While the coronavirus concerns are still high, stocks have recovered their footing, as China has taken steps to stimulate its economy and markets.
The Cabot Global Stocks Explorer portfolio is holding up well, though Luckin Coffee (LK) sold off hard and then sharply rebounded this week. Our emerging markets timer (EEM) is marginally positive, and in an uptrend in the last month.
Today’s recommendation is a leader in fintech with a great growth story, strong numbers and an attractive entry point.
Cabot Global Stocks Explorer 704
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Global Markets Stage a Rebound
One early 2020 trend is that the world’s top money managers are buying more stocks outside of the United States. According to data from the Investment Company Institute, flows into global equity funds were up every week in January while domestic equity funds have recorded negative flows each week.
Incredibly, the top five U.S. tech stocks now account for close to 20% of the S&P 500 index’s market value.
The economic and psychological impact of the Wuhan virus is spreading and difficult to measure.
To offset the impact of the virus scare on the economy and markets, the People’s Bank of China is cutting banks’ reserve requirement ratios and pumping hundreds of billions of dollars into markets to help stabilize the economy and stock markets.
While many markets have rebounded over the last week, most commodity prices have seen no such rebound thus far, with oil falling by 20% from its last high and now in a bear market.
Luckin Coffee (LK) pulled back sharply from a high of 50 to the lower 30s, though it has rebounded a bit, to 36.
Analysts believe that there will be some virus-related impact on sales in January and February and there has been some short-seller activity in Luckin acting on allegations that Luckin’s accounting is sub-standard. Please see my recommendation on how to handle LK going forward in the portfolio review below.
Today’s recommendation is a leader in fintech that presents us with a great growth story, strong numbers and an attractive entry point.
New Explorer Recommendation: LexinFintech (LX)
I recommended LX last year but it stalled a bit and, despite its compelling story, I needed to make room for some new ideas.
With LX down about 20% in the last two weeks after reaching a new high, it’s a good time to get back in.
Based in Shenzhen, LexinFintech is an online consumer finance platform for young adults in China.
The company owns and operates Fenqile, a popular online consumer finance platform that offers installment loans and also matches borrowers with other lenders.
Financial service platforms based on mobile phones are often referred to as “fintech.” It’s an exciting, competitive, fast-growing market offering investors significant growth potential.
My recommendation is based on LX’s:
1) huge growth market
2) impressive numbers, credit quality, and low valuation
3) high potential for international expansion.
Let’s dive deeper into these three attributes, shall we?
1) Well-defined, huge, fast growing target market
The company’s target market is 250 million educated young Chinese adults aged between 18 and 36 with high income potential, high educational background, high consumption needs, and a strong desire to build their credit profile.
And because LX begins serving these customers early in their career, it has a clear advantage in data and analysis.
LX gets to these Chinese yuppies years ahead of Alipay and ahead of the banks by five years.
And while there is considerable competition in this space, the market is huge and nobody can serve it all.
2) Strong growth, high credit quality, and low valuation
LexinFintech posted some impressive numbers in its last quarter’s earnings report. Here are the highlights:
- Operating revenue increased 76%.
- Gross profit surged 122%.
- Net income was up 62%.
- Loans outstanding are over $7 billion - double that of a year ago.
- Total loan bookings increased 170%.
- Total number of registered users reached 62 million - up 92%.
Despite these stellar numbers, LX trades at 14 times trailing earnings and just 5-6 times forward earnings.
LexinFintech earned almost $2 a share in 2019 and that number could potentially grow by 50% or more in 2020.
LX’s credit quality continues to be high as the company’s 90-day plus delinquency ratio remains low at 1.41% and it continues to see strong credit performance, as its lifetime charge-off ratio is just over 2%.
3) Opportunities to expand internationally – making it a prime takeover candidate
There is no reason the company cannot take its system and platform to other Asian and emerging markets. This could easily be done through joint ventures with financial institutions that already have a strong position in their home market but wish to follow LX’s first-mover strategy.
Given its growth and rising profile, LX seems to me to represent an ideal takeover candidate. I could easily see a large bank or other financial institution going after LX to strengthen its position with young, high quality consumers.
LX is an aggressive idea and I recommend beginning with a half position. BUY A HALF POSITION
Model Portfolio
Portfolio Change
ProShares Ultra Short China (FXP) — MOVE FROM BUY TO SELL
Updates
Alibaba (BABA) shares surged in a tough environment, going from 208 to 220. Earnings are expected next Thursday, February 13.
Analysts are forecasting the company will report strong growth in the fiscal third quarter of 2020, rising by 24% to $2.25 per share with revenue expected to increase by around 31% to $22.75 billion.
Next week’s earnings release is particularly important because it will show results for the most important quarter of the year. Because of the seasonality of shopping, Alibaba generates approximately 30% of its yearly profits in the fourth quarter.
For a company of its size, BABA is a remarkable growth stock and is a great core holding for those looking for exposure to the rising Chinese consumer class. I would still be a buyer at these levels. BUY A FULL POSITION
Cosan (CZZ) shares edged higher this week as the company approaches an earnings report expected on February 19.
Cosan, based in Brazil, offers a diversified portfolio of fuel distribution, sugar production, ethanol and electricity, rail transportation, warehousing, as well as the distribution of natural gas.
For starters, Cosan has delivered average growth in earnings per share of 73% over the last four years with a 22% return on equity.
In the most recent period of financial results, profits surged 790% on a 20% increase in sales.
