done to Ukraine’s infrastructure and economy. Of course, the economic costs for Russia are also escalating, giving it an incentive to come to the table. A prolonged stalemate will be costly for Ukraine as well as for Russia and China, with a lesser chance for a favorable outcome.

Fourth, it is a paradox that even if Ukraine achieves its ultimate goal of pushing Russia entirely out of its borders, including Crimea, the risks of nuclear escalation elevate considerably. The issue of border security remains. The issue of a large, hostile state with nuclear weapons on Ukraine’s border remains.

The European Community, and Germany in particular, have considerable leverage over China if they have the will to use it since China represents Europe’s largest trading partner. China can repair some of the damage to their already fading brand by bringing Russia to the negotiating table. America also needs the wisdom to continue to support Ukraine while playing its hand carefully and always keeping in mind the national interest. Japan can also pressure China, as China is the source of almost 25% of Japan’s imports.

What might be on the table in Ukraine-Russian negotiations? Russia moving back to the line of February 23; sanctions being released after troops are withdrawn far from the border; Finland’s membership in NATO; Ukraine’s membership in the European Community; and a sizable rebuilding fund for Ukraine with the United States contributing 25%, the European Community, 50%, and the rest of the world 25%.

One option is that Ukraine would renounce joining NATO and become a non-nuclear, non-aligned, neutral country in return for receiving security guarantees from its Western partners and perhaps even Russia. This should and could have been done decades ago.

Portfolio Updates
CVS Health Corporation (CVS) shares were a bit flat this week after adding five points the previous week. CVS Executive Vice President and Chief Financial Officer Shawn Guertin will present at the Goldman Sachs Global Healthcare Conference on June 15.

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, and almost 10,000 stores; it’s viewed in a different category than retail companies such as Target. Nearly 70% of Americans live within three miles of a CVS and it has more than 102 million pharmacy plan members. CVS stock remains a conservative buy as it is still undervalued. BUY A HALF

Fanuc (FANUY) shares were steady this week but up double digits since being added as an Explorer recommendation a month ago. 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 building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts of smartphones. CSLA estimates U.S. market share at 50%, and in China about 20%. Exports account for 90% of Fanuc’s sales.

Fanuc’s stock offers investors a great balance sheet with no debt and $7 billion in cash. In short, Fanuc is a high-quality, profitable play on a clear growth trend. Our six-month target for this quality conservative stock remains 25. BUY A HALF

Ford (F) shares added a point this past week as the company restructures into three units – Ford Pro for commercial customers, Ford Blue for its profitable gasoline-powered trucks and SUVs, and the Ford Model E for electric vehicles. Tesla, which was founded 100 years after Ford, enjoys a clear cost advantage, leading the Michigan-based automaker to consider reducing or eliminating dealer inventories and following Tesla in selling some vehicles directly to customers. In addition, it plans to slash advertising spending for its electric vehicles. Ford is also focusing much of its energy on just two BEV products, the Ford F-150 Lightning pickup and the Ford Mustang. This is in line with what Elon Musk has done at Tesla. Trading at about four times trailing earnings, this is perhaps the best value of the leading EV makers so I encourage you to buy if you have not already done so. BUY A FULL

Novonix (NVNXF, NVX) shares were down marginally this week due to a sharp pullback yesterday. We have already taken some profits in this Australian stock that is a strategic provider of U.S. synthetic graphite that is both higher quality and lower priced than Chinese graphite, but this stock has been a bit volatile. Novonix has a moat as it owns patented-innovative technology and benefits from a strong, well-known partner in Phillips 66. This is an aggressive idea but Novonix remains a buy recommendation for aggressive investors. BUY A HALF

Oracle Corporation (ORCL) shares were up two points this week to reach 71 as the company received final regulatory clearance for its $28.3 billion purchase of the healthcare data company Cerner. Oracle is a software company that also recently announced that its Oracle Cloud Infrastructure (OCI) product gained U.S. Department of Defense approval. This software and emerging cloud stock is showing relative strength in the tech sector. ORCL is a solid, conservative tech stock for an uncertain market. BUY A HALF

Rio Tinto (RIO) shares were up two points in their first week as an Explorer recommendation. Based in London with operations all over the world including Brazil, Rio has a cash position of $15.3 billion, and a giant forward dividend yield of 10.8%. It employs more than 47,000 people across 35 countries on six continents, and supplies the world with gold, diamonds, aluminum, copper, titanium, iron ore and other industrial metals.

The company’s latest quarterly earnings were up 36% with operating margins of 46%, and a return on equity of 41.6%. Over the past five years, Rio has also generated ample cash flow of $5.78 per share, according to Morningstar. The stock has pulled back about 10 points and 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. Copper also goes into charging stations, solar panels and wind turbines. However, at present, annual cleantech demand for copper is only about 1 million tons, or just 3% of supply. Goldman thinks this could go up 5X by 2030, which will move markets since they look ahead. BUY A HALF

Sea Limited (SE) shares jumped from 73 to 80 this week. We have sold into this stock’s tremendous strengths a few times as the company continues to report solid sales growth. Revenue from Sea’s e-commerce wing, Shopee, and gaming arm, Garena, is still growing fast but at a somewhat slowing rate. Meanwhile, revenue from SeaMoney, Sea’s digital financial services unit, more than quadrupled to $236 million. A Goldman Sachs analyst recently picked up the company with a 196 price target. This is still a buy for aggressive investors. BUY A HALF

Sociedad Química y Minera de Chile S.A. (SQM) shares moved up sharply to 115 last Friday before profit taking knocked the stock to around 100. The company reported revenues of more than $2 billion for the first quarter, exploding 4X year over year. Revenues from the lithium segment surged more than tenfold year over year, driven by strong lithium sales volumes and prices. Lithium demand is expected to outstrip supply by 40X by 2040 and SQM’s lithium output is almost 20% of global lithium output. Lithium demand, sales, and prices have been going in the right direction and Russia’s fertilizer exports, which normally account for about 25% of world exports, are down sharply, leading it to companies like SQM to fill the gap. BUY A HALF POSITION