Portfolio Changes:
Local Bounti (LOCL) - MOVE FROM HOLD TO SELL
Inflation and Strategy
The Federal Reserve, America’s central bank, raised its benchmark rate a half percentage point yesterday as assets that investors perceive as safer were among those to rally. While macro issues such as inflation and interest rates are certainly important, in the end it will be company performance relative to expectations that will be decisive.
Even if inflation may be peaking at levels last seen four decades ago, the key question is whether these levels are transitory or sticky and likely to come back to earth slower than many imagine.
The Ukraine/Russia conflict will likely last longer than many expect, keeping prices of key inputs such as oil and wheat high. The Fed’s announcement today probably means rising interest rates will be incremental and prolonged. As an aside, we need to face the fact that the amount of America’s debt will make fighting inflation harder than in the past.
Michael Lewis writes in The Atlantic how in 1979, for example, the government ran a deficit of more than $40 billion – equivalent to about $118 billion in today’s money. The national debt stood at about $830 billion as of 1980. Now, the U.S. national debt held by the public is over $23 trillion ($700,000 for each American) with over $1 trillion in budget deficits forecast for the next five years.
Stock market investors get some protection from inflation because the same factors that raise the price of goods also raise the values of companies. But coping with the fear of high inflation is not easy because of uncertainty since the goal posts and the rules both keep moving.
What is the Explorer strategy to help you deal with this situation?
First, focus on quality, safer stocks that have been taken back with the market’s broad pullback. Second, raise cash selectively but don’t be overly bearish since there remains a tremendous amount of liquidity out there that can move markets quickly. Third, favor real asset/commodity plays, and fourth, search for special situations where there seems to be great value.
Portfolio Updates
CVS Health Corporation (CVS) shares were up 4.8% yesterday to reach 100 as it reported that first-quarter sales were up 11%. The company raised its 2022 earnings outlook slightly, now expecting per-share earnings between $8.20 and $8.40. CVS reported that it expects demand for Covid testing and vaccines to continue to lift sales throughout 2023.
CVS is one of the nation’s leading healthcare companies with almost 10,000 stores and is expanding its digital footprint. Per a February 2022 update, the CVS.com website has gathered more than 2 billion visits over the past year. 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 sells for about 11 times forward earnings – versus 19 times for the S&P 500. BUY A HALF
Fisker (FSR) shares recovered some ground yesterday as the company announced quarterly financials. The company continues to expect to go into production later this year and Q1 2022 operating results were consistent with company expectations. Test and validation phase is progressing on target with 23 out of 55 complete Fisker Ocean prototypes built.
2022 retail reservations for the Fisker Ocean total more than 45,000 as of May 2, 2022, and in addition there are 1,600 fleet reservations. This represents approximately 50% growth since last quarter. Production of its fully electric Ocean SUV is expected to begin in November and the SUV models range in price from $37,499 to $68,999. This stock will likely be flat for a while until it gets closer to production of what could be a breakout custom EV SUV. BUY A HALF
Ford (F) shares were up almost a point this week as the company reported mixed April sales reflecting its transition to a greater proportion of sales coming from electric vehicles. Total U.S. sales fell 10.5% with trucks down 17.8%, SUVs up 2.7%, and electric vehicles up 50.2%. Electrified sales represented 9.5% of total sales. Within Electrified, Mustang Mach-E sales were up 95%.
Production is underway on the F-150 Lightening EV at the Rouge Electric Vehicle Center, within the historic Rouge Complex in Michigan, which is where founder Henry Ford perfected the moving assembly line. By 2030, Ford expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Trading at less than 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
Local Bounti (LOCL) shares were down sharply this past week as the company approaches its May 9 earnings report. This promising company and stock were already on probation so we need to remove it as an Explorer recommendation, though I’m going to keep my shares at least until the earnings report next Monday. MOVE FROM HOLD A HALF TO SELL
Novonix (NVNXF, NVX) shares treaded water for the second week on no news. This Australian company plays a key role as a strategic provider of U.S. synthetic graphite that are both higher quality and lower priced than Chinese graphite, which dominates the production of natural graphite. The Novonix story rests on its innovative technology and the company benefits from a strong partner in Phillips 66.
