October 31, 2024

Portfolio Changes: Super Micro (SMCI) Moves from Buy a Half to Sell

Centrus Energy (LEU) Up 79% in Last Month; Super Micro’s Auditor Resigns

We need to begin with some bad news. Super Micro Computer (SMCI) stock tumbled 32% yesterday after its audit firm, Ernst & Young, resigned. The auditor said it had recently learned of information “which has led us to no longer be able to rely on management’s and the audit committee’s representations, and to be unwilling to be associated with the financial statements prepared by management.”

This is quite a damning statement so, although Super Micro may bounce back, there is just too much risk so I’m moving this stock to a sell.

New economic numbers have come out and the economy is growing with consumer spending, which makes up most of economic activity, delivering 3.7% growth in the third quarter. Strong exports and spending on defense were also tailwinds for growth.

It is earnings week for big tech. Alphabet’s (GOOG) third-quarter results were powered by strong performance in cloud computing, while Google’s search engine and YouTube video platform both reported slowing revenue growth for a second straight quarter. Alphabet’s stock trades at just 20 times projected earnings – the cheapest among mega-cap techs. Microsoft’s (MSFT) revenue rose 16% to $65.6 billion as its net income climbed 11% to $24.7 billion.

Struggling with gold versus Bitcoin as a hedge in your portfolio? Both positions in the Explorer recommendations are doing well but Bitcoin has shown dramatic price swings while gold offers a comparatively smoother ride. In fact, the World Gold Council highlights that Bitcoin’s Value-at-Risk is roughly five times that of gold. Therefore, Bitcoin has a higher upside but is more of a speculative asset than a safe haven.

Chinese investors have been moving billions of dollars out of the country to find safer places to park their wealth overseas. This is despite the country imposing strict capital controls that cap individual purchases of foreign exchange at $50,000 a year. Violators can receive big fines if they break the law. The Wall Street Journal estimates that as much as $254 billion might have left China illicitly in the four quarters through the end of June.

There are several factors driving the outflows: fears that China’s high growth days are behind it, weak property and stock markets. China’s property collapse has burned an estimated $18 trillion in household wealth since 2021, according to Barclays.

China began tightening its grip on capital outflows overseas in 2016. Since then, getting money out of China has become a lot harder, with banks in Hong Kong having strict limits requiring documentation showing the source of funds. To bypass rules, buying and selling art and cryptocurrencies are two ways to move money overseas.

While China tries to stem capital outflows, a struggling Boeing is looking for ways to cut expenses and bring in new capital. The Boeing/Airbus rivalry is taking a turn as Airbus reported positive earnings as Boeing (BA) stock struggles, trading just above 150 a share. Boeing is cutting 17,000 jobs and selling up to $25 billion in shares or debt as well as exploring a sale of some of its space businesses. The company has also failed to reach a deal with 33,000 machinists on strike, costing Boeing $1 billion a month. The company hasn’t turned an annual profit since 2018.

With $58 billion in debt, $12.5 billion of it coming due in 2025 and 2026, Boeing is facing financial pressure.

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 steady as the company reported quarterly earnings of $1.14 per share, beating expectations. This compares to earnings of $0.44 per share a year ago. Agnico Eagle follows a conservative strategy with a history spanning more than 60 years, and it now operates a sizable portfolio of 11 assets located in four countries. 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. Buy a Half

Centrus Energy (LEU) shares continued to surge, gaining 14% this week for a 79% gain in the last month. 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 gained 2% this week, putting the stock’s gain over the last year at about 50%. The company has beaten analyst expectations in each of the last three quarters and will report its next quarter on November 7. 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 were off 4.5% this week as investors await a quarterly earnings report on November 6. The expectations are for a year-over-year decline in earnings on higher revenues. Meanwhile, Starbucks recently reported that global same-store sales fell 7% in the fourth quarter. 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 were up a bit this week as we await earnings tomorrow. Moog reported revenues of $930.3 million, up 11.2% year on year during its last quarter. 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 Boeing 787 and Airbus A350. Buy a Half

Sea Limited (SE) shares pulled back 5.1% this week as it expects to report its next quarterly earnings report on November 12. Sea shares are up 140% this year as the company focuses on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services. Buy a Half

Super Micro (SMCI) stock plummeted 32% yesterday after its audit firm, Ernst & Young, resigned. The auditor said it had recently learned of information “which has led us to no longer be able to rely on management’s and the audit committee’s representations, and to be unwilling to be associated with the financial statements prepared by management.” This is quite a damning statement, and although Super Micro may bounce back, there is just too much risk here so I’m moving this stock to a sell. Move from Buy a Half to Sell

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares are up 62% over the past 52 weeks vs. 39% for the S&P 500. And this outperformance looks set to continue. Last week, IBM reported third-quarter results delivering double-digit revenue growth in software and increases in transaction processing. The company offers exposure to cloud computing, data analytics, cybersecurity, and artificial intelligence. Finally, the company’s AI “book of business” has tripled from the June quarter of this year, from $1 billion to $3 billion. Buy a Half

Unilever (UL) shares were largely unchanged this week as this consumer goods company behind Ben & Jerry’s ice cream and Dove soap reported a bigger-than-expected rise in sales growth. The stock has a 3% dividend, delivers a 32% return on equity and an 8% return on assets. This high-quality European multinational sells consumer products with a strong position in emerging markets. Buy a Half

Visa (V) shares were up again this week as the company reported its fourth-quarter earnings last week with revenues growing 12% year over year and profits up 17% for both the quarter and the year. Visa wrapped up 2024 with a full-year profit of $9.73 per share. One potential problem here is the cloud of a threat of a U.S. Justice Department action to sue Visa, alleging the global payments giant illegally monopolized the debit card market. 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) stands out for several reasons. The fund’s sound investment process and strong management team earn 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.

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.

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 (Q3 results are due out November 6), 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 28 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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