November 14, 2024

Portfolio Changes: None

Dutch Bros Jumps; Sea Rises on Strong Earnings

The rally since the election continues as Bitcoin reached $90,000 for the first time. Tesla (TSLA) has climbed more than 40%, and the KBW Nasdaq Bank Index, which tracks shares of some of the nation’s largest lenders, is surging.

Dutch Bros (BROS) shares jumped 36% this week as it beat analysts’ expectations on the top and bottom lines while offering improved guidance for the remainder of 2024. Sea Limited (SE) soared 10.3% as the Singapore-based company reported overall net income that beat estimates at $153.3 million, with a better-than-projected 31% rise in revenue for the September quarter.

Global military spending is rising and drawing attention from investors. For example, South Korean companies such as Hyundai have been gaining market share. Hanwha Asset Management, a sister company of Hanwha Aerospace, has filed to launch an exchange-traded fund in the U.S. tracking South Korean defense stocks. A similar fund listed in Korea has gained 84% this year.

European Union exports are struggling because of the end of cheap Russian energy, China’s dominance of the electric-vehicle revolution and an overreliance on selling to China. Now a second Trump presidency is likely to damage an export-dependent European Union that is also struggling with anemic economic growth and political crises.

The U.S. is the top goods-export market for the European Union, and for Germany in particular, with pharmaceuticals, machinery and vehicles topping the export list. Volkswagen and Mercedes-Benz have factories in the U.S. as well as other leading European multinationals.

While we watch what Warren Buffett will do with his gigantic pile of cash, I’m remined of the “Buffett Indicator,” which measures where stock valuations stand at any given moment. It is a ratio of all listed stocks to the size of the U.S. economy. Taking the Wilshire 5000 Index as a proxy, it is now around 200%, which would leave it more stretched than at the peak of the tech bubble. This is why some believe that annual returns for U.S. stocks might be lower than the last few decades, though Vanguard’s 10-year projections range from 7% to 9% a year for non-U.S. developed market stocks and 5% to 7% for U.S. small-cap stocks.

You might wonder when and how “globalization” in technology began.

Fairchild Semiconductor’s co-founder and the co-inventor of the integrated circuit, Robert Noyce, made a private investment in a Hong Kong factory making transistor radios in 1960. Noyce noted that Chinese women could assemble semiconductors faster than Americans for about a 10th of the pay, so Fairchild’s Hong Kong plant opened in 1963. Chip design remained in the U.S., but assembly and testing of many chips shifted to Asia.

Finally, the Biden Administration plans for the U.S. to triple nuclear power capacity by 2050 with an additional 200 gigawatts of nuclear energy capacity by mid-century through the construction of new reactors, plant restarts and upgrades to existing facilities. Hopefully, this momentum will only increase.

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 off again this past week despite the company recently reporting quarterly earnings of $1.14 per share, beating expectations and posting record cash flow. The main reason is that a stronger dollar is dampening sentiment for gold. Buy a Half

Banco Santander (SAN) was down 2.9% in its first week in the portfolio. 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. 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%. Buy a Half

Centrus Energy (LEU) shares are up 37% in the last month though momentum has slowed after the federal regulatory agency FERC blocked a deal between Talen Energy and Amazon Web Services for a private energy offtake agreement. Interest in nuclear energy is increasing with new technology and the AI needs for powerful data centers. Nuclear energy now accounts for about 75% of low emission energy in the United States. Buy a Half

Cloudflare (NET) shares seemed unmoved after reporting strong revenue growth with a 28% year-over-year revenue increase, bringing the total to $430 million. In addition, 35% of the Fortune 500 now use its services and the company posted a gross margin over 77%. Cloudflare offers AI computing services using its global network of servers and AI accelerators, complementing its core cybersecurity services. Buy a Half

Dutch Bros (BROS) shares jumped 36% this week as it beat analysts’ expectations on revenue and earnings while offering improved guidance for the remainder of 2024. In addition to growing its store count and sales by 20% and 28%, respectively, compared to last year, the drive-thru coffee chain operator and franchisor posted revenue of $338 million in the period. The American drive-thru coffee chain went public at 23 a share. Dutch Bros now has 950 outlets. Buy a Half

MOOG (MOG-A) shares were off 2% this week after a 17.6% gain last week following a quarter in which revenue was up 8.7% and net income was up 21% year over year. The company provides precision motion control solutions used in aerospace and defense applications such as Lockheed Martin’s F-35 fighters as well as for the Boeing 787 and Airbus A350. Buy a Half

Sea Limited (SE) shares rose 10.3% as the Singapore-based company reported overall net income that beat estimates at $153.3 million, with a better-than-projected 31% rise in revenue for the September quarter. Despite tough competition from Chinese firms, Sea has raised the commissions it charges merchants in many core markets by about a third since the start of the year. Sea’s e-commerce value of goods sold climbed a higher-than-estimated 25% to $25.1 billion. The company focuses on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were unchanged this week after recently reporting double-digit revenue growth in software and offers us exposure to cloud computing, data analytics, cybersecurity, and artificial intelligence (AI). “Big Blue” has a return on equity of 28% but the stock is a bit pricey right now, trading at a price-to-book ratio of 8. Buy a Half

Unilever (UL) shares should be helped by a stronger dollar, but the company faces some risks from higher tariffs since Unilever has manufacturing bases in both Mexico and China. China is Unilever’s largest production base in the world where 10 million products a day are manufactured for brands such as Dove, Clear, and Lux. The stock has a 3% dividend and delivers a 32% return on equity with an 8% return on assets. Buy a Half

Visa (V) shares were steady this week as Visa captures a tiny slice of every transaction with a Visa debit or credit card in over 200 countries without taking on any credit risk.as this company as Visa The company recently reported its fourth-quarter earnings with revenues growing 12% year over year and profits up 17% for both the quarter and the year. Buy a Half

Watch List

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

iShares MSCI India Small-Cap ETF (SMIN) is a $960 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 plans to pay a dividend of $1.60 per share in 2024.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters are 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%.

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, 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 drive-through coffee stores, with 950 locations across 18 states 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.

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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