December 12, 2024

Portfolio Changes: Dutch Bros (BROS) – Move from Buy a Half to Hold a Half

Debt, Risk, and Volatility

I recently noticed a few popular stocks such as MicroStrategy (MSTR) offering exposure to leveraged Bitcoin which to me seems like excessive risk and a sign of potential trouble.

This is like pouring gasoline on a roaring fire. It reminds me of a quote from Edward Chancellor’s book The Price of Time, which offered this gem:

“……as a rule, panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by [the taking on of excessive leverage in good times].”

Morgan Housel, a partner at Oaktree, recently wrote that of the 140 businesses in Japan that are still operating more than 500 years after they were founded, almost all of them kept a lot of cash on hand as a buffer in hard times and little or no debt.

The key to survival through the ups and downs that the market delivers over time is what Warren Buffett describes as having a margin of safety.

The legendary value investor Howard Marks has an iron rule: The more stable the assets, the more leverage (debt) is safe to use.

Bitcoin is anything but stable.

Levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin.

This highlights the difference between maximizing and optimizing investment returns.

Don’t get me wrong. Has anything great ever been accomplished without debt? No question, debt is the foundation of capitalism and the source of great wealth.

The railroads would never have been built nor would America have won World War II without debt. America’s great corporations would have stayed small businesses if they survived at all. Very few baby boomers would have ever owned a home. America would be but a shadow of itself.

What I am saying is that one needs to be intelligent and think things through.

As Howard Marks of Oaktree put it, “Investors face not one but two major risks: the risk of losing money and the risk of missing opportunities.”

He adds this warning: Volatility + Leverage = Dynamite.

Capitalism is connecting capital with opportunity. Those that have access to cash and, more importantly, the willingness to borrow cash after careful analysis based on the best intelligence, capture the opportunity and seize the day.

This is the way it is, and this is the way it will always be.

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 a 20% trailing stop-loss in place.

Agnico Eagle Mines (AEM) shares were up 2% this week for their third straight week of gains. The company’s year-over-year cash flow growth is 23.5%, which is higher than many of its peers with an industry average of 3.9%. In the third quarter of 2024, gold was Agnico Eagle’s primary revenue source, accounting for roughly 99% of total revenue. The remaining revenue came from selling copper, silver, and zinc, treated as by-product metals. A stronger dollar is weighing on gold, but higher geopolitical risks seem to be driving investors to safe havens such as gold. Buy a Half

Airbus (EADSF) shares were up a little as Air India confirmed an order for 100 Airbus jets this week. Airbus has a backlog of more than 8,600 orders to fill and last year beat Boeing for the fifth straight year in the orders and deliveries race as it gained market share by beating Boeing to develop a line of fuel-efficient, mid-sized aircraft. Fuel is one of the airlines’ biggest costs. Buy a Half

Banco Santander (SAN) shares were unchanged this week as the bank announced it was going nationwide in America with its digital OpenBank platform after last week doing the same in Mexico. Banco Santander has added almost 5 million new customers over the last 12 months and has a total of 171 million customers. Banco Santander’s strength is in Latin America and Europe. Buy a Half

BYD (BYDDY) shares were up 6.9% to break 70 and confirm our faith in the stock in its first week as an Explorer recommendation. The company confirmed that it will sell 4 million EVs this year. In 2021 and 2022, BYD more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including into European and Asian markets. BYD is the world’s largest EV battery maker. Buy a Half

Centrus Energy (LEU) followed last week’s 19% gain with little movement this week. The stock cooled in the last month but is still up nearly 50% over the past 12 months. We will have to watch this uranium supply issue as well as regulatory issues closely. Nuclear energy now accounts for about 75% of low emission energy in the United States. Buy a Half

Cloudflare (NET) shares are up more than 50% over the last six months as the company announced it was broadening advanced chip purchases beyond Nvidia. The company expects its revenue to grow 28% this year and analysts expect its adjusted earnings per share to grow 52% this year. Cloudflare sits at the sweet spot of cybersecurity and AI computing services. Buy a Half

