Summer Doldrums
We hope you are having a great summer.
As a kid, I always loved the post-Fourth of July part of the summer. It was cookouts, fresh corn on the cob, days at the lake, and long walks in the woods. However, in the south, where I currently live, we look at this as the dog days of summer. It’s hot, with no relief in sight. Every day seems to be a heat advisory. And the ultraviolet index is maxed out.
The good news for you is that it directs our focus inward (as in the office with air conditioning). No long walks in the woods down here. You could spontaneously combust!
This month, we are going to take a look back at our portfolio. The average performance of our stocks is 23.4%, with an average holding period of not quite a year.
The performance is good, but we need to prepare for the future. We should figure out what to buy, what to sell, and where to take some profits off the table.
We have opportunities to do all three in our current positions.
Let’s Start by Buying More J.B. Hunt Transport Service, Inc. (Nasdaq: JBHT)
We profiled J.B. Hunt in the November 2022.
At the time, the $18 billion freight hauler was an icon for well-run companies. It grew revenue, had little long-term debt, and partnered with Google for innovative supply chain management. At the time we registered it in the portfolio, the share price was $179.27.
That was at the low end of the range of the prices since then, as you can see in the chart below:
The recent high price of $218.78 should have triggered our trailing stop at $164.09.
If you sold, good work, if not, that’s okay.
The precipitous fall in April 2024 came when Hunt missed its first quarter earnings expectations. It and other trucking firms told the market that the freight industry wasn’t rebounding as quickly as hoped. It caused a selloff among all the freight company stocks.
“The bottom has become longer and deeper than feared … even with an inflection in either demand or supply in the coming months, ongoing weakness … could set JB Hunt’s revenue and margins back for much of the remainder of the year.”
Evercore analyst Jonathan Chappell in Reuters
However, in recent weeks, the market began to rebound. Last week we saw better key inflation readings in consumer and wholesale reports. The news bolstered the idea that we could see a rate cut as soon as September 2024.
That spurred the recent climb in J.B. Hunt shares. And that should continue.
The stock currently trades at $173.12 per share. That’s well below its recent high of $218.78. And we believe the freight fright was overblown.
That should allow shares of J.B. Hunt to recover quickly.
Action to Take: Buy J.B. Hunt (Nasdaq: JBHT) up to $175 per share. Use a 25% trailing stop.
From a macro-economic point of view, things are getting better.
J.B. Hunt’s shares will be an excellent way to play a stronger U.S. economy. J.B. Hunt remains a pinnacle of the freight industry.
The company currently pays a 1% dividend. Since we began coverage, it paid out $2.96 per share in dividends. That’s a modest 1.5%.
Let’s keep earning those dividends while we see if the capital gain potential materializes.
Looking Back for Another Buy – Teck Resources Ltd. (NYSE: TECK) Ditching Coal to Focus on Copper
In January 2024, we featured Teck Resources, for its copper forecast.
At the time, all the major copper suppliers had gloomy production outlooks. And they haven’t improved since then.
The only thing that kept the copper price from setting new all-time highs is uncertainty around China’s economy.
We bought shares for $38.51 each and are up about 30% on the position…but this should do a lot better.
On July 12th, the company announced the sale of its steelmaking coal business (EVR) to mining giant Glencore for $7.3 billion. The company plans to use the proceeds to pay down debt, repurchase shares, and invest in new copper opportunities.
However, the problem is that the steelmaking business was the economic engine behind Teck. It generated $8.5 billion in revenue and $4.0 billion in gross profit. Copper and Zinc combined for $6.4 billion in revenue and just $1.1 billion in gross profit.
There are deals to be done in the copper and base metals space. Even though the copper price soared recently, the miners have not responded as well.
Teck probably has a plan to move forward on an accretive deal to grow its production. We should take this opportunity to add to our position or start one for those who missed the first round.
Action to Take: Buy Teck Resources (NYSE: TECK) Up to $52 per share. Use a 30% trailing stop.
The sale of the asset puts a target squarely on Teck. They are now a cash-rich mid-tier mining company with some excellent copper assets.
There are already rumors swirling of potential takeover offers. That’s why we want to own them as well. We could see them go at a significant premium to the current price.
Let’s Take Some Money Off the Table with Coherent Corp. (NYSE: COHR)
In October 2023, we featured a small $4.95 billion technology company as a sort of “Picks and Shovels” provider to the Electric Vehicle industry.
However, the company’s recent rally came from something else entirely.
Coherent makes 800G transceivers. These devices can transmit and receive data over fiber-optic lines at the blistering rate of 800 gigabytes per second. That’s twice as fast as the previous version. These units are in high demand at data centers, high-performance computing, network services, etc. In other words, they are an important part of the AI world.
In the second Quarter of 2024, the 800G revenue doubled, year over year. As you would imagine, that also drove outstanding revenue for the company as a whole.
That’s how we find ourselves up 144% in just nine months. And we should take some money off the table.
We DO NOT want to sell our whole position here. Coherent’s future looks bright. This company should continue to grow substantially in the future. However, we should do one of two things at this point:
- Recover your initial capital.
OR
- Sell half of your position
The reasoning is simple – eliminate risk.
If we take the first option, we have removed all risk of loss. All the money at risk after that are gains. So, even if the stock tanks, we are bullet proof. If we take the second option and sell half our position, we lock in a 22% gain AND we have no risk at all with the remaining position.
That’s how we grow our wealth.
And with Coherent Corp. this gain came from an unanticipated source. It wasn’t baked into our math, so there is still more potential upside to come.
By removing our risk of loss, we can let this grow to its potential, without concern.
Action to Take: Sell Half of Coherent Corp. (NYSE: COHR) and book a 22% gain.
This performance is an indicator of just how well we can do with these “Picks and Shovels” plays. The company creates innovative products for use in innovative industries.
When one takes off, like this high-speed data module, it can propel stocks to incredible heights.
Two Other Portfolio Opportunities to Add
Some other names in our portfolio remain high on our radar:
- BYD Company (OTC: BYDDY) is still a buy up to $64 per share. The Chinese EV maker is Tesla’s main rival at a fraction of the price.
- Utilities Select Sector SPDR Fund (NYSE: XLU) is a buy up to $72 per share. The fund tracks electric power utilities. This is a play on the rising power demand from data centers, among other things. We like the 3.2% dividend yield as well.
Make sure to go back and reread the issues where we discussed these ideas in detail. There is no “one size fits all” stock. We want to provide you with excellent ideas, but not all of them work for every investor.
As always, thanks for subscribing…and make sure you wear your sunscreen this summer!
For the Good,
The Mangrove Investor Team
