October 17, 2024

Portfolio Changes: PDD Holdings (PDD) – Move from Buy a Half to Hold a Half

Banks Strong as Tech Wobbles a Bit

Bank stocks such as Morgan Stanley (MS) and Goldman Sachs (GS) had strong earnings while tech is starting to show signs of weakness. ASML (ASML) reported sharply lower quarterly sales and giant Samsung Electronics’ share price (listed on the Korea Exchange) has fallen almost 30% over the past six months as it struggles to catch up with SK Hynix and Micron in supplying the most advanced AI chips.

Still, everyone is waiting for Nvidia’s (NVDA) earnings as capital spending in AI remains robust.

Beijing also rattled nerves as it sent a record number of warplanes across a dividing line in the Taiwan Straits and sailed an aircraft carrier off the main island’s coast. Taiwan also reported a surge in cyberattacks this week.

In other China news, super-consultant McKinsey, which ramped up in 1993, is overhauling its China business after cutting back on government-linked clients and reducing headcount by nearly 500 people, about a third of the total.

At the end of September, China cut rates, promised to boost government spending, and pledged property price support. All this ignited a stock market rally. I see China as a good trade rather than a sustained rally, but we shall see.

Chinese President Xi Jinping has made his disdain for stock speculators clear – even as he also wants to ensure a reasonably healthy economy. The attitude of many in China is that the stock market is a casino.

China swung into stimulus mode in late 2014, setting off an eye-popping stock market rally that crashed back to earth in mid 2015. The Shanghai Stock Exchange Composite Index more than doubled its level from October 2014 to June 2015, but then plunged more than 40% in just two months.

This volatility is a sharp contrast to countries such as Switzerland. Its $700 billion economy delivers welfare benefits comparable to Sweden, with more streamlined government, lower taxes, and more financial stability than Nordic social democracies, while avoiding stock market instability and financial crises.

Switzerland also boasts a higher average income, with levels of income inequality that have become comparable to those in Scandinavia. Average family wealth in Switzerland is $685,000, and they have a sizable sovereign wealth fund to back it all up.

In Asia, only Singapore can be considered as well run and stable.

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

Centrus Energy (LEU) shares jumped 16% this past week as it has become a key player in the growth of nuclear energy which now accounts for about 75% of low emission energy in the United States. The company develops a type of uranium essential to the industry underlined by a recent supply agreement with Korea Hydro & Nuclear Power for a decade of low-enriched uranium deliveries to feed Korea’s reactors. Buy a Half

Cloudflare (NET) shares are up 15% over the last two weeks with institutional investors currently owning almost 80% of outstanding shares. Cloudflare offers AI computing services using its global network of servers and AI accelerators, complementing its core cybersecurity services. The company will report its next quarterly earnings on November 7. Buy a Half

Dutch Bros (BROS) shares gained 11.3% this past week as the company recently started rolling out a digital ordering program and management expects it to be in all stores by the end of the year. It already has a robust membership rewards program, which accounts for 67% of sales. As of the end of June, there were 912 Dutch Bros outlets, with a goal of 4,000 within the next few years. Buy a Half

MOOG (MOG-A) shares again closed just under 200 this week amidst no news for this fast-growing defense technology stock. MOOG supplies advanced primary flight controls on the most modern military aircraft such as Lockheed Martin’s F-35 fighters as well as flight controls for the Boeing 787 and Airbus A350. Buy a Half

PDD Holdings (PDD) shares, after a 32% jump two weeks ago, have pulled back 16% in the last two weeks, prompting me to change the stock’s rating to a hold. Consumer stocks have been weak as Beijing has not delivered the previously announced growth stimulus. PDD’s revenue is still expected to grow to grow at a compound growth rate of 38% but this is still an aggressive stock. Move from Buy a Half to Hold a Half

Sea Limited (SE) shares were up this week, closing at just under 100. Sea is focused on the Southeast Asia region, where young consumers are a big driver of economic performance. That’s a significant tailwind for the company’s consumer-centric businesses in e-commerce, digital entertainment, and digital financial services. Sea Limited revenue surged at least 20% in all three of its segments in its latest quarter. Buy a Half

Super Micro Computer (SMCI) was up 7% in its first week back in our portfolio. Supermicro has been around for more than three decades, selling workstations, servers and other equipment but it vaulted into the spotlight along with the artificial intelligence (AI) boom.

Companies building AI platforms turn to Supermicro for their data center needs leading to a growth rate over the past 12 months that’s five times faster than the industry average. Supermicro’s technology and its ability to tailor a particular product to a customer’s need is helping the company deliver quarterly revenue this year that is more than a full year of revenue as recently as 2021. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were steady at 230 following last week’s 6.6% climb. IBM is driven by software, consulting, and infrastructure, boosted by accelerated AI adoption. IBM’s book of business in generative AI has grown to more than $2 billion. Buy a Half

Unilever (UL) shares had an up week and combine a 3% dividend rate with a surprising 8% growth rate for 2024. The company delivers a 32% return on equity and an 8% return on assets. Buy a Half

Visa (V) shares were up 3.8% this week as the company has generated almost $19 billion in free cash flow (this is what’s left of cash flow after capital spending) during the past year alone. There is the cloud of a threat of U.S. Justice Department action to sue Visa, alleging the global payments giant illegally monopolized the debit card market. 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

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 the largest 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 Full

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.

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. The company has more than 900 stores as of the end of the second quarter, including 36 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).

PDD Holdings (PDD) is growing much growing faster than its competitors. Its return on equity is a stunning 49%. PDD was only founded nine years ago (as Pinduoduo), and it has carved out a niche with its discount marketplace, which targeted shoppers in China’s lower-tier cities. From 2023 to 2026, analysts still expect PDD’s revenue to grow at a compound growth rate of 38%. That growth should be driven by its market share gains in China and by Temu, its cross-border marketplace that connects Chinese sellers to overseas buyers. This is a competitive market in China watched closely by regulators.

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.

Super Micro Computer (SMCI) has been around for more than three decades, selling workstations, servers and other equipment but it vaulted into the spotlight along with the artificial intelligence (AI) boom. Companies building AI platforms turn to Supermicro for their data center needs leading to a growth rate over the past 12 months that’s five times faster than the industry average. Supermicro’s technology and its ability to tailor a particular product to a customer’s need is helping Supermicro deliver quarterly revenue this year that is more than a full year of revenue as recently as 2021.

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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