December 9, 2021

U.S. stocks have stabilized over the last few days as investors keep confidence in markets despite the Omicron variant, concern over inflation, and mixed economic data. Today we have two upgrades and a new recommendation from a country with an emerging and vibrant fintech culture supported by its government. The standout stock this week in the Explorer recommendations is Marvell Technology Group (MRVL), which jumped from 71 to 91 after the company recently reported that adjusted earnings soared 72% on a 61% increase in sales.

New Recommendation

China Stocks Face Pressure to Go Home
Electric vehicle stocks rebounded recently but long term the shortage of chargers may weigh on growth. The current number of public chargers, about 1.3 million, cannot begin to satisfy the demands of the world’s rapidly expanding electric fleet. According to an estimate by the International Energy Agency (IEA), by 2030 as many as 40 million charging points will be needed, requiring an annual investment of $90 billion. According to the Boston Consulting Group, there are now almost double the charging points per electric vehicle in the European Union and China as in America.

U.S.-listed stocks are again in the news. The SEC laid out rules last week requiring Chinese companies listed in the U.S. to face audits or risk delisting within three years. This means that 248 Chinese companies listed on the three largest U.S. exchanges could be delisted within three years.

The total market value of these firms easily exceeds $2 trillion, or about 10% of the NYSE’s 2020 equity market capitalization, according to the World Federation of Exchanges.

Ride-hailing giant DiDi Global (DIDI), which has a market cap of $37 billion, is preparing to delist from the New York Stock Exchange and to relist in Hong Kong following increasing pressure from Chinese regulators.

Meanwhile, Beijing’s financial regulators are developing rules that will make it more expensive and difficult for Chinese tech startups to list outside of China. China’s thinking is that the rapid growth of financial markets over the past three decades means that it no longer needs Wall Street deals. We shall see.

The upshot is more and more listings on Chinese stock exchanges due to China pulling companies home, as well as Congress and American regulators pushing them out.

New Explorer Recommendation
Brazil’s Nu Holdings (NU) (initial public offering is expected to be priced this morning)
I do not normally recommend IPOs, but will make an exception for aggressive investors for a couple of reasons.

First, fintech ideas in under-banked markets such as Brazil are in favor, and second, given the recent market selloff, the bankers managing the offer will probably price the offering at a reasonable price.

Let’s look into the situation.

Brazil still has 34 million adults who do not have a bank account or do not use it frequently. The numbers are from a study from the Instituto Locomotiva, carried out in January 2021. According to the study, 16.3 million people do not have a bank account and another 17.7 million – around 11% – have not used their bank account for at least a month.

Most of the unbanked Brazilians are young women, aged between 18 and 29 years old. According to the survey, another 79% of the population are underbanked. These are people who, even with an active bank account, do not use some financial services, such as credit, investments, payment methods, or insurance.

Of course, Brazil, with a population of 215 million, offers plenty of opportunities beyond the unbanked. That brings me to my latest recommendation – an IPO set to debut on the New York Stock Exchange this morning.

Nu Holdings (NU), a financial services and payment company, claims more than 48 million customers in a country and region where fintech is flourishing. Fintech should be seen across all the business it impacts such as transportation, food service, retail and telecommunication industries as well as financial services.

David Vélez, a Colombian-born Stanford M.B.A., and his partners launched Nubank as a credit-card company operating in the digital world. Mr. Vélez designed Nubank to offer consumers its no-fee card through an online application. No credit history, no problem. Card users’ limits start small but as a record of paying back debt is established, those limits grow. Building a credit history is helpful for the cardholder; for those who pay off their balances every month, the card is a hassle-free, no-cost convenience. Nubank’s application for a license to operate as a financial company in Brazil was approved in 2018 and last year it began working with Chubb (CB) to offer digital life insurance.

Total revenue for 2021 should top $1 billion, nearly twice the $535 million last year. In October, Nubank revealed that it turned its first-ever half-year profit in Brazil, its home market and its biggest one, according to Reuters. It’s nice to have a profitable company launching an IPO for a change.

The prospectus indicates that Nubank plans to use proceeds to fuel its growth in Brazil, and also in Colombia and Mexico, countries where it launched in 2020. And it is investigating other sectors it can disrupt, such as healthcare and telecommunications. Still, considering the inherent risks of IPOs, particularly Brazilian IPOs, most investors should proceed with caution and watch how the stock opens, with only speculators buying at the opening. Given the appetite for fintech ideas in emerging markets, it could work out very well.

