Stocks are on track to post gains for July as Explorer recommendations have a good week with new pick Centrus Energy (LEU) up 20% followed by Cloudflare (NET), up 15%. Now, we head to Germany for today’s pick.

Cabot Explorer Issue: July 21, 2022

It looks like stocks may be on track to post gains in July as the S&P 500 is up about 4% this month. The tech-heavy Nasdaq has done even better, up close to 8%, while the Russell 2000 index of small-cap stocks is nearly 5.4% higher.

Why the improvement? Last month, U.S. crude oil was around $120 a barrel; now it is about $100. Prices at the gas pump were over $5 a gallon; now they’re under $4.50. Ten-year Treasury yields have gone from roughly 3.5% last month to around 3% today.

Beyond Taiwan and Covid, Xi Jinping’s leadership is being challenged by middle class Chinese who are boycotting mortgage payments across at least 301 projects in about 91 cities. (See graph below, courtesy of Bloomberg.)

Property makes up 20% of China’s economic activity and some 70% of household wealth in China is held in real estate. A wave of property developer defaults has rattled global investors.

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler may just be negotiating, but he was pessimistic about a deal with China that would avoid the delisting of some 200 companies from U.S. stock exchanges.

Finally, Beijing’s greatest fear is capital flight, which is why capital controls try to keep this to a minimum. Many high net worth Chinese would like to get money (and maybe themselves) out of the country.

Now let’s get today’s pick – from an entirely different part of the world.

New Explorer Recommendation
Infineon Technologies (IFNNY)

Europe’s Leading Chipmaker and Siemens’ Spinoff

German Precision and Quality – Undervalued and in Uptrend

While Congress wrangles over subsidies for semiconductor companies, I have found a leading German chipmaker that is a major supplier of chips for automakers. Today’s recommendation presents both a value entry point and a strong uptrend.

Infineon Technologies (IFNNY) is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon was founded when the company was divided from its Siemens parent in 1999. Infineon Technologies now contains four reportable business segments.

• Automotive provides products for use in powertrains, comfort electronics and safeties related to the automotive sector. This includes microcontrollers and sensors.
• Industrial Power Control provides chips and modules for generation, transmission, and consumption of electrical energy. This includes things like electrical drives for industrial applications, consumer electronics, renewable energy modules, conversion, and transmission products.
• Power Management & Multimarket supplies components for efficient power management or high-frequency electrical applications, including lighting management, LED, power supplies for everything from commercial servers to PCs, medical technology, microphones, and other high-frequency products.
• Digital Security Solutions gives the market microcontrollers for cell phone SIMs, payment cards, security chips, passports, ID cards, and other documents.

Infineon’s automotive chip business benefits from intangible assets around proprietary chip designs as well as high switching costs once its products are designed into automotive programs.

Automotive, industrial, and communications infrastructure customers, in particular, are unlikely to choose an inferior chip in order to save a little on the cost of a piece of equipment worth tens of thousands of dollars.

While the company has spun off of its low-margin wireless baseband chip business to Intel, Infineon acquired Cypress Semiconductor in 2020, with plenty of cross-selling opportunities for these complementary companies.

Infineon is also a player in electric vehicles as they require 3-5 times more chips and battery rechargers require more as well. Anker Innovations, a leader in mobile charging and consumer electronics, announced today that it has partnered with Infineon and top industry leaders in Gallium Nitride (GaN) technology to develop a new generation of charging solutions for both home and commercially.

This is an excellent time to begin building a position in this stock given its recent uptrend during the last month after a sharp pullback since late last year, when its stock price was double what it is right now.

During a brutal equity selloff in the first half of the year, and with technology stocks particularly hard hit amid rate hikes, Infineon Technologies is an excellent growth stock trading at a discount to its intrinsic value and thus offering investors a margin of safety.

In addition, the company reported earnings per share up 131% in it latest quarter, with a return on equity of 14.3%. Finally, Infineon is trading at a forward price-to-earnings ratio of 12.4 – near its biggest discount to the Stoxx 600 Technology Index on record. BUY A HALF POSITION

Model Portfolio

Portfolio Changes
Rio Tinto (RIO) - MOVE FROM BUY TO SELL

Updates
Centrus Energy (LEU) was up more than 20% to reach 31 in its second week as an Explorer recommendation. Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry.

The nuclear power industry is rapidly changing, with a new generation of advanced reactors under development. Centrus provides an integrated solution for meeting the industry’s engineering, manufacturing and fuel needs. The United States has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years.