Dutch Bros (BROS) shares are up more than 60% since the start of November and are a bit expensive so I’m moving the stock to a hold for now. The company recently reported revenue growing 27.9% year over year to $338 million in the third quarter. The drive-thru coffee chain operator’s key metric going forward is how many new stores it opens with aggressive expectations. Move from Buy a Half to Hold a Half

Sea Limited (SE) shares have had a great year, up 188% so far, as I plan to visit the Singapore company in early 2025. You may consider selling some shares to take profits off the table if you have not already done so. The company focuses on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Sea’s digital entertainment segment is often overlooked but it serves 628 million users. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares are up 45% so far this year as the company announced its Investor Day event on February 4. IBM recently announced a series of key AI partnerships with Amazon. IBM offers us conservative exposure to a blend of cloud computing, data analytics, cybersecurity, and artificial intelligence (AI). Buy a Half

Unilever (UL) shares have underperformed during the last six months though the conglomerate is a standout compared to Europe’s FT 100 index. The company continues to juggle product strategy and pricing across the world to mitigate risks from higher tariffs since Unilever has manufacturing bases in both Mexico and China. Buy a Half

Visa (V) shares have underperformed during the last six months as the U.S. government seeks to make the case that Visa is a near monopoly on the debit card side of the business. Visa remains a global leader in digital payments connecting 4 billion account holders to more than 130 million merchants and 14,500 financial institutions. Visa dominates the U.S. payments sector with 52% of the U.S. credit card market. Buy a Half

Watch List – Stocks we like but do not follow week-to-week

ConocoPhillips (COP), Franco-Nevada (FNV), MOOG (MOG-A)

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 $930 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 top Chinese-listed stocks. Buy a Half

Oberweis Micro-Cap Fund (OBMCX) fund stands out for several reasons. The fund’s sound investment process and strong management team earns it a rare Morningstar Medalist Rating of Gold. Over the past five years it has posted an impressive average annual return of 18.9%. 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.

Agnico Eagle Mines (AEM) follows a conservative strategy and with a history spanning more than 60 years, and now operates a sizable portfolio of 11 assets located in four countries. Management forecasts gold production of approximately 3.45 million ounces in 2024. The company estimates it has about 54 million gold ounces of proven and probable reserves. Furthermore, Agnico Eagle has paid a dividend for 41 consecutive years with a dividend compounded growth rate of 23% per year since 2005 and paid a dividend of $1.60 per share in 2024.

Airbus (EADSF), along with Boeing, is one of only two manufacturers that make the full-size commercial jets needed by the world’s airline industry. China’s COMAC is making gains but is probably a decade away from being a competitive rival. Boeing’s troubles are Airbus’s opportunity. Airbus, incorporated in the Netherlands but based in Toulouse, France, is making planes as fast as it can and has a backlog of more than 8,600 orders to fill. Airbus last year beat Boeing for the fifth straight year in the orders and deliveries race, with 2,094 net orders and 735 delivered planes. I visited its facilities recently and while it shares some of Boeing’s supply chain challenges, Airbus has a clear edge right now. Airbus is benefiting from its decision deliver the fuel efficient to launch A321neo, a single-aisle aircraft with 180 to 230 seats. Fuel is one of the airlines’ biggest costs. Airbus’s new A321XLR model will also enable airlines to use cheaper narrow-body jets on long-haul flights.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. In the second quarter, it welcomed over 4 million new customers compared to the previous year. About 55% of deposits and loans are in Europe with the balance in Latin America. In its most recent quarter, Santander’s revenue was up 8% while net profits increased 16%.

BYD (BYDDY), in both 2021 and 2022, more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., European, and Asian markets. BYD is the world’s largest EV battery maker and with CATL and others, is working on sodium-ion batteries. Much less energy dense than lithium batteries, sodium batteries should be much cheaper. BYD will also launch a next-generation Blade battery in 2025, with longer range and faster charging. That, along with various other models, could help rev up BEV sales growth next year. BYD expects solid-state batteries for high-end models by 2027, but not fully reaching lower-end models until 2030-2032.

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 950 drive-through coffee stores as of the end of the third quarter, including 38 that it opened in the quarter. 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 29 consecutive years of dividend increases.

Watch List: MOOG (MOGA.A) supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350, Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer (ERJ) and Gulfstream, owned by General Dynamics (GD).

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.

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.

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