July 11, 2024

Portfolio Changes: PayPal (PYPL) – Move from Hold a Half to Sell

Hedging Risk with Contrarian Ideas

Explorer stocks put in a solid performance this week as Federal Reserve Chairman Jerome Powell was on Capitol Hill for two days of testimony. His remarks were parsed as if he were an oracle, but the takeaway seems that we are moving towards a rate cut dependent on labor markets cooling off a bit more.

I really don’t like paying too much attention to macro issues like interest rates and would rather focus on new ideas that most investors are not following closely. Right now, in a market so dependent on a small number of leading stocks, you can reduce your portfolio’s overall risk profile by adding some stocks in countries and sectors where expectations and downside risk are low.

That brings me to this week’s new disruptive Explorer recommendation, a stock that we have made money with in the past but is down about 50% so far this year.

But first, following up on the Explorer’s developing nuclear power trend, tech companies seeking reliable electricity supplies are zeroing in on America’s nuclear-power plants.

The owners of roughly a third of U.S. nuclear-power plants are in talks with tech companies such as Amazon to provide electricity to new data centers needed to meet the demands of an artificial intelligence (AI) boom.

Nuclear energy-powered data centers would match the grid’s highest-reliability power with a powerful customer that needs 24/7 carbon-free power, enabling the addition of data centers needed in the global AI race.

The EV race continues as Tesla and China’s BYD fight it out for the top EV producer crown while many other rivals jostle for position.

Tesla’s stock has rebounded nicely but Bloomberg reports that shipments from Tesla’s Shanghai factory fell 24% in June. Meanwhile, in the U.S., Tesla’s sales accounted for about half of EVs sold through May, down 62% from about a year ago. BMW, Ford, Hyundai, Kia, Mercedes and Rivian, among others, all had sales growth of 50% or more.

BYD announced the building of a $1 billion car factory in Turkey. This gets it into the European Union market to meet the growing demand for new-energy vehicles in the region and to reach consumers.

We are due to add a disruptive, potentially undervalued, aggressive Explorer stock idea and were thinking that EVs might be a good place to look. This sector is out of favor and therefore any good news could move EV stocks sharply upward.

New Explorer Recommendation

NIO (NIO)

NIO Inc., founded in 2014, designs and manufactures premium smart electric vehicle as well as innovations in next-generation technologies including assisted and intelligent driving, digital technologies, electric powertrains, and batteries.

Nio is based in Shanghai, a huge, dynamic city with a population of about 25 million which equals the combined population of America’s four largest cities: New York, Los Angeles, Chicago, Houston, plus Canada’s Toronto and Montreal.

This highlights the scale of China’s consumer market of 900 million, not to mention that almost two of every three EVs are made in China.

Earlier this year I would have said Nio was not a buy but at current prices, down 50% so far in 2024, it seems an opportunity after taking several factors into consideration.

The near mania over anything touching electric vehicles (EV) has long worn off but the fundamentals of the industry never looked stronger along with advances in technology.

Through no fault of its own, Nio is in the crossfire of trade tensions between China, the U.S. and Europe which is probably one reason Nio stock is down in 2024. Given that China and Asia are by far its most important markets, this seems a bit overdone.

While EVs make up about 7% of U.S. auto sales, the number in China is about 30% and is projected by Benchmark to perhaps get to 50% by 2030.

Taking a step back, electric vehicles are a winning proposition for China because they help solve two big problems. First, the mandarins in Beijing have a powerful incentive to push EVs due to political pressures to reduce smog in major cities.

Second, EVs can generate significant jobs and help the country capture the commanding heights of the EV ecosystem, a key goal of its 2025 strategic plan.

Nio is also competitive with BYD in the EV technology game along with Tesla. Its recently launched ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S.

Furthermore, since 2020, it has offered consumers its battery-as-a-subscription service whereby buyers can swap batteries rather than wait for recharging. Nio receives a subscription fee for these services and locks down loyalty and recurring revenue.

Even better, Nio will begin manufacturing these battery packs in house later this year and this is also the target date for Nio to roll out a more affordable EV priced between $30,000 and $45,000.

Nio has also generated a lot of media attention with its E9 electric supercar priced at $1.2 million and differentiates itself from its competitors with a network of battery-swapping stations.

A key challenge for Nio stock is its negative profit margins, which are being pressured by the pricing war and the need for more scale. While it is trying to offset that pressure by cutting marketing expenses, its adjusted operating loss still needs to move the other way.

Nio stock is clearly an undervalued EV player at these price levels, but we need to accept that this is an aggressive stock recommendation.

The company had a rough first quarter. Nio’s deliveries were down 3% in the first quarter year over year to 30,053 and revenue was down 9% due to price cuts.

