April 18, 2024

Portfolio Changes: Exscientia (EXAI) – Move from Hold to Sell

Peter Lynch’s Strategy Stands the Test of Time

Explorer stocks were quiet as equities fell for the fourth straight day. Super Micro (SMCI) had an up week as most other chip stocks led the pullback.

When I started in this business as an institutional stockbroker, Peter Lynch, the portfolio manager for Fidelity’s Magellan fund, was seen as a master of the game. His forte was picking smaller growth stocks. Upon stepping down in 1990 after his fund became too big to make any small-cap stock pick meaningful, he had delivered, over a 13-year period, a 29% per annum return to investors.

The advantage he had was that compared to large-cap stocks, small caps were less covered by Wall Street research analysts and thus traded at bargain prices relative to their growth prospects.

His lessons still ring true today. Just last November, he had this to say about small-cap investing and the state of the market.

“I love it when stocks go down. … We’ve been in an incredible bear market for two years, except for basically 10 big stocks. Stocks are almost selling for less than cash. Look at the Russell 2000.”

Our edge is that we have the flexibility to pick smaller stocks or small-cap U.S. or international ETFs.

They do come with more risk since they tend to have more debt, don’t produce profits every year, have thinner management teams, and are more focused on one or a few markets rather than operations across the world like the blue-chip multinationals. They tend to disrupt markets rather than dominate them. The key is to blend both types of stocks in your portfolio.

The proof is in the pudding. From 1927 to 2016, the smallest 10% of stocks in the U.S. delivered a staggering 17.5% compound annual return, significantly beating the 9.2% return from the largest 10% of stocks.

We will be increasing exposure to U.S. and international small caps.

Explorer Weekly Stock Commentary

Below is a brief update on each Explorer stock. Any changes in ratings will be highlighted. This section is all you need to read each week.

Explorer Disrupter Recommendations – need to watch more closely and have 20% trailing stop-loss in place.

Cloudflare (NET) shares closed at 89 this week and I recommend you accumulate more shares since Cloudflare’s CEO expects sales to grow from $1.3 billion to $5 billion over the next five years. Cloudflare handles and protects data from over 180 countries, 30% of Fortune 1000 companies, and forecasts 28% revenue growth in 2024. Buy a Half

Exscientia (EXAI) shares underperformed again this week, so I need to move this stock to a sell. The application of AI to develop drugs more efficiently is very promising but the market we have right now is impatient for results. I will continue to monitor this stock. Move from Hold a Half to Sell

Franco-Nevada (FNV) shares were steady this week after we recently upgraded this recommendation to a full position. Gold and precious metal stocks are supported by stubborn inflation and growing geopolitical uncertainty. This gold-silver-platinum royalty and streaming company offers us exposure to precious metals without the operational risks associated with traditional mining. Buy a Full

IperionX (IPX) shares finished the week just over 14 on no news. Iperion has the potential to be a leading American titanium metal and critical materials company using patented, environmentally-friendly metal technologies to produce high-performance titanium alloys. Buy a Half

Novo Nordisk (NVO) shares were unchanged this week and have been trading sidewise for several weeks after a strong start to the year. The market for anti-obesity drugs is about $6 billion and Goldman Sachs estimates it could grow to $100 billion by 2030. There are an estimated 800 million people with obesity worldwide and only 2% of these patients are being treated. This Danish drugmaker’s market value is now larger than Denmark’s GDP. Hold a Half

PayPal (PYPL) shares dipped from 65 to 63 this week and sit about 80% below their 2021 peak when digital payments and fintech were a favored sector. I believe the stock is a great value opportunity. PayPal benefits from the tailwind of electronic payments and the upward trajectory of online shopping. According to Boston Consulting Group, the worldwide fintech sector is expected to be worth $1.5 trillion by 2030, and PayPal is in the pole position with 426 million users. Buy a Half

Sea Limited (SE) shares were unchanged this week and this is another stock trading way below its highs. Sea stock trades at just two times sales and has the potential to grow in the most dynamic markets in the world. Sea generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment. As its digital gaming and entertainment segment regroups, its fintech payments segment delivers steady growth. Buy a Half

