August 22, 2024

Portfolio Changes: None

Why Did Warren Buffett Sell Apple Stock?

Explorer stocks had a good week, but I wanted to highlight that recently, Warren Buffett sold almost 400 million of Apple (AAPL) stock during the second quarter. The Oracle of Omaha sold about 390 million shares of Apple stock, reducing Berkshire Hathaway’s ownership to roughly 400 million shares.

Granted, Berkshire booked some giant investment gains during the second quarter, with Apple accounting for a big share of those winnings. This is nothing to sneeze at, but why did Buffett and company decide to sell the shares, thereby missing out on some big capital gains? Forbes notes that Apple’s average closing price in the second quarter was 186, which is well below the 226 at which the stock closed on August 20.

Buffett is famous for saying the proper time frame to hold a stock is “forever.” The stock sale could have been undertaken for tax reasons or maybe because Mr. Buffett perceived too much China risk? And unlike most mortal investors, Buffett is drowning in cash so liquidity could not have been an issue.

Regardless, it underlies the difficulty of timing the sale of a stock. The challenge is compounded by factors well outside the control of a company’s management such as a black swan or grey swan event that disrupts the overall stock market.

I think the decision whether to sell is a particularly tough call with “dominating” stocks like Apple that have tremendous resources at hand to shift strategies and pivot to new market opportunities. With more aggressive and speculative “disruptive” stocks, you need to always take some profits off the table and limit losses.

Many of these more aggressive stocks often come back strong while, from time to time, some sink into oblivion. Play the odds, don’t look back with remorse after you take some profits.

Always remember what J.P. Kennedy, the father of JFK and a Wall Street operator, often said: “Only a fool holds out for top dollar.”

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

Centrus Energy (LEU) shares were up 7.6% this week with no significant news to report. Earnings per share more than doubled and revenue was up 92% in its second quarter while the company reported a healthy backlog of $2.7 billion. This stock remains a buy as it tracks the emergence of new and safer nuclear power technology. Buy a Half

Cloudflare (NET) shares were steady this week as the company both secures and speeds up websites while offering full cloud applications. Cloudflare has more than 210,000 paying clients and about half of its revenue comes from outside the United States. It boasts a diversified client base with roughly two-thirds of its revenue coming from more than 3,000 clients spending at least $100,000 annually. Buy a Half

Dutch Bros (BROS) shares were up slightly in the stock’s first week as an Explorer recommendation. This is an operator and franchisor of drive-through coffee stores, with about 900 locations across 17 states in the U.S. Shares have pulled back in the last month due to a combination of some profit taking and guidance from management that growth may moderate a bit. It is expanding at a steady pace, expecting up to 165 new stores this year. A Cowen analyst reiterated a buy rating this week with a price target of 47. Buy a Half

Neo Performance (NOPMF) shares were up 9.2% this week after it was reported that the company was selling its China rare earths business for $30 MM. While Neo is a key player in rare earths processing, I need to uncover the details regarding this transaction which might limit profits going forward. Hold a Half

Novo Nordisk (NVO) shares were little changed this week. I don’t expect demand for its products will slow even in the face of a couple of headwinds. Demand for Wegovy is still high. Ozempic sales surged 30% to $4.26 billion while Wegovy sales were up 69% in the latest quarter. Hold a Half

Sea Limited (SE) shares were up 6.8% this week after surging 26.4% the previous week in response to another good quarter. Sea founder and CEO Forrest Li mentioned in the recent earnings call that he was “very, very focused on” building the right AI tools for Sea’s business and sees great applications in e-commerce and gaming. All three of Sea’s major segments are moving in the right direction. Buy a Half

Super Micro Computer (SMCI) shares were up 8% this week after a 17% jump last week after I upgraded the stock from a hold to a buy. Supermicro is a key server supplier to Nvidia and many cloud computing giants as it supports the AI infrastructure buildout, buoyed by accelerating spending on AI data centers. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were up 2.5% this week after a 3% rise last week. IBM is primarily a consulting and cloud company but has also consistently led in AI research, with numerous AI patents and AI-driven analytics. IBM’s AI backlog has grown to more than $2 billion. Buy a Half

Unilever (UL) shares are up 31% so far this year which is impressive for one of the world’s largest producers of consumer goods. It offers a wide range of products in the fields of beauty, personal care, home care, and nutrition with a focus on emerging markets. This is a great core holding. Buy a Half

Visa (V) shares were up marginally this past week, and I again encourage you to buy the stock if you haven’t already done so. Visa is the world’s largest credit card, debit card, and payments network, serving 4.5 billion credit/debit cards. This is a very profitable fintech with a commanding market position. Buy a Half

Watch List – past recommended stocks that I still like and keep an eye on

BYD (BYDDY), ConocoPhillips (COP), Franco-Nevada (FNV)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a close ended fixed income mutual fund launched and managed by Aberdeen Standard Investments (Asia) Limited in Singapore. 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

iShares MSCI India Small-Cap ETF (SMIN) is a $960 million fund that holds a basket of about 500 small-cap India stocks. It is nicely diversified with the top 10 stocks accounting for just 12% of assets. The lead sector is industrials at 25%, followed by finance at 15%, consumer goods at 14%, basic materials at 13% and healthcare at 10%. Buy a Half

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 a 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.

Centrus Energy (LEU), based in Bethesda, Maryland, supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. Centrus Energy is building an enrichment facility in Ohio and would be very likely to benefit especially if federal funding moves forward to support this and other nuclear projects. I believe Centrus stock will benefit from increasing demand for its services, and that downside risk is low while upside potential is significant.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields, though cloud computing is its bread and butter.

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.

Dutch Bros (BROS) is an operator and franchisor of drive-through coffee stores, with about 900 locations across 17 states in the U.S. Dutch Bros has seen its share price soar but in the last month its stock has pulled back from 42 to as low as 29 due to a combination of some profit taking and guidance from management that growth may moderate a bit. It’s expanding at a steady pace, expecting up to 165 new stores this year, and it envisions up to 4,000 stores over the next 10 to 15 years.

Watch List: 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.

Neo Performance (NOPMF) manufactures the building blocks of permanent magnets and powers many modern of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to permanent magnets. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo also has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 5.4% dividend, and incentives are aligned with about 20% of the outstanding stock held by management.

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 its increasingly popular weight-loss drugs, Ozempic and Wegovy, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

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 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 Supermicro, 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.

Unilever (UL) is a dominant consumer goods giant with a trove of 400 recognizable brands in its diversified portfolio – from Vaseline to Dove – that it sells in over 190 countries. However, 30 “power brands” account for almost 75% of Unilever’s total sales. It is a steady, stable stock for an uncertain environment and for a change, its stock is selling at a rare discount, trading at just over two times sales. Two other reasons I like Unilever are that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. 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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