Cabot Explorer 740

While concerns over the Covid Delta variants are escalating, the market has steadied as the week progressed as 85% of S&P 500 companies have exceeded analysts’ Q2 earnings expectations, according to FactSet. Still, investors remain moderately cautious and relatively risk averse. Today’s new recommendation is an overlooked stellar fund run by none other than value investor Bill Ackman.

Cabot Explorer 740

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FDR’s New Deal on Steroids
Now that Blue Origin’s and Virgin Galactic’s successful launches are in the books, Wall Street is assessing the profit potential of space tourism. UBS projects the space tourism business segment to be around $4 billion but the broader space sector to be worth $400 billion, which could grow to $900 billion by 2030. This includes earth imaging businesses, mobile communications companies, providers of space-based internet and all the businesses supporting those firms with launch services, logistics and satellite manufacturing.

Rockets are not the only things going up these days. Just take a look at federal spending, budget deficits and inflation. It looks like we have Franklin Roosevelt’s New Deal on steroids on our hands. The federal budget deficit, already $1 trillion in 2019, exceeded $3 trillion in pandemic 2020 and is on a path to hit $3 trillion again in 2021, with federal spending exceeding $6 trillion.

Just to put this number into historical perspective, FDR’s New Deal spending spread over several years comes to $856 billion in current dollars. The Marshall Plan to help rebuild Europe and block Communism came with a price tag of $144 billion in current dollars. America spent $4.8 trillion in today’s dollars over more than four years fighting World War II. It seems improbable that this amount of spending will not have negative side effects both this year and down the road. Recall Milton Friedman’s dictum: “Inflation is always and everywhere a monetary phenomenon.”

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New Explorer Recommendation
Going Dutch with Bill Ackman
Pershing Square Holdings (PSHZF)
Today, I’m recommending little-known Pershing Square Holdings of the Netherlands – Bill Ackman’s largest investment vehicle, structured as a closed-ended fund with about $10 billion of net assets. Ackman, a well-known value investor, founded Pershing Square Capital Management in 2004 with $54 million, much of it his own money.

Pershing Square Holdings shares trade around 36, a 27% discount to their most recent weekly net asset value of close to 50 a share. American investors can buy Pershing Square Holdings on Euronext, the London Stock Exchange, or through a U.S. Pink Sheet listing under the ticker PSHZF. The U.S. shares offers decent liquidity with an average daily volume of about 50,000 shares though some brokerage firms may restrict the ability of U.S. investors to buy shares of the fund because of its offshore status.

Pershing Square Holdings has a concentrated portfolio of about 10 stocks, such as Lowe’s (LOW), Hilton Worldwide (HLT), Chipotle (CMG), Howard Hughes (HHC) and Domino’s Pizza (DPZ). Unlike a mutual fund, a closed-end fund trades on an exchange – like a stock – and can sell for more or less than its net asset value (NAV).

From the fund’s 2004 inception through the end of last year, investors multiplied their investment 15X, versus the fivefold return they would have achieved in a zero-cost S&P 500 index fund. Pershing Square Holdings returned 70% in 2020 after gaining 58% in 2019. Ackman adroitly hedged the Pershing portfolio with credit-default derivatives before the pandemic, which offset equity losses during the market downdraft in March 2020. This is exactly what you want a hedge fund to do to earn its hefty performance fees of 16% of the profits.

One major positive is that Ackman is the largest holder of Pershing Square Holdings with a 21% stake worth $1.5 billion. One drawback with Pershing Square Holdings is that it is classified as a passive foreign investment company, which requires U.S. holders to file an IRS form 8621. This could cause some tax hassles for investors.

But the big discount on the fund and the opportunity to invest with a successful investor like Ackman offsets that minor headache as he looks for situations with asymmetrical risk: lots of potential upside and limited downside, and he prefers to hold positions for several years.

In short, Pershing Square Holdings allows you to access the skills of one of the world’s most successful hedge fund managers – one who uses investment strategies and techniques you cannot replicate – at a significant discount to the net asset value of the holdings in the fund.

BUY A HALF

Model Portfolio

Portfolio Changes
Cabot Corporation (CBT) Move from Hold a Half to Sell

Updates
Altimeter Growth Corp. (AGC) shares are bouncing around between 10 and 11 as this SPAC awaits a merger with Singapore’s Grab Holdings, expected in the fourth quarter. Grab is Southeast Asia’s leading super-app platform with over nine million users, offering them a wide range of delivery, mobile payments, and financial services. I suggest you buy a half position here if you have not already done so. BUY A HALF

Cabot Corporation (CBT) shares were down 7% this week, confirming my recent downgrade of this stock. This week, based on its recent lackluster performance, I’m moving this stock to a sell though on paper it presents good value and is a well-managed company. MOVE FROM HOLD A HALF TO SELL

Cloudflare (NET) shares tacked on another four points this week as the company gained certification to sell products to government clients. Federal, state, and local governments are modernizing their security infrastructure as they see an uptick in the volume and type of cyber threats. This company provides network security, performance and reliability services to a growing portion of global web traffic. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF

Fisker Inc. (FSR) shares finished slightly up this week after Monday’s pullback. The company is contracting all of its manufacturing, delivery, and service operations to third parties such as Magna International and Foxconn. Fisker takes charge in designing and financing its vehicles. The company has promised a zero-commitment lease for $379 per month with a $2,999 initiation and activation fee.