But in April, Nio’s vehicle deliveries rebounded and were up 134% and in May grew 234%. Nio delivered 21,209 vehicles in June, representing an increase of 98.1% year over year. Overall, Nio delivered 57,373 vehicles in the second quarter of 2024, representing an increase of 143.9% year over year.

Nio’s stock seems to be poised for a rebound even though the macro picture for China is not encouraging. Nio has a premium brand image, which will differentiate it from its mass-market competitors and its advancing battery technology and charging solutions will ease range anxiety on electric cars.

Nio has also recently completed a test where its solid-state battery traveled over 650 miles on a single charge. Solid-state batteries are the holy grail of the EV world and if Nio can be viewed as a leader it will have a big impact on the stock.

The company has a strong cash position, but markets are likely to focus on delivery growth and, perhaps more importantly, a narrowing of Nio’s cash burn.

Nio’s stock is almost 90% below its all-time high from February 2021.

This is an aggressive Explorer recommendation.

BUY A HALF

Explorer Weekly Stock Commentary

ASML Holdings (ASML) shares were up 4% this past week and have been a major beneficiary of the focus on artificial intelligence (AI). This Dutch semiconductor equipment giant’s monopoly in the extreme ultraviolet (EUV) lithography space means that chipmakers and foundries such as TSMC need to rely on ASML. The company is sitting on a significant order backlog but keep in mind that this is an aggressive stock so we can expect some volatility. Buy a Half

Centrus Energy (LEU) shares were firm this week after rising more than 5% in its first week as an Explorer recommendation. Centrus supplies essential nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. The stock is trading at just 9 times trailing earnings and 14 times forward earnings. Buy a Half

Cloudflare (NET) shares gave back 4% this past week. This cybersecurity company blocks billions of threats online for its customers every day with network speed that beats competitors such as Amazon and Google. It also delivers a strong cash flow and will report its next earnings on August 1. Buy a Half.

Neo Performance (NOPMF) shares were up slightly following last week’s 12% surge after the stock was upgraded by mining and metals broker Stifel. The company announced a strategic board review to maximize shareholder value, but the key issue will be a sharper increase in rare earth prices. Neo remains a value buy due to its strategic importance and cash position coupled with low debt. Buy a Half

Novo Nordisk (NVO) shares are up 14% over the last three months and this represents a slowing of price appreciation due to more competition. Demand remains high but Lilly’s Mounjaro product is gaining some market share at Novo’s Ozempic expense so I’m keeping this stock a hold. Novo also recently announced plans to invest $4.1 billion in another U.S. factory to meet the demand of its biggest market. Hold a Half

PayPal (PYPL) shares were unchanged this week and while this stock seems undervalued to me, I’m going to move this to a sell as it is not demonstrating any momentum at all. This will raise some cash that we will put to work on new ideas. Move from Hold a Half to Sell

Sea Limited (SE) shares were up more than 6% this week as its e-commerce Shopee delivery network (SPX Express) delivered 70% of orders within three days and reduced its cost per order by 15% across Asia. Sea posted $3.7 billion in total revenue during the first quarter, a 22.8% increase over the first quarter of 2023. Buy a Half

Super Micro Computer (SMCI) shares have been a bit volatile lately. Up 7.5% this week, down 10% the previous week, and up 20% the week before that. We have taken some profits so I’m keeping this a hold for now as revenue expectations for the coming quarter are high. This aggressive stock is at the heart of the AI boom. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were unchanged this week and the stock should be seen as a hedge against more aggressive tech ideas. IBM is a conservative play on AI and advanced cloud markets. Buy a Half

Unilever (UL) shares were up 3% this week as the company continues efforts to streamline its business such as spinning off its Ben & Jerry’s and Magnum ice cream business. This is a reliable, long-term global consumer play with significant exposure to emerging consumer growth markets. Buy a Half

Visa (V) shares were off slightly this week and I encourage you to take advantage of recent weakness to buy this stock as a core holding. There are over 4.3 billion Visa-branded cards in circulation and Visa in effect gets a royalty on every transaction. This tremendous scale leads to operating profit margins of around 65%. 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

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.

ASML Holdings (ASML) makes the lithography equipment that use to make advanced chips. It is currently the only company that makes cutting-edge extreme ultraviolet lithography (EUV) machines that are used to make the world’s most advanced and expensive semiconductor chips. That is at the seven nanometer (nm) and below size and standard. I would argue that this company has a stronger competitive position than even Nvidia does given its highly prized specialty. This gives ASML significant pricing power and a wide economic moat, making it highly profitable as it sells some of these machines for close to $400 million apiece.

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 4.9% 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 signature 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 less than two times sales. Two other reasons I like Unilever is 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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