BUY A HALF POSITION

Portfolio Changes and Updates

Model Portfolio

Portfolio Changes
Cloudflare (NET) - From Hold to Buy
Virgin Galactic (SPCE) - From Sell Half Position to Incremental Buy

Updates
ChargePoint Holdings (CHPT) reported quarterly financials on Tuesday, with a net loss of -$69.4 million relative to a loss of -$40.9 million in last year’s comparable period. But ChargePoint reported its gross margin increased year over year to 25%, while revenue grew 79%. The company is investing in building out its charging network and attributed the margin increase to “product cost improvements and the impact of acquisitions.”

Despite the accelerating losses, ChargePoint has shown some strength in a tough market, perhaps buoyed by the infrastructure bill, giving back only two points after the earnings release. The company offers drivers in North America and Europe more than 118,000 places to charge their electric vehicles (EVs) and has 200,000 partner ports. I believe that the stock is a buy at its current levels with EV growth in favor with investors again. BUY A HALF

Cloudflare (NET) shares were down for the week at 160, compared to 167 a week ago. The company announced that it has acquired Zaraz, a company that has developed technology to speed up and secure websites by reducing the impact of third-party marketing and analytics tools. Zaraz is the first company Cloudflare has acquired built on its own technology, Cloudflare Workers.

The company’s fundamentals remain sound though the stock has performed poorly as of late. It recently announced third-quarter revenue increased 51% year over year to $172.3 million. Customers surpassed 132,000 in the quarter, up 31%. Enterprise customers reached 1,260, up 71%. The stock is up 220% over the last year. Cloudflare also announced a partnership with Oracle and now both organizations that use both Cloudflare’s cybersecurity solutions and Oracle’s cloud infrastructure will automatically save money by avoiding data transfer fees charged by cloud providers.

Cloudflare provides network security, performance and reliability services to a growing portion of global web traffic. I’m going to move this stock to a buy for aggressive investors as its price presents us with an attractive entry point. MOVE FROM HOLD A HALF TO BUY

Coupa Software (COUP) reported third-quarter fiscal 2022 earnings of 31 cents per share, an increase of 72% year over year. The company also reported revenues of $185.8 million, up 40% year over year. Coupa’s subscription revenues increased 40% year over year to $164.7 million, and subscription revenues contributed 89% to revenues. The stock was volatile this week in an unsettled tech market, reaching 183 on Tuesday, falling to 163 yesterday morning before closing at 173.

Coupa specializes in software providing cloud-based business through its spend management platform. Its platform connects organizations with suppliers globally, and provides visibility into and control over how companies spend money, optimize supply chains, and manage liquidity, as well as enables businesses to achieve savings that drive profitability. The company already has 2,000 clients including Amazon and Walmart with some estimating its potential target market at $94 billion. I’m keeping this stock a buy as its services are increasingly in demand. BUY A HALF

Fisker Inc. (FSR) shares were up 33% in November and this week, after losing a little ground, made a steady recovery, closing at 18.8 on Wednesday. Fisker offers investors a custom, “asset light” and “Apple of autos” strategy relative to EV maker leaders like Tesla. Its Ocean EV has a sub-$40,000 retail price point, making it a more affordable EV option. We have to accept that the company’s first product will be launched in the latter part of 2022, perhaps ahead of some of its bigger competitors. This is an aggressive stock but I confirm a buy rating on Fisker even though it won’t go into production until late 2022. BUY A HALF

Ford (F) stock was up this week as Chairman Bill Ford acquired almost 2 million shares of his company for about $20.5 million through the exercise of stock options. Ford says it has received 200,000 preorders for its F-150 Lightning pickup truck, which is scheduled to go on sale this spring. The Ford F-150 Lightning is expected to have a starting price of just $40,000 (without the bells and whistles) and will have a range of over 300 miles.

Ford’s strategic plan, outlined in May, has positioned the company as an aggressive player in electric vehicles, committing $7 billion for three new battery factories, in Tennessee and Kentucky, along with a plant to build electric pickup trucks, as part of $30 billion in electric-vehicle investment planned through 2025. Its Mustang Mach-E electric SUV, a competitor to the Tesla Model Y, is off to a strong start with about 22,000 Mustang Mach-Es sold so far this year. Ford estimates global Mach-E demand could be 200,000 vehicles a year in the near future.

