September 19, 2024

Portfolio Changes: None

What’s More Important Than the Fed Rate Cut?

The Federal Reserve has voted to lower interest rates by a half percentage point, the first since 2020 and more than many expected. The overwhelming Fed board vote suggests more rate reductions are likely this year. This Fed move was clearly already baked into markets but keep in mind that the Fed only controls overnight interbank interest rates. Nevertheless, this action will help support the market and boost interest rate-sensitive stocks such as real estate and utilities.

Now we need to see how labor markets, and especially corporate profit numbers, develop.

More important than Fed rate cuts to stock markets and the economy is whether the next Congress keeps driving up deficits and the national debt. If so, it is inevitable that rates will have to go up over time.

Tesla CEO Elon Musk recently suggested that there will be over 1 billion humanoid robots within the next two decades. This of course is tied to news that Tesla will start producing humanoid robots to work in their factories starting next year. The hard part is determining whether this is positioning the stock for a higher valuation compared to other automakers or this robotics initiative will show in Tesla’s numbers within a reasonable time frame.

I continue to think that adding some more European stocks is a good idea because capital will chase their lower stock valuation consistent with what analysts call “reversion to the mean.” Over the last 10 years, the FTSE 100 index has delivered a 6% per annum total return, versus 13% for the S&P 500. Taking into consideration dividends, total shareholder yield for the FTSE 100 is twice that of the S&P 500. And the European market is well balanced and not tilted to tech like the U.S. market.

Meanwhile, China’s benchmark CSI 300 index is now at its lowest level since January 2019, roughly 50% below its 2007 high. This means that stocks traded on the mainland and Hong Kong exchanges have together lost $5 trillion in market value in just the last three years.

Finally, we are looking for new nuclear power ideas since nuclear plants generate electricity 24/7/365 – more than twice as much as solar and wind resources. The generating assets require fewer maintenance outages than coal or gas, making electricity even more reliable. Nuclear energy is the only carbon-free emissions baseload energy source available today, offering efficient operations around the clock. One example, Georgia Power’s Plant Vogtle in Waynesboro, Georgia, is delivering carbon-free nuclear energy to more than 1 million homes.

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

Centrus Energy (LEU) shares were steady this week as demand for processed uranium increases. Russia reportedly supplies around 14% of global uranium concentrates, 27% of conversion, and 39% of enrichment, while Kazakhstan produces 43% of the world’s uranium. Four hundred forty nuclear reactors across 32 countries provide about 10% of the world’s electricity. There are roughly 65 new nuclear reactors under construction around the world, with an additional 110 planned. Centrus is at the middle of this growth as a diversified supplier of nuclear fuel and services for nuclear power plants in the U.S. and globally. Buy a Half

Cloudflare (NET) shares were unchanged this week. Its revenue had a compound annual growth rate (CAGR) of 46% from 2019 to 2023. It currently delivers data from 330 cities in over 120 countries across the world. Cloudflare is both a cloud and cybersecurity play and I encourage you to buy at current levels if you have not already done so. Buy a Half

Dutch Bros (BROS) shares were up about 5% for the second straight week as the company has doubled its store count and tripled its sales since 2020. The company still plans to double its store count in North America again by 2026, and it’s starting to get more serious about international expansion. Dutch Bros is a great growth story and focuses on convenient locations which are drive-thru only. Buy a Half

Novo Nordisk (NVO) shares were off 2% this week as potential price cuts loom and the likelihood grows that its weight loss drugs might be part of Medicare coverage. Its recently announced obesity pill could prove stiff competition for Eli Lilly and offers a glimpse of its pipeline of its next-generation drugs. Demand for Novo’s products is still high, but the stock has struggled a bit to regain the momentum it had in the first half of this year. Hold a Half

PDD Holdings (PDD) shares were up 3% this week as all eyes are on its TEMU platform, a cross-border marketplace that connected its Chinese merchants with overseas buyers. PDD (formerly Pinduoduo) has more than 167 million monthly active users (MAUs) worldwide, with about 50 million of these users in the United States. From 2023 to 2026, analysts still expect PDD’s revenue to grow at a compound growth rate of 38%. This an aggressive growth stock that has pulled back sharply and trades at just 7 times next year’s projected earnings. Buy a Half

Sea Limited (SE) shares were up 5.7% this week as its Shopee e-commerce sales growth has accelerated. Shopee dominates fast-growing Southeast Asia with a 48% market share. Singapore-based Sea also operates digital-payments provider SeaMoney and Garena, a global online games developer that has the region’s top game as well. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares were up a couple of points again this week as the company has steadily become a provider of cloud and data platforms. The stock has surged 33% this year and is expected to see earnings growth of 5% for this year. Buy a Half

Unilever (UL) shares were largely unchanged this week and are up 36% in 2024 – more than five times that of the benchmark FTSE 100 index. The stock delivers a return on equity of 32% as the company offers a wide range of products in the fields of beauty, personal care, home care, and nutrition with a focus on emerging markets. Buy a Half

Visa (V) shares were up a point this week as this card giant offers steady compounded growth that is recession resistant. During the past 15 years, Visa has gone from less than 20 a share to just over 288. And through it all, its biggest drawdown (pullback in the stock from its high) was just 36%. Visa leverages its dominance over the U.S. and global credit and debit card market by charging businesses a swipe fee of about 1.5% to 3.5% for every transaction, leading to high operating margins. 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 micro-cap-centric 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 28 consecutive years of dividend increases.

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 increasingly popular 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.

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.

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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