NIO (NIO) MOVES FROM BUY TO HOLD
SQM (SQM) MOVES FROM BUY TO HOLD
China, Hong Kong, and Patience
The S&P 500 is down about 20% so far this year, putting it on pace for the worst first half in five decades. The return of inflation, a weaker Chinese economy and the Ukraine conflict have all hit growth and weighed on stocks.
Don’t be too discouraged. In 1970, the S&P 500 fell 21% in the first half and then gained 27% in the second half, ending the year roughly flat.
As the market continues to test our patience we need to keep in mind that the great value investor Benjamin Graham famously said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.”
And what does it weigh? Earnings.
Any company that increases its earnings quarter after quarter, year after year, sees its stock price go up. Share prices usually follow earnings.
In the short term, of course, this doesn’t work since people are not completely rational 100% of the time and neither are stock prices. Emotions get in the way, both good and bad. Patience can be painful.
China was patient until it could get its hands on Hong Kong, but since then has been impatient. While China celebrates the 25th anniversary of the turnover of sovereignty of Hong Kong from the British to the Chinese, two very different but symbolic maritime events are making international news.
Hong Kong’s Jumbo Floating Restaurant has been an institution in Aberdeen harbor for over 46 years. Looming as a floating imperial palace, it attracted locals and tourists alike but closed in 2020 in the wake of the pandemic.
On June 14 of this year, just two weeks before the 25th anniversary, it was towed to the high seas, its destination a mystery to all. At least this was the case until it was reported that it had capsized or sunk near the disputed Paracel Islands in the South China Sea as it was being towed en route to Cambodia – China’s most steadfast ally in Southeast Asia.
That the story keeps evolving is a sign of declining transparency in Hong Kong. This is spawning all sorts of conspiracy theories. Was the Jumbo intentionally sunk? Was it moved out of Hong Kong because of its history in British Hong Kong – a history that China is trying to bury in the textbooks it has recently approved for Hong Kong students?
Then there is the basic right of a free press. Hong Kong’s Foreign Correspondents’ Club (FCC) recently suspended its annual Human Rights Press Awards so as not to “unintentionally” violate any laws, according to a statement from the club president.
The prestigious award has run for more than a quarter of a century and the decision to cancel was due to the introduction of a national security law in 2020 to bring the former British colony into line with the rest of China. Hong Kong was promised a great degree of autonomy and freedoms under a “one country, two systems” agreement in 1997 on its handover from British to Chinese rule.
Though Hong Kong has been sheered of many promised freedoms, foreign financial companies flock to Hong Kong lured by the riches of managing Chinese wealth. Hong Kong’s economic power has also sharply declined as its GDP relative to Mainland China has fallen from 16% in 1997 to 3% today.
Meanwhile, in Shanghai, China’s third aircraft carrier and the first designed and built at home was pre-launched – representing a clear sign of China’s intention to project power throughout the Pacific.
At roughly 80,000 tons, the Fujian betters Britain’s HMS Queen Elizabeth, and is eclipsed by only America’s nuclear-powered super carriers. It also puts China’s carrier fleet as the second biggest after America’s, which boasts 11 carriers.
Portfolio Updates
Cloudflare (NET) shares, in their first week as an Explorer recommendation, took off from 44 to 52 but then settled at 45.
Cloudflare provides content delivery and security services to over 19% of websites on the internet; the next best is at 2%. Its global network connects with 10,500 other networks – including internet service providers, large enterprises, and other cloud vendors. In fact, in terms of speed, Cloudflare consistently outperforms public clouds including Google.
This off-the radar company and potential takeover target provides cloud-based services to secure websites. In its Q1 earnings report, Cloudflare revenue was up 54% year-over-year and recorded net client retention of 127% and the company also set a quarterly record for signing up new customers. Globally, about 95% of its internet users are within 50 milliseconds of their data centers.