This is an aggressive idea and the company is at least a year away from reaching breakeven in terms of profitability. Novonix remains a buy recommendation. BUY A HALF
Oracle Corporation (ORCL) shares were steady this week as this “big tech” company morphs into more of a cloud service provider to complement its sterling position as a software company. Oracle’s newly released Java 18 is being well received by the market as it delivers better performance, stability, and security that will further improve developer productivity. This company along with IBM and other quality big tech companies will likely resume its upward trend when tech markets are back in favor. BUY A HALF
Sea Limited (SE) shares had a very disappointing April but were up about 10 points this past week. We made substantial gains with this stock as it rocketed upward, posting huge growth, but the stock is down sharply since last October and has been weak and volatile in 2022.
While the company’s sales growth may moderate and it continues to spend heavily to push sales forward, delaying profitability, a rebound in the stock is quite possible. A Goldman Sachs analyst recently picked up the company for the first time with a buy recommendation and a 196 target – more than double the current price (90).
All three of Sea’s revenue drivers are still delivering growth. Its Garena gaming and entertainment segment revenue is expected to be $3 billion in 2022. E-commerce sales are expected to increase 76% to $9 billion, and digital finance SeaMoney revenue is expected to increase 155% in 2022. I will keep this a buy for aggressive investors. BUY A HALF
Sociedad Química y Minera de Chile S.A. (SQM) shares were up more than 10% this week and it looks like shares are opening up strong this morning. SQM has lithium plants in Chile and through a joint venture in Australia and its output is almost 20% of global lithium output. Lithium demand, sales, and prices have been going in the right direction and the Ukraine situation is crimping Russia’s fertilizer exports that normally account for about 25% of world exports.
SQM is also the world leader of potassium nitrate for plant nutrition, with a 46% market share. The company is also the world’s #1 producer of specialty chemicals. It had a stellar year in 2021, with revenue up 57.5% and net profits tripling over 2020. Global lithium demand exploded 55% in 2021 primarily due to it being a key ingredient for lithium ion batteries for electric vehicles.
For SQM, the current consensus growth estimate for this year calls for earnings-per-share growth of 127% with the long-term growth estimated to be around 40% if current trends hold. This stock has come back a bit recently, providing a reasonable entry point for aggressive investors. BUY A HALF
StoneCo Ltd. (STNE) shares were up 5% this week and are still a buy as the Brazilian stock market is one of the world’s top performers in 2022. This Warren Buffett-backed company had a record net addition of 378,000 clients in the fourth quarter of 2021, bringing its active merchant partner count to 1.8 million. Payment volumes increased 55% year over year.
Based in Sao Paulo, StoneCo is a digital payments company providing financial technology solutions for merchants to conduct electronic commerce across in-store, online, and mobile channels in Brazil. Warren Buffett’s Berkshire Hathaway has invested $340 million in this fintech company. BUY A HALF
| Stock | Price Bought | Date Bought | Price 5/4/22 | Profit | Rating |
| CVS Health Corporation (CVS) | 104 | 4/18/21 | 101 | -3% | Buy a Half |
| Fisker (FSR) | 15 | 2/4/21 | 11 | -30% | Buy a Half |
| Ford (F) | 20 | 11/23/21 | 15 | -26% | Buy a Full |
| Local Bounti (LOCL) | 9 | 4/1/22 | 6 | -35% | Sell |
| Marvell Technology Group (MRVL) | -- | 4/1/21 | -- | -- | Sold |
| Novonix (NVNXF) | 2.24 | 8/6/21 | 3 | 53% | Buy a Half |
| Oracle Corporation (ORCL) | 94 | 11/11/21 | 75 | -20% | Buy a Half |
| QuantumScape (QS) | -- | 2/3/22 | -- | -- | Sold |
| Sea Limited (SE) | 15 | 2/8/19 | 90 | 507% | Buy a Half |
| Sociedad Química y Minera de Chile S.A. (SQM) | 75 | 4/29/22 | 80 | 6% | Buy a Half |
| StoneCo Ltd. (STNE) | 9 | 3/11/21 | 10 | 7% | Buy a Half |