October 7, 2021

Portfolio Changes:
Taiwan Semiconductor (TSM) – Move from Buy to Sell

Washington and Beijing: Two Ambitions, One Winner
U.S. crude oil hit a seven-year high as stocks, especially tech stocks, face headwinds. Today I am moving dominator Taiwan Semiconductor (TSM) to a Sell as Taiwan, America, China and Japan play a dangerous game. China sent 52 warplanes into the islands air buffer zone after the U.S. and allies held exercises nearby.

When China began its opening in 1980, its manufacturing labor wages were only 5% of America’s and so its competitive edge in manufacturing was enormous. The second factor was a matter of scale, with China’s population more than 10 times larger than Japan’s.

Unlike Japan, China was never in any sense an American ally and had an ideology, history and culture completely different from America. Japan became part of the West after World War II by embracing a democratic form of government and was anchored by the Mutual Cooperation and Security Treaty signed with the United States in 1951.

But in terms of a mercantilist, export-oriented strategy, China’s and Japan’s strategies were very similar with the exception that China was by necessity much more open to foreign direct investment. China also pressured foreign investors to give up intellectual property for access to its low-wage factories and vague promises of access to its consumer markets. It is no surprise that China only selectively opened up, stayed with a state-directed strategy for important industries, and welcomed foreign capital without ceding control. China’s leadership never considered weakening the power of the Chinese Communist Party for one key reason.

Why change a winning strategy? Why even take the risk of losing control?

China Inc. captures intellectual capital and encourages multinational companies from Japan, South Korea and Australia and throughout Europe to give up intellectual know-how while rejecting any calls to open up and treat America or other foreign countries with reciprocity and fairness. China has also broken its word with Hong Kong, bullied and threatened neighbors from India to Taiwan, and endangered American and allied ships in international waters.

Portfolio Updates
ChargePoint Holdings (CHPT) shares are being held hostage by the EV cycle and how much remain in capital and subsidies as the stock fell from 22.3 to 17.9 last week. The stock is well below its 52-week high of 46 even though the company reported that the most recent quarterly revenue grew 61% year over year. ChargePoint has developed an EV-charging network that offers drivers in North America and Europe more than 118,000 places to power up their EVs.

It is the leading North American Level 2 charging network using 240-volt power. This lead is a huge advantage because of network effects as the company already has partnerships with more than roughly 60% of the Fortune 50 companies. Therefore, while competition is intense, I believe that the stock can be accumulated at its current levels with a medium-term outlook. BUY A HALF

Cloudflare (NET) shares have fully recovered, up 6.3% yesterday to a price of 133. It is still one my favorite stocks given its aggressive sales strategy, the company is protected by several moats, including network effects and high switching costs, and the co-founders are still heavily involved. The company grew revenue 53% in its most recent quarter. Cloudflare provides network security, performance and reliability services to a growing portion of global web traffic. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF

Else Nutrition Holdings (BABYF) shares went from 1.91 to 2.03 in their first week in the Explorer portfolio. Else is a young, Israeli-based, plant-based food and nutritional company aimed at babies and toddlers. Trading at a market value of only $195 MM, this stock is speculative but it has a number of characteristics that could be framed as conservative. It is riding the powerful trend of parents wanting more of a plant-based diet for their kids. Else bypasses all the hormones, pesticides, chemicals, dairy, soy issues since it is made from almonds, buckwheat and tapioca.

I’m also impressed by its growth trajectory, huge markets, top executives with experience at companies such as Abbott and Mead Johnson, and strong scientific and advisory boards. It has already secured patents in key markets, which are estimated at $80 billion and growing at a 4-5% clip.

Another reason I think there is upside in the stock is the discovery potential. Institutional investors have a very small proportion of issued stock and management owns 41% so they are plenty motivated.

In addition, I’m impressed with the marketing and distribution efforts thus far. Finally, Else may expand the brand to cereal, post-toddler nutrition and nutritional drinks. It’s a good story so let’s begin with incrementally building a half position. BUY A HALF

Fisker Inc. (FSR) shares are a bit off with the EV cycle, dipping from 15.8 to 13.9. Fisker offers investors an “asset light” and “Apple of autos” strategy relative to EV maker leaders like Tesla. Its Ocean EV has a sub-$40,000 retail price point making it a more affordable EV option, but we have to accept that the company’s first product won’t be launched until the latter part of 2022. This is an aggressive stock but I confirm a buy rating on Fisker. BUY A HALF

Glaukos (GKOS) shares were down a bit this week as Covid continues to keep some patients from handling their eye issues. Based in Laguna Hills, California, Glaukos is a medical technology company focused on innovative therapies for the treatment of glaucoma, corneal disorders and retinal diseases.

