August 8, 2024

Portfolio Changes:
Neo Performance (NOPMF) – Move from Buy a Half to Hold a Half
NIO (NIO) – Move from Buy a Half to Sell
Super Micro Computer (SMCI) – Move from Hold a Half to Buy a Half

Keeping Market Turbulence in Perspective

Markets remain on edge after Monday’s big selloff, Tuesday’s recovery, and yesterday’s down day. Some disruptive Explorer stocks were hit rather hard leading to Nio (NIO) being removed from the recommended list today while Super Micro (SMCI) is upgraded to a buy.

On Monday, trading in 401(k)s was more than eight times the daily average, the highest since 2020. My guess is that most of this activity was selling rather than buying.

Before getting to why we need to stay calm and keep this market volatility in perspective, let me briefly cover what prompted Japan’s stock selloff and why it spread.

Japan’s weak yen had been inflating corporate profits and valuations, and therefore fueling the most robust stock rally in decades. Foreign investors provided much of the capital flows, as interest in China waned. That dynamic turned on a dime last Wednesday, when the Bank of Japan unexpectedly raised its key interest rate for only the second time in nearly two decades.

The rate hike sent the yen up past 150 to the dollar and investors started selling Japanese stocks as well as other U.S. stocks. The cocktail of a stronger yen and higher interest rates was a potent driver to the downside. Japan’s stock market then rose on Tuesday after the Bank of Japan promised not to raise interest rates while markets are unstable.

Japan aside, before this week’s pullback, the S&P 500 technology sector was up more than 80% from its bear market low in October 2022. As you all know, I have been beating the drum that a pullback in big tech was inevitable.

Stock prices fluctuate, and sometimes faster and more unexpectedly than is rational.

This highlights the need to have a flexible strategy that reduces the chance that you are selling or buying at the worst time. Taking profits from time to time from big winners helps calm the nerves. Having a 20% or so trailing stop-loss in place for aggressive stocks also takes some of the worry out of your portfolio

In general, having a sizable cash position, a well-diversified core portfolio, and a separate trading-oriented “explore” portfolio will help you keep the core in place.

You should also always have a list of 5-6 stocks that you want to buy if markets sell off quickly.

Semiconductor stocks on my mental watch list include the combo NVIDIA (NVDA), Advanced Micro (AMD), and to a lesser degree, Intel (INTC). Nvidia is still expensive after a pullback, Intel is very weak, and AMD is right in the middle from both a technology and valuation perspective.

Nvidia’s quarterly profits have risen almost tenfold in the last two years or so, leading to it becoming the world’s third-most valuable technology company after Apple and Microsoft. But several issues have led to the stock falling about 25% in just over three weeks – a loss of some $900 billion in market value.

I expect to see more volatility in the weeks ahead. That will create opportunities for short-term traders and provide attractive entry points for long-term investors as well.

Explorer Weekly Stock Commentary

Centrus Energy (LEU) shares gave back 3% this week even as the company reported $189 million in revenue for the quarter ended June 2024, representing a year-over-year increase of 92%. EPS was $1.89 for the same period compared to $0.83 a year ago. This stock remains a buy as the emergence of new and safer nuclear power technology is a major Explorer theme. Buy a Half

Cloudflare (NET) shares were largely unchanged in a turbulent market after it reported a strong quarter with revenue up 30% and a net loss of $15 MM representing an 84% improvement over a year ago. This cybersecurity company powers 80% of websites and blocks billions of threats every day for its expansive client list. Buy a Half

Neo Performance (NOPMF) shares were off 9.5% this week and the stock is on the edge of being removed from the portfolio. It does report earnings today, however, so a quick turnaround is possible. Neo is a key player in rare earths processing, but prices remain weak and a turnaround more elusive then expected. Move from Buy a Half to Hold

NIO (NIO) shares pulled back sharply this week even as the company reported it delivered about 20,500 EVs last month, marking the third straight month the company has surpassed this target. Nio has delivered about 44% more EVs so far in 2024 compared to 2023. The market clearly expected more, so given the unsettled market, I’m moving this aggressive stock to a sell. Move from Buy a Half to Sell

Novo Nordisk (NVO) shares were off 10% this week despite its key weight-reducing products posting some solid quarterly numbers. Ozempic sales surged 30% to $4.26 billion while Wegovy sales were up 69%. As I mentioned last week, Novo’s weight-loss drugs are at the center of a huge market, but we need to keep in mind that it is an expensive stock. Hold a Half

Sea Limited (SE) shares were largely unchanged as we look forward to earnings on August 13. This will be an important date as we look for confirmation that the company’s profitability is trending upwards and demonstrates some consistency since it has missed earnings expectation two of the last four quarters. The stock is up 60% so far in 2024. Buy a Half

Super Micro Computer (SMCI) shares closed 30% lower this week after it reported quarterly revenue surged 143% and it estimates the next quarter’s revenue will be up more than 200%. Concerns include Nvidia announcing a delay in some new products as well as lower gross profit margins. The stock is still up 75% since the start of the year, but it’s down nearly 60% from its March record high. Supermicro has been buoyed by accelerating spending on AI data centers. We have taken some profits, so I’m moving this to a buy. Move from Hold a Half to Buy a Half

Explorer Dominator Blue-Chip Recommendations - More Buy and Hold

International Business Machines (IBM) shares were down 2.8% as IBM focuses on the twin technologies of AI and cloud computing. Both areas are huge markets, expected to be $184 billion and $676 billion, respectively, in 2024. IBM has consistently led in AI research, with numerous AI patents and pioneering technologies in machine learning, natural language processing, and AI-driven analytics. IBM’s book of business for AI has grown to more than $2 billion since the launch of Watsonx. Buy a Half

Unilever (UL) shares were steady this week after the stock jumped 8.6% last week following comparable-sales growth beingup 3.9% in the second quarter. The company is one of the world’s largest producers of consumer goods and offers a wide range of products in the fields of beauty, personal care, home care, nutrition with a focus on emerging markets. Buy a Half

Visa (V) shares were off 3.4% and the stock is now off 10% from its recent high so I encourage you to buy 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 so a big portion of the world’s consumer spending runs on the Visa network, from the United States to Europe to emerging markets in Asia and Africa. According to research by PwC, global cashless payment volumes are projected to grow by more than 60% from 2025 to 2030. 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: 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.

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 5.7% 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 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 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 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 – down about 25% from all-time highs and 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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