Upgrading Two Stocks

“You don't need to be a rocket scientist.

Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

- Warren Buffett

The Portfolio

We continue to beat the market. Our blog portfolio continues to perform well and volatility in the portfolio remains low vs the overall market. Year-To-Date the portfolio is up +18.24%. Our benchmark index, the S&P 500 is up 17.20% YTD.

If you're an investor looking for diversification and growth, and you'd like to know more about the way I build a portfolio; please feel free to email me. clay@claybaker.com

Upgrading two Stocks

A couple of our portfolio bell-weather positions surpassed my price targets today. Usually I'd wait for the share price to advance a bit further, but I'm a little sensitive about these two companies; Nvidia and ASML Holdings. We can divine a great deal about the future of the US and world economy by tracking a few bell weather stocks, and these are two of mine. ASML makes the machines that make the future possible. Nvidia is making the future available to us all. If you want to know what lies ahead, just read up on what ASML and Nvidia are developing. ASML was one of my favorites in 2017 as well (ASML Rocks!).

Upgrading not one but two semi-conductor companies in the current economic environment is likely to draw chuckles to my blog, fortunately I don't hear as good as I used to. A trade war with China, a decline in the sales of gaming chips and boards, a decline in sales to data centers, and in May the Trump Administration blocked US technology companies dealing with Huawei. The executive order bans “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service” without special approval.

So why would I even hold these companies in our portfolio, let alone upgrade their price targets? Simple, we're long-term investors here and the trade war with China is short term by comparison. We'll probably sell these two companies when poodle skirts come back into fashion.

NVDA: Several analysts who conducted channel checks on inventory see Nvidia gaming chip sales improving. Other analysts who look at the data center business see data center sales improving all the way into 2020 by as much as 15% CAGR's. In March Nvidia agreed to purchase Mellanox, a data connectivity company, for $7 billion dollars. Mellanox is very important to Nvidia's future but due to the strategic importance of semi-conductors, a deal like this goes through regulatory approvals not just in the U.S, but also China. China is the only regulatory body that hasn't yet approved the acquisition, but Nvidia CEO Jensen Huang is optimistic.

Hours ago the Trump administration announced that they would begin green lighting some chip sales to China's telecommunication behemoth, Huawei. This doesn't mean that Nvidia will suddenly start shipping boat loads of chips to China, but it could mean that China will respond in kind by approving the Mellanox deal which should provide a significant boost to the stock price.

I'm upgrading our price target on NVDA from $182 to $210. (14.7% upside)

ASML: ASML designs and manufactures the machines that make semi-conductors. More specifically, teh imaging machines that make ever smaller chips possible. Nvidia can design an advanced chip, but they need ASML's equipment to manufacture that chip. As we progress further into building out a 5G network across the globe, more advanced chips will be required in ever greater quantities for everything from data centers and switching equipment, to smart phones and smart TVs and everything in between. Everything in our digital life will be going through a prolonged upgrade.

The company's new “Extreme Ultraviolet” lithography is likely to be the dominant method of fabricating the next generation of 10nm, 7nm, and 5nm nodes. A nano-meter is 1 billionth of a meter. Without going through a treatise on nano-meter (nm) chip technology, let's just understand that they came out with a better way to make smaller, faster, better chips. I would suggest that this virtually eliminates all competition at the high end, and minimizes competition that currently exists at ASMLs low end. What's more important than having "Extreme Ultraviolet" (EUV) Lithography? Selling EUV lithography. In all of 2018 EUV accounted for 32% of ASMLs revenue. In Q1 2019 EUV was 22% for the quarter, and 41% for Q2. Unit sales, while still single digits (this is expensive stuff) nearly doubled.

I'm also encouraged by management guiding to improved earnings. Specifically I'm looking at the forward price/earnings projection versus the TTM P/E. The forward P/E is 30.5% lower than the current P/E, suggesting that earnings will improve significantly over the next twelve months. In January 2018 ASML announced its 2018-2019 share buy back program. Share buy backs are a great way for publicly traded companies to return capital to investors. Because these shares will be retired upon purchase the reduction in shares should cause some price appreciation which is a benefit to all shareholders. While the share buyback program was a factor in deciding to purchase ASML in 2018, the purchase will amount to approximately 10 - 12 million shares out of the 421 million shares outstanding, or roughly 2.5%.

I'm upgrading our price target on ASML from $250 to $286. (13.7% upside)

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

  5. VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)

  6. CVS reaches $91.50 (2-27-2019)

  7. Bull market takes another leg up (4-7-2019)

  8. The Fed will lower rates 1-2 times (5-13-2019)

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your research.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD, HD, AWR, XLNX, MRVL, NBRV

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved