September 5, 2024

Portfolio Changes: Neo Performance (NOPMF) – Move from Hold a Half to Sell

Dr. Copper and Nvidia – Both Under the Weather

This was a rather tough week for stocks though the financial media always goes overboard calling a 2% drop in the Nasdaq index a “plummet.”

For many analysts, copper prices have long been considered a better leading indicator regarding the health of the global economy. Bloomberg reports that Goldman Sachs has exited a long-term bullish position on copper while slashing its price forecast for 2025 by almost $5,000 a ton. The bank has been one of the biggest supporters of the industrial strategic metal, but the increasingly weak Chinese economy has crimped demand, plus excess inventories overhang supply resulting in copper prices being down almost 20% since May.

Goldman now expects prices to average $10,100 next year, compared with a previous target of $15,000 a ton. This is more than a haircut.

Nvidia’s recent weakness is also in the headlines. Nvidia (NVDA) lost $279 billion in market value on Tuesday, which was the biggest dollar loss for a company in one day in market history.

The chip designer sits at the heart of the AI boom. No other stock offers Nvidia’s combination of brand, enormous growth and volatility, and spectacular rise in market value. Besides powerful chips, Nvidia also sells networking gear that ties together hundreds or thousands of its processors as well as a software platform which allows customers to edit the chips. Most companies posting profits of more than $15 billion per quarter get there gradually over time. In contrast, Nvidia had profits of $16.6 billion in the second quarter, an incredible increase of more than $10 billion from the same period a year ago.

This all makes reliably valuing the company extremely difficult. Can the company maintain this torrid pace of growth? Does it have a durable moat to keep competitors at bay? Do the new antitrust probes by the U.S. Department of Justice (DOJ) tied to potential violations of monopolistic and antitrust rules have any merit? With the stock down 15% in the last week, I’ll be looking at all three issues in the coming week.

For the third consecutive year, I’m pleased to report that most Americans favor expanding nuclear power. According to a recent Pew Research Center survey, 56% of U.S. adults support increasing the use of atomic energy to power the electric grid. This number is still less than the 70%-plus for solar and wind power, but it is up about 10% in the last few years. We are making progress. Zero-carbon technologies comprise more than 40% of world electricity generation, according to a report released this week from BloombergNEF.

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 had another down week, but the upside potential is clear as the stock is now trading at a price-to-earnings ratio of just 6.5. Its earnings estimate for the next quarter has been raised in the last month, a good sign for the stock. Centrus remains a buy as new nuclear power technology becomes more acceptable. A recent Pew Research Center survey shows that 56% of U.S. adults support increasing the use of atomic energy to power the electric grid. Buy a Half

Cloudflare (NET) shares pulled back 4% this week but are up 15.7% over the last three months. Cloudflare operates the fastest cloud network in the world for more than 210,000 clients and about half of its revenue comes from outside the United States. Cloudflare announced it is partnering with CrowdStrike (CRWD) to connect their platforms to stop security breaches. Management estimates its market at around $176 billion this year and that this will grow to $222 billion by 2027, driven by growth in artificial intelligence (AI) and 5G cellular networks. Buy a Half

Dutch Bros (BROS) shares were largely unchanged this week. It is an operator and franchisor of 912 coffee stores as of the end of June, while Starbucks runs 16,730 stores in the United States alone. Dutch Bros focuses on speed and convenience and its locations are drive-thru only. In addition, it offers much more than coffee such as energy drinks, boba tea, milkshakes, and smoothies. It expects up to 165 new stores this year. Buy a Half

Neo Performance (NOPMF) shares were steady this week but I’m moving this to a sell after learning that the company was essentially forced to sell its China-heavy rare earths processing business for $30 MM in cash to China state-owned company Shenghe. Move from Hold a Half to Sell

Novo Nordisk (NVO) shares were unchanged this week. Novo has been a leader in the diabetes drug market for about 100 years and is a pioneer in the GLP-1 receptor space that is now driving the fast-growing weight loss market. One of its most promising new products in development is CagriSema, a once-weekly injectable drug that combines semaglutide and cagrilintide, that could be a treatment for both type 2 diabetes and weight loss, which could generate $20.2 billion in revenue by 2030. Demand for Novo’s products is still high with Ozempic sales up 30% to $4.26 billion in the last quarter while Wegovy sales were up 69%. Hold a Half

PDD Holdings (PDD) shares were off 3% this week after we added this stock as an Explorer recommendation. This was after the company’s second quarter came in with revenue up 86% and net income up 144% year over year. Despite these numbers, investors panicked over weaker guidance, sending PDD stock from nearly 150 to 100 a share in a single day. I recommend that aggressive investors buy the stock as it is growing much faster than its competitors and 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%. Buy a Half

Sea Limited (SE) shares pulled back 5% this week but the stock was up nicely in August. During the second quarter, Sea’s Shopee e-commerce platform processed about 2.5 billion orders, representing a 40% increase from the year-ago period. During the second quarter, SeaMoney registered more than 4 million first-time borrowers, which was double the number it added in the same period last year. Buy a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

International Business Machines (IBM) shares reached 204 this week and the stock is up 24% over the last three months. The company recently announced it was closing two China research and development centers and reaffirmed that a new IBM mainframe computer will soon hit the market. The new Telum II will have four times the AI computing capacity of the original processor, launched in 2021. Buy a Half

Unilever (UL) shares edged up this week and has gained almost 18% over the last three months. It has also generated a return four times that of the benchmark FTSE 100 index which is a basket of Europe’s top 100 companies. 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 3.6% as Visa leverages its dominance over the U.S. credit and debit card market. Data compiled by Statista shows the company with a 61% domestic market share with three companies controlling the remaining 39%. This scale has given Visa impressive profitability, posting high operating margins and a return on equity of nearly 50% with minimal debt. 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 a 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 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 about 900 locations across 17 states in the U.S. Dutch Bros has seen its share price soar but in the last month its stock has pulled back from 42 to 31 due to a combination of some profit taking and guidance from management that growth may moderate a bit. Dutch Bros is 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 targets 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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