Doesn’t seem like a company that’s struggling in the post-pandemic world and a stock that should be down from 211 in November 2021 to its present price of 45, does it? Plus, its stock is trading at just 22 times earnings, the lowest valuation of the past two years. BUY A HALF
CVS Health Corporation (CVS) shares made a modest gain this week to finish at 93. This is a good value stock for this sort of market because its first-quarter revenue was up more than 11% year over year and CVS Health’s earnings per share has grown 26% each year, compounded, over the past three years.
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 its core markets grow each year even in a weak economy. CVS stock is still a buy representing value since it is trading at just under 11 times forward earnings. BUY A HALF
Fanuc (FANUY) shares posted a small gain this week driven by the weaker Japanese yen. 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 stock offers us a high quality stock that should be firm with its strong balance sheet with $7 billion in cash. Fanuc 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 were flat this week but the company made some news.
Ford completed a deal with Australia’s Liontown Resources, which starting in 2024 will give Ford an annual supply of 150,000 tons of lithium – a key component of EV batteries. Ford also announced it is raising some prices reflecting higher material costs. Finally, the company recently extended a deal with Volkswagen (VWAGY) that would double European EV production to 1.2 million cars by 2023.
What will move this stock? The much anticipated F-150 Lightening EV truck should be hitting markets later this summer. Ford stock stands out for its value as it trades at just over four times trailing earnings. I encourage you to buy if you have not already done so. BUY A FULL
Nio (NIO) shares ended the week largely unchanged but at one point pulled back sharply amidst a claim that the company overstated its sales and profits – a charge the company aggressively denied. Last week we were up 22% but I recommend that given this accusation you put in place a 20% stop-loss and I’m moving this to a hold until this situation clears up.
Nio is launching the ES7, a five-seater electric SUV, and expects to start deliveries in late August. 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. In addition, Nio offers consumers its unique battery-as-a-subscription service whereby owners can swap batteries rather than wait for recharging. MOVE FROM BUY TO HOLD A HALF
Oracle Corporation (ORCL) shares were up about three points this week but I’m following some reports that its sales may be a bit weaker than anticipated and that is chiefly why I moved this to a hold last week.
As the world’s leading database management software company, Oracle is a conservative company and historically been one of the safest stocks in software. Oracle is a solid tech stock for an uncertain market but also has limited upside given its size and the competition in its markets. The company is expanding its cloud business for higher growth and margins. HOLD A HALF
Rio Tinto (RIO) shares held firm this week as copper prices retreated due to fears of an economic slowdown. Rio should have some downside protection given that it is trading at about four times trailing earnings and now offers a dividend yield just over 12%.
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. BUY A HALF
Sociedad Química y Minera de Chile S.A. (SQM) shares were down about five points this past week and given that lithium prices are softening after a big increase, I encourage you to sell about half your shares to lock in some profits. I’m also moving this to a hold until an uptrend re-develops.
The company reported first-quarter revenues more than four times the total from 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. Importantly, this isn’t just a lithium play. It’s also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine so SQM is seen as a joint fertilizer and lithium play. MOVE FROM BUY A HALF TO HOLD
| Stock | Price Bought | Date Bought | Price 6/30/22 | Profit | Rating |
| Cloudflare (NET) | 50 | 6/24/22 | 46 | -9% | Buy a Half |
| CVS Health Corporation (CVS) | 104 | 4/18/21 | 93 | -10% | Buy a Half |
| Fanuc (FANUY) | 15 | 5/13/22 | 16 | 5% | Buy a Half |
| Ford (F) | 20 | 11/23/21 | 12 | -43% | Buy a Full |
| Nio (NIO) | 18.50 | 6/10/22 | 22 | 18% | Hold |
| Oracle Corporation (ORCL) | 94 | 11/11/21 | 69 | -26% | Hold |
| Rio Tinto (RIO) | 72 | 5/26/22 | 63 | -12% | Buy a Half |
| Sea Limited (SE) | -- | 2/8/19 | -- | -- | Sold |
| Sociedad Química y Minera de Chile S.A. (SQM) | 75 | 4/29/22 | 84 | 12% | Hold |