May 2, 2024

Portfolio Changes: None

Richard Bernstein on Stocks

“The whole world is under-followed relative to the Magnificent Seven…Whether you’re looking at a place like Japan… emerging markets… commodity sectors… there’s really a ton of opportunities that people just refuse to look at.”

-Richard Bernstein, CEO and CIO, RBAdvisors

Richard Bernstein is a former chief investment strategist at Merrill Lynch and his classic book, “Style Investing”, is worth a read. Today I share a few takeaways from his perspective on strategy and today’s markets that I believe are on the money. We need to think less about the Fed and interest rates and more about what trends, sectors, and stocks will likely outperform the markets with less risk and volatility.

First, he argues there’s nothing all that special about the Magnificent Seven. While the big tech stocks that have been the primary market drivers in 2023 and early 2024, and have strong growth and cash flow, they have a lot of company.

As of early February, Bernstein states that 140 stocks in the G7 economies were forecast to grow earnings by 25% or more over the next year – and just three of them are in the Magnificent Seven.

The market has recently been overly focused on speculative, momentum-driven stocks rather than stocks with the strongest fundamentals. Momentum seems to dominate both quality and value.

Finally, in the U.S., coverage of small caps is dismal. Bernstein joins me in believing they look relatively attractive and have promising potential for profit growth. Cyclical stocks remain underweight; energy, mining, materials, and industrials such as transport, industrial real estate, steel, and shipbuilding are among the most overlooked sectors. I attended a precious metals summit this week in Washington and the mood is bullish amongst both miners and investors.

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 20% trailing stop-loss in place.

Cloudflare (NET) shares finished the week at 88 as we await quarterly earnings out today after the close. Cloudflare handles and protects data from over 180 countries, 30% of Fortune 1000 companies, and the company projects 28% revenue growth in 2024. Buy a Half

Franco-Nevada (FNV) shares rose as high as 124 and settled for the week at 122. I attended a precious metals summit this week in Washington and the mood is bullish amongst both miners and investors.

Gold stocks are supported by stubborn inflation and rising geopolitical uncertainty. This gold-silver-platinum royalty and streaming company offers us exposure to precious metals without the high capital costs and operational risks associated with traditional mining. Buy a Full

IperionX (IPX) shares reached 14.4 this week and we are looking for the next leg up for this smaller, more aggressive stock. IperionX aims to be a leading American producer of high-performance titanium alloys using its patented cleaner technology. Buy a Half

Novo Nordisk (NVO) shares breached 130 and ended this week at 129 as the company announced it was reducing prices for its products in Denmark by roughly a third. Goldman Sachs projects the market for obesity medications could grow to $100 billion in the next decade. Hold a Half

PayPal (PYPL) shares closed at 66 after the company reported earnings of $1.08 per share for first-quarter 2024, which improved 27% on a year-over-year basis. Revenue was up 10% and both exceeded expectations. PayPal is best known for its namesake payment platform, but the company also owns the popular Venmo app. According to Boston Consulting Group, the worldwide fintech sector is expected to be worth $1.5 trillion by 2030. Buy a Half

Sea Limited (SE) shares were steady this week as we await earnings on May 14. Its $163 million in profit in 2023 was its first annual profit. Analysts believe the improvements will continue, as they predict 116% earnings growth this year and a 163% increase in 2025. Sea stock trades at just over two times sales and has the potential to grow in the most dynamic markets in the world. Sea generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment. Buy a Half

Super Micro Computer (SMCI) shares were down 14% yesterday after the company reported fiscal 2024 third-quarter (ended March 31) results, with revenue of $3.85 billion, up 200% year over year as well as earnings per share (EPS) of $6.65, up 308%. This is an aggressive, high-growth AI stock which is why I suggested taking some profits off the table earlier this year. While aggressive investors may wish to add to their position, I will keep this stock a hold. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares pulled back to 164 with market weakness in AI tech-related stocks. On the positive side, a court overturned a judgment requiring IBM to pay rival BMC Software $1.6 billion and IBM also recently announced it has agreed to buy HashiCorp, which sells software that helps companies manage their cloud-computing operations. Buy a Half

Unilever (UL) shares were up two points to 52 in their first week as an Explorer Dominator stock after the company reported underlying sales growth of 4.4% in the first quarter of 2024. Unilever is a dominant consumer goods giant with hundreds of 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. The stock is selling at a rare discount – at about two times sales. Buy a Half

Visa (V) shares pulled back to 264 this week despite the company beating recent first-quarter top- and bottom-line earnings expectations. Visa earned $2.51 per share on $8.8 billion in sales. Visa has more than 4.3 billion cards in circulation and more than 130 merchants in its network. Visa is purely a payments platform and unlike banks, which often need to set aside capital to cover potential loan losses. Buy a Half

Watch List

• BYD (BYDDY)
• ConocoPhillips (COP)

Explorer ETF/Fund Positions

Global X Lithium & Battery Tech ETF (LIT) offers solid exposure to other beaten-down lithium names at a low cost. With an expense ratio of 0.75%. 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.

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.

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.

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.

IperionX (IPX) aims to become a leading American titanium metal and critical materials company. It is using patented metal technologies to produce high performance titanium alloys, from titanium minerals or scrap titanium. And it is trying to do it at lower energy costs and lower carbon emissions. The company also has backward integration to titanium minerals via control of the largest U.S. titanium resource in Tennessee. Installation and commissioning of the HAMR titanium furnace is expected during the second quarter, before producing its first titanium metal in mid-year 2024.

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 this weight-loss drug, this well managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.

PayPal (PYPL) is a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem. PayPal has been cutting costs and expanding margins and earnings growth. In addition, PayPal’s new CEO is spearheading an innovation drive doubling down on growth efforts and boosting crypto capabilities.

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 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 Super Micro, 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 recognizable 400 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 roughly 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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