Fed Hikes Again, Ford’s Supply Chain Woes, Oracle Posts Strong Quarter
FedEx (FDX) reports earnings later today and all will be watching as its shares tumbled last week after it issued a sales warning. The Federal Reserve issued its fifth interest rate hike of 2022, and it certainly won’t be the last one, warned dove-turned-hawk Fed Chairman Jerome Powell. This brisk run-up in rates, which should have been earlier and faster, is hitting growth stocks hard since those are mostly high revenue growth companies that are not yet profitable. The market is punishing this group to levels that tempt longer-term investors.
The Nasdaq composite index is down about 26% this year, versus the S&P 500’s 18% loss, and the Russell 1000 smaller company growth stock index is down 25%. Essentially, companies that surged during the pandemic rally, when interest rates plunged, have fallen hard as rates rise. The thinking is that investors are willing to pay a premium for “growth,” meaning rapidly increasing sales numbers, on the chance that these sales turn into massive profits.
“Random Walk” guru and Princeton economist Burton Malkiel offered his take on the market this week. His cyclically adjusted price-to-earnings, or CAPE, multiple for the market as a whole currently stands at 29. This is lower than a recent peak of 38 in December 2021 and well below the historic peak of 44 at the height of the dot-com bubble in early 2000. But it is substantially above the average of 16. Stay defensive but opportunistic. Keep in mind that stocks have been a pretty good inflation hedge historically. And pay attention to dividends stocks.
Turning to robots, China installed almost as many robots in its factories last year as the rest of the world. Shipments of industrial robots to China in 2021 rose 45% according to the International Federation of Robotics (IFR), a robotics industry trade group. Jay Huang, director of Greater China research at Bernstein, said the economics of China’s shifting labor market and improving robot technology mean China is likely entering a robot boom. He projects that China will go from 1 MM industrial robots to about 3 MM by 2030.
Finally, related to our position in rare earths maker MP Materials (MP), the Defense Department this month stopped accepting new F-35 combat jets made by Lockheed Martin because they contained critical magnets with Chinese-made content from contractor Honeywell. The number of Chinese companies in the Pentagon’s supplier base jumped to 655 firms between 2012 and 2019, according to consultant Govini.
Portfolio Updates
Portfolio Changes:
Cloudflare (NET) MOVES FROM BUY A HALF TO SELL
Freeport-McMoRan (FCX) MOVES FROM HOLD A HALF TO SELL
Centrus Energy (LEU) shares gave up some gains this week, backing up from 49 to 41 even though interest in boosting nuclear energy continues to grow at home and abroad. The company recently announced that it has secured new nuclear fuel sales contracts and commitments worth an estimated value of $270 million so far this year with most revenues coming through multi-year contracts with major utilities, often signed years in advance.
Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry. Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. Centrus stock is still trading way off its 52-week high and at less than four times earnings. BUY A HALF
Cloudflare (NET) shares closed yesterday at almost exactly the same place where they started the week, at 61. Despite Cloudflare’s impressive growth, profitability is elusive and insiders are selling the stock so I’m moving this to a sell in this environment. MOVE FROM BUY A HALF TO SELL
Fanuc (FANUY) shares were dead even at 15 despite a glowing Wall Street Journal article highlighting the growth of the industrial robot. The subtitle of the article was: “Aging populations, supply-chain woes and the EV revolution to boost demand for robots made by companies such as Japan’s Fanuc”.
Fanuc’s robot orders in the latest quarter rose 23% from the previous quarter, driven by strong demand everywhere and especially the U.S.
Fanuc’s robot division has grown to be its biggest revenue contributor, accounting for nearly 40% of its total sales, but machine tool sales were weaker to China in particular.
Jefferies estimates that Fanuc is the world’s leading manufacturer of industrial robots and FANUY is a high quality stock with a strong balance sheet with plenty of cash. BUY A HALF
Ford (F) shares pulled back from about 15 to 13 this week amid supply chain woes. The company believes these will impact third-quarter earnings by about $1 billion in higher-than-expected supplier costs and material shortages that have led to unfinished vehicles it couldn’t sell during the period. For 2022, the company projects that adjusted operating results for the third quarter will fall between $1.4 billion and $1.7 billion. Ford stock is still a buy, however, as it trades at just over five times trailing earnings. BUY A HALF
Freeport-McMoRan (FCX) shares dipped from 30 to 28 and higher interest rates and slower expected global and Chinese growth are taking a toll. In this environment, I think it is wise to sell and come back as an uptrend develops.