Ford is a low-risk way to play the EV boom and I encourage you to buy if you have not already done so. BUY A HALF

Marvell Technology Group (MRVL) shares increased from 71 to 91 after the company recently reported that adjusted earnings soared 72% on a 61% increase in sales. In addition, its data center revenue skyrocketed 109% to $500 million, gross margins hit a record 34.5%, and the firm paid down $151 million in long-term debt.

Marvell’s semiconductor chips are used in a number of growth applications such as 5G wireless networks, cloud computing, automotive, and industrial markets. Several Wall Street analysts have raised estimates and Credit Suisse recently upgraded the stock, calling Marvell “one of the most strategic assets in semiconductors.” Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of 5G capabilities I recommend buying this stock if you have not already done so. Marvell is up more than 80% this year and it remains an excellent semiconductor play. BUY A HALF

Novonix (NVNXF) shares pulled back sharply last Friday after a rapid rise due to the tech selloff, an article in Australia that was positive but cautioned on valuation, and most probably, some profit taking, as I have advised our more conservative investors to do. This week, however, the stock has made a steady climb from 5.8 to 6.7.

Based in Australia, the technology and advanced materials supplier is focused on synthetic graphite for the electric vehicle and storage battery industry. It is scaling up its synthetic graphite anode operation to fill the gap in the U.S. supply chain as its operations are now almost entirely in North America.

Novonix, as a non-Chinese synthetic graphite producer, is immune to any potential disruptions caused by either Chinese politics or its international trade disputes. Getting Phillips 66 involved in its operations will give Novonix better access to specialty coke and other materials that the energy company makes for electric car battery producers. This is an aggressive idea but this stock is a play on an important clean technology. It is a speculative stock but I still rate it a buy. BUY A HALF

Oracle Corporation (ORCL) shares were quite stable this week, trading in a tight range between 91 and 89.

Oracle is the world’s largest database management company, with more than 430,000 customers in an incredible 170-plus countries. For close to 50 years, the company has offered its software and, more recently, cloud-engineered systems. It has the industry’s broadest and deepest suite of cloud applications. More than 18,000 patents worldwide protect Oracle’s business model and profit margins. Most importantly, Oracle is now taking on the “big three” in cloud services.

While most investors still view Oracle primarily as a software company, it is positioning itself more as a cloud company, so sales and earnings should expand. Oracle offers us growth at a very reasonable price. The stock is at only 18 times earnings with big profit margins, a high return of equity, and $39 billion in cash. BUY A HALF

Sea Limited (SE) shares have been underperforming the overall market recently and this week shares were steady at around 265. No news except some sense that there’s a bit of a slowing of growth despite the fact that since late 2016 revenue has grown some 2,800%. It has been a great stock and I have encouraged taking partial profits during its steady rise.

It still has room for considerable growth as Southeast Asia’s booming internet economy is set to double to $363 billion by 2025, eclipsing the previous forecast of $300 billion, according to research from Google, Temasek Holdings, and Bain. I see further potential upside to Sea because of strong momentum in its gaming portfolio and increasing fintech revenues. Aggressive investors should be an incremental buyer of this stock after the recent pullback. BUY A HALF

Veeco (VECO) shares were up this week, which is a good sign of strength in a difficult environment, as the company shipped the first Laser Spike Annealing System (LSA101) from their new San Jose, California facility to a leading semiconductor manufacturer. Veeco’s new facility features 70,000 square feet of manufacturing and engineering lab space and 30,000 square feet of office space. The manufacturing space will be nearly double that of Veeco’s previous San Jose facility, indicating an expected increase in this business.

This is an American high-quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading edge technology to U.S.-based and international high-end chipmakers, some of which are 100% reliant on Veeco technology. Revenue growth for 2021 may be up 30% and earnings are growing at a 20% clip. The stock represents a backdoor play on semiconductors. Our expectation is that Veeco is building a base to move a leg higher.

I recommend that you acquire shares if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares were up from 14 to 16 this week but are still down 75% from their 2021 high.

Three weeks ago, I recommended selling half your shares as we are still up more than 100% from our initial entry point. This concept stock, based on space mania, is still intriguing as the company mentioned that $450,000 space-tourism seats are selling faster than it anticipated. I believe this company (and stock) is similar to Tesla in its early days. However, I fully admit they have missed targets and there is more competition out there such as Blue Origin. The company has to end the delays and increase revenue.

However, I now recommend that most investors incrementally buy this stock as the potential outweighs the risk. MOVE FROM SELL HALF TO INCREMENTAL BUY

The next Cabot Explorer issue will be published on December 23, 2021.