One near-term catalyst for this stock is that the Biden administration is pushing lawmakers to support a $4.3 billion plan to buy enriched uranium directly from domestic producers. In addition, the stock is still trading way off its 52-week high and at less than three times earnings. I have a six-month target of 50. BUY A HALF

Cloudflare (NET) shares leapt from 44 to 53 this week, a 19% jump! Cloudflare consistently delivers impressive financial results. Revenue soared 53% to $731 million in the past year. The company regularly outperforms public clouds including Google. This is still a buy given that the stock was trading at its lowest valuation of the past two years prior to last week’s big move. The company will report its next financial results on August 4. BUY A HALF

CVS Health Corporation (CVS) shares went from 92 to 95 this week as the company expects to report its next earnings report on August 3. This is a good value stock for this sort of market because its first-quarter revenue was up nicely and CVS Health’s earnings per share has grown 26% annually, compounded, over the past three years.

CVS Health is one of the nation’s leading healthcare companies with almost 10,000 stores and its core markets grow each year even in a weak economy. CVS stock is still a buy, trading at just over 11 times forward earnings. BUY A HALF

Fanuc (FANUY) shares were up a point this week to reach 16. Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. Fanuc is a high-quality stock that should be firm with its strong balance sheet and a huge stockpile of cash. Fanuc is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25. BUY A HALF

Ford (F) shares were up 15% this week as the company announced it is cutting 8,000 jobs on the combustion engine side of the business in order to allocate more resources to electric vehicles (EVs). An AAA survey indicated that about 25% of Americans would likely buy an EV for their next car purchase with the major factor in that decision being fuel costs.

Recently, the Mustang Mach-E replaced Tesla’s Model 3 as Consumer Reports’ top EV for 2022. The much anticipated F-150 Lightening EV truck should boost interest in Ford stock. Ford stock stands out is its value as it trades at just four times trailing earnings. I encourage you to buy if you have not already done so. BUY A FULL

Nio (NIO) shares were up this week as the company works through the headwinds of China’s Covid restrictions and the semiconductor shortage.

In June, the company delivered an all-time high 12,961 EVs. Even with reduced output during April and May, the automaker still achieved more than 25,000 deliveries during the second quarter and hopes to ramp up to 50,000 EV deliveries in 12 months.

Nio reported its second-quarter vehicle deliveries late last week, with quarterly vehicle deliveries up 14% year over year and June deliveries increasing 60%. New Nio models continue to be launched and some offer battery upgrades with ranges of 621 miles on a single charge.

There are short sellers out there and the SEC and China are still wrangling about Chinese companies like Nio complying with American financial disclosure requirements. I would have a 20% stop-loss in place for this stock while I monitor the situation. HOLD A HALF

Oracle Corporation (ORCL) shares went from 69 to 72 despite heat waves causing cloud outages for Google and Oracle.

In other news, Oracle and Microsoft (MSFT) announced a deeper interoperability of their clouds, allowing customers to more easily run projects across both two platforms. Cloud providers previously tried to lock customers into a single platform, but the industry is evolving into a multi-cloud environment. About two-thirds of enterprise-level companies use multiple clouds, according to a May 2021 report by Boston Consulting Group.

As the world’s leading database management software company, Oracle is a conservative company and has historically been one of the safest stocks in software. HOLD A HALF

Rio Tinto (RIO) rebounded from a low of 54 to 57 this week. The copper miner that is one of the leading global iron-ore producers. While the shares now trade at just five times the 2022 earnings estimate with a 13.8% dividend yield, concern over lower demand from China and the risks of a global slowdown prompt me to take profits and remove this stock as an Explorer recommendation. If we can avoid a recession and China comes back, we could revisit this company down the road. MOVE FROM BUY A HALF TO SELL

Sociedad Química y Minera de Chile S.A. (SQM) shares went from 81 to 89 this week and now the challenge will be for the next quarter to keep pace with the company’s last quarter in which it posted revenues more than four times the comparison with the previous year. Revenue from the lithium segment surged more than tenfold.

The company is also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine so SQM is both a fertilizer and lithium play. HOLD A HALF

The next Cabot Explorer issue will be published on August 4, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld

Analyst Bio

Carl Delfeld

Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.

He received his Masters in Law and Diplomacy at the Tufts Fletcher School; worked for the First National Bank of Boston (now Bank of America) in London, serving as director of the Japan and South Korea Group; served as vice president at the investment bank Robert W. Baird & Company, developing new business in Tokyo, Hong Kong and Sydney; was Asia advisor to the U.S. Congressional Joint Economic Committee, the U.S. Finance Committee and the U.S. Department of the Treasury; wrote for Forbes Asia and the Far Eastern Economic Review; served as a member on the U.S. National Committee on Pacific Economic Cooperation and the Japan-U.S. Friendship Commission; was chairman of the Asian Pension Forum and wrote a book, titled, Red, White & Bold; the New American Century.