Some analysts estimate that Cosan earned around $1.30 a share in 2019. But earnings could more than double this year. That means the stock is selling for just eight times forward earnings. If you have not yet done so, I recommend you put some Cosan in your portfolio. BUY A HALF
Luckin Coffee (LK) shares have been volatile since reaching a high just under 50 on January 17. Since then, they’ve pulled back sharply, just below 30, but since rebounded to 36.
The company recently announced Luckin Coffee Express, a vending machine for brewed coffee and snacks. The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks stores.
It’s been reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue. This and the emergence of short sellers have impacted Luckin’s stock. I have been recommending that you take some Luckin profits off the table but, in the wake of the sharp pullback, I would be a buyer of LK at 40 or lower. BUY A HALF
Marvell Technology Group (MRVL) shares were up 5% in the first three days of this week but continue to underperform. Still, we’ll give the stock some time as we await earnings on March 4.
Our 5G play, Marvell recently sold its Wi-Fi business to NXP and is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware.
New markets are emerging in which Marvell has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics. This is a quality company operating in high-growth, strategically important markets and the company is boosting its stock buyback program.
I recommend that you buy a half position if you have not already done so. BUY A HALF
NovoCure (NVCR) shares fell sharply last Friday and then bounced from 80 to 86 this week.
NVCR is a unique company in the biotech space marketing what is actually a device, Optune, to treat cancer in a revolutionary way by way of mechanically disrupting cancer cell division.
This process uses electrical fields to non-invasively disrupt cancer cell division and growth. Sales are expected to be up 30% in 2020 with positive earnings.
In its most recent quarter, gross margins were firm at 75% and the balance sheet is strong with $313 million in cash. I encourage you to begin with a half position if you have not already done so. BUY A HALF
Ping An (PNGAY) shares have held firm in the past week, underlining its blue-chip quality.
Ping An provides financial products and services for insurance, banking, and asset management but is best known for its life, health and property insurance business.
It is also evolving into more of a financial technology (fintech) play and its Co-CEO, a former McKinsey consultant, is heading up the effort to transform the company into more of a blend of financial services and technology. Ping An is a dominant player in this space with over 200 million retail customers and ranked 29th on the Fortune Global 500 list.
The numbers for Ping An are encouraging; its last quarterly earnings were up 49.7%, the company delivers a 24% return on equity and the stock is only trading at 14 times trailing earnings and nine time projected earnings.
I recommend you begin a position in high quality Ping An. BUY A FULL
Rakuten (RKUNY) shares showed a little life this week, breaching 8 yesterday, as earnings are due out next Thursday, February 13.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank, and #1 credit card.
This stock is very cheap trading at just under nine times trailing earnings, but pending an uptrend developing, I’m keeping it a hold. HOLD A HALF
Rio Tinto (RIO) shares staged a modest rally this past week even as copper prices continued to weaken as traders worried about China, which is a big buyer of Rio’s copper and other commodities.
London-based Rio is one of the world’s premier multinational mining and commodity firms. Operating across 35 countries, it supplies the world with gold, diamonds, copper, titanium, iron ore and other industrial metals.
Rio offers good value currently trading for about seven times earnings and offers a current dividend yield of 5.7%. I encourage you to buy a full position in Rio if you have not yet done so. BUY A FULL
Sea Limited (SE) shares added a point this week to reach 46. This is impressive given the volatility in Asian shares; the stock is now up 15% in 2020, building on a triple-digit rise in 2019.
Sea’s gaming group, Garena, has acquired 100% of Phoenix Labs, an independent game developer. This is a welcome development, as it will diversify its gaming revenue.
Garena, Sea’s gaming group, continues to do well in India and Latin America. Its lead independent game, Free Fire, continues to maintain its position as the #1 or #2 grossing game on the Google Play Store in India.
The company is primarily known for gaming and its e-commerce platform Shopee is being deeply discounted despite gaining share in the fast-growing Southeast Asian market.
More conservative investors may want to take some partial profits in Sea while aggressive investors should hang onto all their shares. This company has the potential to be an enduring growth stock. Sea is expected to report its next earnings on March 3. BUY A HALF
Virgin Galactic (SPCE) shares moved up 1 point in the last week after a couple of months of stellar performance.
The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue.
Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021.
The big payoff is down the road, with hypersonic point-to-point travel. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at five times the speed of sound could make the same journey in just two hours.
Media attention to the private space race has focused on Jeff Bezos, who founded Blue Origin in 2000; SpaceX, which was founded in 2002 with colonizing Mars as its ultimate mission; and, of course, Branson, who started Virgin Galactic in 2004.
This is an aggressive idea that has made a strong move since being added to the Explorer portfolio but I believe there is more upside as the company is likely to remain in the media spotlight throughout 2020.
The stock has a lot of momentum behind it and management is very media savvy. BUY A HALF
EXPLORER ETF POSITIONS
Direxion Mexico 3X Bull ETF (MEXX)
This leveraged ETF position pulled back with emerging markets early in the week and then recovered to where I recommended it a week ago.
An aggressive play on Mexico, it tends to move 300% up and down relative to the underlying index. Thus, this position is only for more aggressive investors and I suggest a trailing 20% stop loss. BUY A HALF
ProShares Ultra Short China (FXP)
I added this position to hedge against the impact of the coronavirus on Chinese stocks, including the allocation to Chinese stocks that we presently have in the Explorer portfolio.
I’m removing it now because 1) the risk of panic selling related to the coronavirus issues has hopefully passed and, 2) China’s expansionary policy responses make this ETF unnecessary. MOVE FROM BUY TO SELL
The next Cabot Global Stocks Explorer issue will be published on February 20, 2020.
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