Portfolio Changes:
None
Fed Raises Rates, U.S. Senate Passes Semiconductor Subsidy Bill
As expected, America’s central bank, the Federal Reserve, raised its benchmark interest rate 0.75% for the second straight meeting in an effort to beat down inflation that’s been running at a four-decade high.
What perhaps was unexpected was that stocks rose on the announcement and that two-year and 10-year Treasury bond rates hardly moved. My opinion is that the Fed remains far behind the curve.
In other financial news, specifically in relation to our portfolio, Ford (F) released quarterly financials that easily beat expectations. For the quarter, Ford’s revenue was $40.2 billion versus an estimate of $34.8 billion, with adjusted earnings per share of $0.68 versus $0.45. Our nuclear play, Centrus Energy (LEU), was up 20% in its second week.
Our sale of Rio Tinto (RIO) last week was just in time as the company reported a sharp decline in first-half profit and cut its dividend in half. Chile’s SQM (SQM) shares are clearly demonstrating relative strength and bucking the broad commodity stock pullback by surging from 80 to 97 in the last two weeks.
In Washington, the U.S. Senate voted 64-32 to proceed on a semiconductor $76 billion subsidy and tax credit bill that quickly ballooned through an amendment to fund all sorts of bureaucratic initiatives for advanced technology. Together all this could potentially reach a price tag to taxpayers of $280 billion.
Intel, Texas Instruments, and Advanced Micro Devices are just some of the companies that expect to benefit financially from this boondoggle. In my opinion, the legislation won’t work because it is a scattershot bureaucratic strategy and it is unfair because it puts significant taxpayer funds at risk without any upside potential.
We need to look back to why our semiconductor supply chain is fractured and how peer rival China is catching up fast. This “Chips bill” is rich in irony because the reason American semiconductor firms aren’t competitive in advanced semiconductor chips is primarily due to the decisions they have made to always put share price above America’s economic and national security.
Unlike semiconductor chip design, which is not capital intensive and offers high profit margins, the fabrication of chips, especially high-performance advanced chips, requires enormous amounts of capital, time, and technical skill.
Now, it would be very hard to overstate the importance of semiconductors to the future of the U.S.-China rivalry and America’s economic and national security. Semiconductors are the most strategically important technology because they underpin the circuitry at the heart of everything from smartphones to advanced satellites. You might think of these micro-chips as the brains inside all advanced technology.
Today, 75% of total chip production is in Asia, with China on a trajectory that could give it a 30% market share by 2030. By 2025, 40% of the world’s capacity to produce chips will be in China, up from 15% last year, according to International Business Strategies Inc., a consulting firm. China is investing significant resources in becoming self-sufficient in both mature and more advanced chips including tax waivers for up to 10 years. China is also on a buying spree of the world’s chip-making equipment.
While U.S. regulations block China from the most advanced chipmaking equipment, in 2021 Chinese foundries bought almost $15 billion worth from three American companies: Applied Materials, Lam Research, and KLA Corp., according to The Wall Street Journal. Meanwhile, many American leading chipmakers still receive 35% or more of annual revenue from China in one form or another.
Advanced Micro Devices, better known as AMD, has a China story that sums up America’s vulnerability due to the seeking of profits at all costs. In 2008, it spun off its lower-margin, capital-intensive chip fabrication operations to go, as they say in the industry, fabless, through the formation of GlobalFoundries. The Emirate of Abu Dhabi then became the owner of GlobalFoundries through its sovereign wealth fund – the Advanced Technology Investment Company (ATIC).
AMD’s next move in 2016 was even more controversial.
In short, through a joint venture, AMD transferred technology to develop advanced computer-chip technology to its Chinese partners in return for a sizable cash infusion.
According to The Wall Street Journal, in February 2016, AMD reached a joint-venture deal involving a leading Chinese supercomputer developer, and a state-backed military supplier called Sugon Information Industry, to make chips licensing AMD’s advanced processor technology. In exchange, the Chinese government gave AMD $293 million in licensing fees plus royalties on the sales of any chips developed by the venture.
“It’s the keys to the kingdom,” said retired Brigadier General Robert Spalding, who served on the National Security Council in 2017 and 2018.
Furthermore, in April 2016 AMD sold an 85% stake in two of its semiconductor factories in China and Malaysia to an entity controlled by China Integrated Circuit Industry Investment Fund for $371 million. AMD’s share price soared.
The most recent turn of events for GlobalFoundries (GFS) is telling as it went public last October through an initial public offering, raising nearly $2.6 billion.
Intel and Texas Instruments made their big blunder much earlier when both were invited and declined to participate in the funding of Taiwan Semiconductor (TSM), now the world’s dominant leader in producing microchips with complete domination of high-performance microchips.
This is already too long so I will tell you my semiconductor-related plan for our portfolio next week!
Portfolio Updates
Centrus Energy (LEU) was up more than 20% in its second week in the Explorer portfolio to reach 31 in its second week as an Explorer recommendation. Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry.
The nuclear power industry is rapidly changing, with a new generation of advanced reactors under development. Centrus provides an integrated solution for meeting the industry’s engineering, manufacturing and fuel needs. The United States has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years.