Super Micro Computer (SMCI) shares outperformed Nvidia (NVDA) this week, finishing at 960. For the full fiscal year, Super Micro is on track to deliver revenue of $15 billion and Loop Capital projects revenue of up to $40 billion for fiscal 2026. The company reports its next earnings on May 2. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares demonstrated their strength over the last several weeks as the stock held its value, trading at just 18 times forward earnings with a 3.6% dividend. Earnings are expected next week for this conservative play on cyber consulting and AI. Buy a Half

Visa (V) shares also highlight the value of a dominating stock as it holds steady in a more volatile market. Visa has than 4.3 billion cards in circulation and more than 130 merchants in its network. Next earnings report is expected out next Tuesday, April 23. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)
  

Explorer ETF/Fund Positions

Global X Lithium & Battery Tech ETF (LIT) offers solid exposure to other beaten-down lithium names at a low cost. With an expense ratio of 0.75%. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Buy a Full

Morgan Stanley China A Share Fund (CAF) offers exposure to a basket of the largest Chinese-listed stocks. Buy a Half

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest quality emerging market stocks. Buy a Half

WisdomTree’s Japan Hedged Equity ETF (DXJ) offers exposure to broad basket of dividend-rich Japanese stocks hedging for yen currency fluctuations. Buy a Full

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Watch List: BYD (BYDDY) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). The company also manufactures and supplies EV batteries, including to Tesla, and makes its own chips. This is vertical integration that would make Henry Ford proud. BYD is in a strong position to be one of, if not the leader of the EV revolution in terms of size, scale, and growth.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields: cloud computing, AI, cybersecurity, and edge computing. its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data - from where it is located to where it is needed (edge computing) - is a massive business opportunity in which Cloudflare already excels.

Watch List: ConocoPhillips (COP) is a global energy industry giant and one of the largest independent exploration and production (E&P) companies in the world, as measured by production levels and proved reserves. The company, founded in 1917 and based in Houston, has operations in 13 countries, although almost half the company’s production is derived from U.S. sources.

Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

International Business Machines (IBM) is a blue-chip artificial intelligence (AI) and India play with a nice dividend yield. Known as “Big Blue,” IBM now primarily helps businesses and governments manage their information technology in the cloud era. The stock sells at a discount to the S&P 500 multiple and the information technology sector’s forward earnings multiple. IBM has paid a dividend every quarter since 1916 and has had 28 consecutive years of dividend increases.

IperionX (IPX) aims to become a leading American titanium metal and critical materials company. It is using patented metal technologies to produce high-performance titanium alloys, from titanium minerals or scrap titanium. And it is trying to do it at lower energy costs and lower carbon emissions. The company also has backward integration to titanium minerals via control of the largest U.S. titanium resource in Tennessee. Installation and commissioning of the HAMR titanium furnace is expected during the second quarter, before producing first titanium metal in mid-year 2024

Novo Nordisk (NVO) specializes in treatments for diabetes, hemophilia, and obesity. The company supplies half of the world’s insulin, and its diabetes care products are used by over 34 million people today. Novo highlights that more than 750 million people are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on sizable and growing demand for this weight-loss drug, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia. Some of you may recall this stock from when it was an Explorer recommendation in the fall of 2019 at around $30 and became more than a 10-bagger to its 2021 high.

Super Micro Computer (SMCI), commonly known as Super Micro, manufactures enterprise computer server hardware for cloud computing, artificial intelligence, data storage and telecommunications. Super Micro stock looks relatively inexpensive right now for the growth that it has been delivering. The company trades at just two times sales. Super Micro has two larger rivals, Dell (DELL) and Hewlett Packard (HPE), but it is forecast to grow five to 10 times faster. Furthermore, both Dell and HPE have relatively high debt whereas Super Micro has a net positive cash position. This is an aggressive pick in a sector experiencing extraordinary growth.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa has the largest card network in the U.S., processing $14.8 trillion of payment volume in the last 12 months. Visa’s financial infrastructure also underpins much of the world’s commerce. The duopoly between Visa and Mastercard is often referred to as one of the best businesses in the world, with insurmountable moats, low operating costs, and plenty of opportunities for unlocking additional value. Visa currently trades at a discount to its archrival MasterCard. This leaves it much better poised to outperform the latter going forward.

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