This is no reflection on management as Freeport is managing its finances well with a return on equity of 27%, return on assets of 12%, and has an ample cash reserve of $9.5 billion. With a valuation of just under 10X earnings, I think we have upside potential but the current pullback makes me pause. MOVE FROM HOLD A HALF TO SELL
Infineon Technologies (IFNNY) shares were again solid as many other semiconductor stocks are under pressure. The company’s EPS is expected to grow 38% this year and cash flow growth is strong. Infineon is a leading broad-based European chipmaker founded when the company was divided from its Siemens parent in 1999 and is focused on auto markets rather than consumer electronics. BUY A HALF
Kraken Robotics (KRKNF) was up slightly this week as this maritime/defense micro-cap is among the first Canadian companies qualified to sell directly to the Government of Canada without competition. The company recently signed a follow-on contract to supply additional KATFISH™ for the NATO Navy’s new mine hunting vessels. Kraken Robotics has also landed a major contract to provide new sonar systems for the Royal Danish Navy.
Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software-centric sensors and underwater robotic systems. Kraken is a well-run company in a strategic area of growth and a prime takeover candidate. BUY A HALF
MP Materials (MP) shares were steady this week and selling at a more reasonable 24X earnings, less than half its post-IPO P/E of more than 50.
The company reported earnings per share surging 139% from the prior-year quarter’s levels but rare earths concentrate prices have pulled back sharply so I recently moved this stock to a hold.
This stock is a way to play clean tech, defense, semiconductors, and other advanced and emerging technologies through some of their basic inputs. HOLD A HALF
Oracle (ORCL) shares pulled back from 71 to 66 even as the company reported solid results in its first fiscal quarter. Without foreign currency effects, its cloud infrastructure revenue increased 58% year over year, and its cloud application revenue was up 48%. In addition to the impressive cloud business growth, Oracle’s founder and chairman, Larry Ellison, noted that Oracle can save cloud users money and offer a better product than Amazon’s AWS. “We expect next quarter we’ll be announcing some brands and companies moving off of Amazon,” Ellison said.
Oracle also announced this week the launch of Java 19, its latest version of the world’s number one programming language and development platform.
One key advantage for Oracle is that its cost structure is fairly fixed so each additional dollar of revenue earns more profit than the last. This cost structure also enables Oracle to offer big enterprise clients a discount for bundling services HOLD A HALF
Sociedad Química y Minera de Chile S.A. (SQM) shares gave up the five points it gained last week to finish the week around 104, or just five times forward earnings. Lithium prices and fertilizer prices are key drivers and Chile’s political risk is a bit of a drag on performance. SQM’s dividends are sizable with annual dividend yielding 10.8% and an impressive five-year annualized dividend growth rate of 12%. SQM is a double play as the company is also the largest producer of potassium nitrate used for fertilizer so the stock offers two drivers of revenue and profits. HOLD A HALF
Taiwan Semiconductor (TSM) shares were flat this week though in this sector they are a bright spot given their overall market dominance and near monopoly on high performance chips. A Needham analyst expects TSM will grow top-line revenue 15% in 2023 despite an overall expected fall in industry sales. TSM also trades at a very reasonable 16 times earnings as the stock has come back to 77 from a 52-week high of 145 on January 13.
While nobody right now can compete with America’s software programmers, semiconductor designing, and equipment, most advanced chips come from Taiwan, an island with a population of 24 million about 100 miles away from the Chinese mainland. Meanwhile, America buys 70% of its most sophisticated chips from Taiwan, posing an economic and national security issue.. BUY A HALF
| Stock | Price Bought | Date Bought | Price 9/22/22 | Profit | Rating |
| Centrus Energy (LEU) | 27 | 7/8/22 | 40 | 45% | Buy a Half |
| Cloudflare (NET) | 50 | 6/24/22 | 57 | 13% | Sell |
| Fanuc (FANUY) | 15 | 5/13/22 | 15 | -2% | Buy a Half |
| Ford (F) | 20 | 11/23/21 | 13 | -37% | Buy a Half |
| Freeport-McMoRan (FCX) | 31 | 8/19/22 | 28 | -7% | Sell |
| Infinenon Technologies (IFNNY) | 25 | 7/22/22 | 24 | -8% | Buy a Half |
| Kraken Robotics (KRKNF) | 0.28 | 9/2/22 | 0 | 7% | Buy a Half |
| MP Materials (MP) | 35 | 8/4/22 | 31 | -12% | Hold a Half |
| Oracle Corporation (ORCL) | 94 | 11/11/21 | 66 | -30% | Hold a Half |
| Sociedad Química y Minera de Chile S.A. (SQM) | 75 | 4/29/22 | 98 | 30% | Hold a Half |
| Taiwan Semiconductor (TSM) | 77 | 9/16/22 | 76 | -2% | Buy a Half |