One near-term catalyst for this stock is that the Biden administration is pushing lawmakers to support a $4.3 billion plan to buy enriched uranium directly from domestic producers. In addition, the stock is still trading way off its 52-week high and at just three times trailing earnings. I have a six-month target of 50. BUY A HALF
Cloudflare (NET) shares reversed some of the gains from last week, ending at 48. While Cloudflare consistently delivers impressive revenue results, the company is also yet to be profitable, mainly due to sizable compensation and general expenses but the correction in this stock in 2022 seems way overdone relative to the company’s track record, market, and potential for growth.
Revenue soared 53% to $731 million in the past year. I still believe this is a buy given that the stock is trading at its lowest valuation of the past two years. The company will report its next financial results next Thursday, August 4. BUY A HALF
CVS Health Corporation (CVS) shares gained three points this past week as it heads to its next quarterly earnings next Wednesday, August 3. There are rumors that this quarter could be weaker than expected. CVS represents a quality hybrid of growth and value as its first-quarter revenue was up nicely and the company’s earnings per share has grown 26% each year, compounded, over the past three years. CVS Health is one of the nation’s leading healthcare companies with almost 10,000 stores and its core markets grow each year even in a weak economy. BUY A HALF
Fanuc (FANUY) shares were steady this week at 16 even though the Japanese yen is down 25% against the USD in 2022. This should be boosting sales to many markets. Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. Fanuc offers us a high-quality stock that should be firm with its strong balance sheet with a huge stockpile of cash. Fanuc is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25. BUY A HALF
Ford (F) shares were up 5% yesterday and are up another 7% in pre-market trade today as the company released quarterly financials that easily beat expectations. For the quarter, Ford’s revenue was $40.2 billion versus estimates of $34.8 billion, with adjusted earnings per share of $0.68 (versus $0.45).
Recently, the Mustang Mach-E replaced Tesla’s Model 3 as Consumer Reports’ top EV for 2022. The much anticipated F-150 Lightning EV truck should boost interest in Ford stock. Ford stock stands out for its value as it trades at just four times trailing earnings. I encourage you to buy if you have not already done so. BUY A FULL
Infineon Technologies (IFNNY) is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon was founded when the company was divided from its Siemens parent in 1999. This is an excellent time to begin building a position in this stock given its recent uptrend during the last month after a sharp pullback since late last year, when its stock price was double what it is right now.
The stock is trading at a discount to its intrinsic value and offering investors a margin of safety. In addition, the company reported earnings per share up 131% in it latest reported quarter with a return on equity of 14.3%. Finally, Infineon is trading at a forward price-to-earnings ratio of just 13. BUY A HALF
Nio (NIO) shares lost a point this week and the stock is trying our patience. The stock is down about 70% from its all-time high but looking ahead, the clouds of Covid may be clearing. China accounted for almost 60% of global exports of electric vehicles in 2021 and the Chinese government is trying to boost EV demand through subsidies. In two years, Nio managed to increase its quarterly production of EVs from less than 4,000 to more than 25,000. Once supply chain issues are cleaned up, the company should be able to produce more than 50,000 EVs yearly.
Nio drivers can quickly swap their batteries up to six times per month without leaving their cars. It’s faster than EV charging – taking only three minutes per swap. The fastest car to charge on average, Tesla’s Model S charges about 200 miles in 15 minutes – about five times as long as the average Nio battery swap. New Nio models continue to be launched and some offer battery upgrades with ranges of 621 miles on a single charge.
We will give NIO a bit more time but I would have a 20% stop-loss in place. HOLD A HALF
Oracle Corporation (ORCL) shares reached 75 this week on the back of a bullish report from IBM on the potential growth of cloud computing. Oracle and Microsoft (MSFT) recently announced a deeper interoperability of their clouds, allowing customers to more easily run projects across two platforms. About two-thirds of enterprise-level companies use multiple clouds, according to a May 2021 report by Boston Consulting Group.
My expectations for Oracle are moderate since it is a conservative company with a decent dividend and has historically been one of the safest stocks in software. HOLD A HALF
Sociedad Química y Minera de Chile S.A. (SQM) shares are clearly demonstrating relative strength and bucking the broad commodity stock pullback by surging from 80 to 97 in the last two weeks. The challenge will be for the next quarter to keep pace with the company’s last quarter that posted revenues more than four times the comparison with the previous year. Revenue from the lithium segment surged more than tenfold.
The company is also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine so SQM is viewed as a fertilizer and lithium play. HOLD A HALF
| Stock | Price Bought | Date Bought | Price 7/27/22 | Profit | Rating |
| Centrus Energy (LEU) | 27 | 7/8/22 | 31 | 13% | Buy a Half |
| Cloudflare (NET) | 50 | 6/24/22 | 49 | -3% | Buy a Half |
| CVS Health Corporation (CVS) | 104 | 4/18/21 | 96 | -8% | Buy a Half |
| Fanuc (FANUY) | 15 | 5/13/22 | 16 | 6% | Buy a Half |
| Ford (F) | 20 | 11/23/21 | 13 | -35% | Buy a Full |
| Infinenon Technologies (IFNNY) | 25 | 7/22/22 | 26 | 2% | Buy a Half |
| Nio (NIO) | 18.50 | 6/10/22 | 19 | 5% | Hold a Half |
| Oracle Corporation (ORCL) | 94 | 11/11/21 | 76 | -19% | Hold a Half |
| Rio Tinto (RIO) | -- | 5/26/22 | -- | --% | Sold |
| Sociedad Química y Minera de Chile S.A. (SQM) | 75 | 4/29/22 | 97 | 29% | Hold a Half |