Ocean’s sub-$40,000 retail price point makes it a more affordable EV option. But we have to accept that the company will have little or no sales revenue in 2021 and the company’s first product (the Ocean) will be launched in 2022. This is an aggressive stock but I believe the EV market has room for a limited number of custom EV players. BUY A HALF

International Business Machines (IBM) shares jumped on Tuesday and Wednesday. Big Blue is really a turnaround story as the growth comes from cloud services with sales up 13% from a year ago to $7 billion, led by a reported 20% increase in cloud services provider Red Hat. Through the first six months of the year, free cash flow was $2.56 billion, handily covering the $1.47 billion it paid out in shareholder dividends.

IBM has also spent $2.87 billion on cash acquisitions so far this year. It’s purchased nine small software and consulting companies since January to augment its cloud presence. IBM is trading at just over 13 times forward earnings and 12 times free cash flow, with a 4.6% dividend yield. I encourage you to hold this stock as a long-term conservative play on key technology markets. BUY A HALF

Marvell Technology Group (MRVL) shares were marginally up this week after rising 24% in the first half of 2021. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks. Marvell’s Q2 outlook is $1.06 billion in revenue, up 46% year over year. This stock had a great 2020 and the momentum continues. BUY A HALF

Palantir Technologies (PLTR) shares finished the week above 22, continuing to hold their ground in a choppy market. The company’s software and data platform is primarily used by government agencies in a wide range of applications and in its most recent quarter the company’s U.S. government revenue jumped 83% year over year. The company sees plenty of room to grow as the private sector currently represents just 44% of its business. I encourage you to buy shares if you have not already done so. BUY A HALF

Pinduoduo (PDD) shares drifted a bit lower this past week, falling from 110 to 104. With China stocks being under a bit of a regulatory cloud due to increased scrutiny by both Chinese and U.S. regulators, shares face a bit of a headwind. Admittedly, the chart does not look good, down from highs just above 200 in February, but this is counterbalanced by the company having great numbers. I moved this stock to a hold recently pending clarification of the regulatory issue.

Pinduoduo’s edge in China’s discount marketplace is a platform that allows shoppers to team up for group discounts and the company continues to post impressive growth. Pinduoduo’s revenue surged 97% in 2020, then jumped another 239% year over year in the first quarter of 2021 to reach $3.3 billion. HOLD A HALF

Porsche (POAHY) shares held firm in their second week as an Explorer recommendation. Porsche has a controlling interest in Volkswagen, a leader in electric vehicles. Porsche recently announced a joint venture with Customcells to produce high-performance batteries that will significantly reduce charging times. While competitor Ferrari’s (RACE) U.S.-listed shares trade at about 41 times forecast 2021 earnings, Porsche trades at less than seven times consensus estimated earnings for 2021.

Last quarter’s earnings were up sharply over their previous pandemic comparison, with the stock nearly doubling since last September. Still, the stock trades at just 73% of book value and has only $37 million in debt. I encourage you to buy a half position if you have not already done so. BUY A HALF

Sea Limited (SE) shares continue to chug along, zooming from 272 to 294 this week, after being up 38% in the first half of 2021. I see further upside potential to Sea’s share price from: (1) strong momentum in its gaming portfolio; (2) the ramp-up of e-commerce revenues with wider adoption of online services and market share gains; (3) opportunity of growth through Sea Money fintech operations and geographically in India.

I would be an incremental buyer of this stock but long-time holders should take partial profits from time to time. BUY A HALF

Taiwan Semiconductor (TSM) shares dipped back to 118 this week. The geopolitical rivalry between the U.S. and China is a bit of a headwind but this company has significant strengths. First, it dominates the premium, big-profit part of the microchip business. It has a diversified suite of products providing a stable revenue base. And most importantly, Taiwan Semiconductor has the capital required to maintain its lead in advanced chips. I encourage you buy this dominant, strategic semiconductor stock if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares held firm against the backdrop of rival Blue Origin’s successful space journey above the Karman line set 100 kilometers, or about 62 miles, above the surface of the Earth. The 10-minute flight, which included Jeff Bezos and three passengers, went off smoothly. The reusable rocket landed. And the capsule, carrying the four passengers, touched down shortly after the rocket and after the crew experienced moments of weightlessness while looking down on planet Earth.

We are still about 5X higher than where we got into Virgin. If any weakness develops from here, I will likely upgrade this to a buy for this aggressive concept stock. HOLD A HALF

The next Cabot Explorer issue will be published on August 5, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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