July 25, 2024

Portfolio Changes: ASML Holdings (ASML) – Move from Buy a Half to Sell

As China Catches a Cold, U.S. and European Stocks Suffer

This was a difficult week for stocks. Yesterday the S&P 500 sank 2.3% while the tech-heavy Nasdaq declined 3.6%. Collectively, the so-called “Magnificent Seven” lost $768 billion in market value.

America does face some uncertainty but overall has a strong economy but, as I have highlighted, the stock market has become too concentrated at the top and debt is building up too rapidly. China, on the other hand, faces economic issues such as weak consumption, a property slump, 20% youth unemployment, and a struggling stock market in the red so far in 2023. Given the size and importance of China’s economy, this impacts all markets.

China’s numbers indicate that it seems to be closing in on a potentially crippling “balance-sheet recession.” This is an expression coined by renowned economist Richard Koo to earlier describe Japan, when Japan’s households and businesses prioritized debt repayment and pulled back on consumer spending and investment. This aggregate collapse in demand led to a prolonged Japanese economic downturn.

Yet scores of multinationals from Starbucks to Tesla are reliant on China for both manufacturing and consumer sales. Germany looks especially vulnerable, with UBS strategists estimating it accounts for half of the European Union’s exports to China. The epitome of European luxury, LVMH (LVMH), recently posted sales from the greater China region down 14%.

Intel (INTC) receives about 27% of its revenue from China. FactSet estimates that ASML (ASML) received 26% of its revenues from China in 2023 while ASML revenue from the United States was only 11%. China accounted for 18% of Apple’s (APPL) revenue in 2023, and the number for other big tech companies such as Nvidia (NDVA) and Taiwan Semiconductor (TSM) is also significant.

Furthermore, China’s overall weaker economy and lackluster financial markets have forced global money managers to move capital out of China into other Asian markets. Japan and India are natural places to land as they are both liquid and high quality.

Next week I will focus on India, but other opportunities can also be found in Asia such as Asian frontier markets, which offer a triple play of interest rate cuts, an earnings recovery, and an overall current valuation of only 7 times earnings. Unfortunately, the best options here are unlisted funds such as the AFC Asia Frontier Fund which is up about 40% since early 2023. I met the CEO of AFC, Thomas Hugger, in Hong Kong years ago and since then he has launched a series of related country funds such as the AFC Vietnam. Vietnam’s exports are surging and now represent a staggering 83% of its economy.

Explorer Weekly Stock Commentary

ASML Holdings (ASML) shares retraced another 6% this week and the stock is underperforming so I’m moving ASML to a sell because the political risk is too high. A key issue is that China accounted for 26% of its revenue in 2023 and Taiwan represents 29% of its sales. This stock has become too volatile so I’m moving this to a sell. Move from Buy a Half to Sell

Centrus Energy (LEU) shares were down 5% this week after being up 8% the previous week despite receiving permission to import Russian uranium. Centrus supplies essential nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. The stock is trading at an attractive valuation and price entry point. Buy a Half

Cloudflare (NET) shares were down 5% this week. This leading cybersecurity company, which powers 80% of websites in some form, is expected to report earnings on August 1. Cloudflare blocks billions of threats every day for its expansive client list. Buy a Half

Neo Performance (NOPMF) shares, after three straight weekly gains, were off 4% this week. Neo is a key Western leader in rare earths and critical metals because of its global operations. Neo remains a good value stock despite a pullback in commodity prices due to its strategic importance and sizable cash position coupled with low debt. Buy a Half

NIO (NIO) shares were off 6% this week as Tesla reported weak sales and as the global EV market deals with weaker than expected consumer demand. NIO designs and manufactures premium smart electric vehicle and is known for its styling and next-generation technologies. The company’s signature is its unique battery swapping charging solutions. This is an aggressive stock recommendation, and its chief risk is rising protectionist sentiment. Buy a Half

Novo Nordisk (NVO) shares were only off a couple of points in a tough week as it plans its next major factory site in Denmark as the 100-year-old company works to meet soaring demand for its weight loss drugs. Ozempic was also linked to lower rates of dementia and other cognitive issues in a recent Oxford study. Hold a Half

Sea Limited (SE) shares were up 70% in the first six months of this year but this week the stock retrenched 6% along with the broader market. Sea posted $3.7 billion in total revenue during the first quarter and the company is expected to report its next earnings around August 13. Buy a Half

Super Micro Computer (SMCI) shares pulled back this past week as the company announced it will report earnings on August 6. The stock is up about 140% the last six months and 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 up in after-market trading on Wednesday after it posted a strong second quarter, exceeding expectations for both revenue and free cash flow. IBM’s book of business for AI has grown to more than two billion dollars since the launch of Watsonx one year ago. IBM is a counterweight to more volatile tech growth stocks as well as a conservative play on AI and advanced cloud markets. Buy a Half

Unilever (UL) shares gave back the 3% they had gained last week but are still up about 19% so far this year. This company is a quality, long-term global consumer play with significant exposure to emerging consumer growth markets. Buy a Half

Visa (V) shares were down 6% despite reporting a quarter with net revenue up 10% to $8.9 billion and net income surging 17% to $4.9 billion, or $2.42 per share. These were in line with expectations, but management poured some cold water on the stock by noting that while high earners were still spending, lower earners had started to cut back on spending. There are over 4.3 billion Visa-branded cards in circulation and this tremendous scale leads to operating profit margins of around 65%. This should be a core portfolio holding. 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 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% 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 11% from all-time highs and at just over 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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