Glaucoma impacts 3 million Americans. Glaukos’ revolutionary product is the iStent, a tiny L-shaped titanium implant. Glaukos has the most comprehensive pipeline in ophthalmology. New product launches will broaden its market opportunities, including acquisitions and expansion into international markets. The timing to invest in the stock is logical since its share price is down more than 55% from its year high and its balance sheet is solid with more than $400 million in cash. The baby boomers are coming. BUY A FULL

International Business Machines (IBM) shares were ahead three points this week to 142. IBM has a new CEO and ambitious plans and in 2020 completed seven acquisitions at an aggregate cost of $723 million. All are hybrid cloud and AI-focused. Big Blue will split into two companies by the end of the year and the stock’s valuation is at half the level of the S&P 500 on a price-to-earnings basis. This is a conservative income play that should probably find a home in any global portfolio. BUY A HALF

Marvell Technology Group (MRVL) shares were up 7.3% yesterday to reach 63.75. Marvell earnings in its recent quarter jumped 62% while sales surged 48%. Credit Suisse upgraded the stock, calling Marvell “one of the most strategic assets“ in semiconductors. Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of 5G capabilities. I recommend buying at current prices if you have not already done so. BUY A HALF

Novonix (NVNXF) shares took a significant hit this week, falling from 5 to 3.5. Part of it was surely profit taking, as shares had more than tripled since May and more than doubled in the last month. You hopefully took some profits too. Novonix is an Australian technology and advanced materials supplier focused on synthetic graphite for the electric vehicle and storage battery industry. The company is a non-Chinese synthetic graphite producer, making it effectively immune to any potential disruptions caused either Chinese politics or its international trade disputes.

Novonix is a technology-first company that traces its corporate lineage directly to a Tesla-sponsored battery research lab at Dalhousie University in Nova Scotia and has quite a bit of technical brainpower behind it. This is an aggressive idea but this stock is a play on an important clean technology. BUY A HALF

Palantir Technologies (PLTR) shares were down a point and are well down from their annual high. The “big data” market opportunity is massive and should lead to growth in the years ahead. Palantir’s revenue rose 47% to $1.1 billion in 2020, and it expects its revenue to rise more than 30% annually from 2021 to 2025. Palantir’s stock currently trades at 34 times this year’s sales.

Palantir expects that growth to be driven by its two core platforms: Gotham, which serves government clients; and Foundry, which provides lighter versions of those services for enterprise clients. Its third platform, Apollo, provides cloud-based updates to both platforms. The stock is a bit expensive but not if you consider its potential growth and accelerating free cash flow generation. I encourage you to buy shares with a medium-term outlook if you have not already done so. BUY A HALF

Sea Limited (SE) shares have pulled back from 353 to 315 in the last month, after a big run. Still, the company expects that its e-commerce revenue will grow by 121% in 2021. I would be an incremental buyer of this stock but long-time holders should definitely take partial profits from time to time (hopefully you did prior to the last month!). I have been a bit cautious on this stock but I’m getting close to a full buy. BUY A HALF

Taiwan Semiconductor (TSM) is a dominant company but I have determined that there is too much risk relative to its potential upside. So today, I’m moving Taiwan Semiconductor (TSM) to a Sell as Taiwan, America, China and Japan play a dangerous, uncertain game. China sent 52 warplanes into the islands air buffer zone after the U.S. and allies held exercises nearby. MOVE FROM BUY A HALF TO SELL

Veeco (VECO) shares held firm in a volatile tech market the past two weeks. This is an American high quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading edge technology to U.S.-based and international high-end class chipmakers, some of which are 100% reliant on Veeco technology.

Some analysts expect revenue to pick up nicely in 2021, with revenue growth close to 30% and with up to 50% earnings growth, from 86 cents per share to $1.29, and then to grow further in 2022. Veeco is also growing earnings at a 20% rate and represents a backdoor play on semiconductors. I recommend that you acquire shares if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares lost some ground, sliding from 25.6 to 23 last week; but we need to look forward. The stock is more than 3x higher than our original buy point. I’m still bullish on Virgin Galactic. Prices are still holding firm, and the business puts safety above all else. But I am a bit concerned over insider selling and timing going forward.

I believe a hold rating is appropriate for the time being. HOLD A HALF