Cabot Global Stocks Explorer 707

Market volatility and weakness accelerated this week through Wednesday though U.S. Senate passage of a “bailout” measure may lead to a rebound on Thursday. In general, you should sell into strength and cautiously buy into weakness. Our emerging market signal is decidedly negative with the EEM down to 30 from a mid-January high of 46. It has not been at this low a level since early 2016 and got down to 20 at the bottom of the global financial crisis in 2008. Today we do a little selling, increase our S&P 500 Inverse ETF position marginally and add JPMorgan (JPM) to the watch list.

Cabot Global Stocks Explorer 707

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Volatility Continues - How to Handle and Hedge It
The market over the last few weeks has been unsettling at the very least.

Just when you think markets have found a bottom and maybe begun an uptrend, they go the other way.

Nobody knows where the bottom is but we all know there is a bottom and the market will recover, giving us all an opportunity to recoup losses. Our goal should be to get ready for it when it comes and to invest cautiously in the meantime. In general, you should try to sell into strength.

The surge in the value of the U.S. dollar has led to rapid outflows from emerging markets, reaching $30 billion in 45 days amid the virus outbreak, according to the Institute of International Finance.

All major emerging-market currencies tracked by Bloomberg have weakened against the dollar since January 20 – roughly the day that COVID-19 became a real concern in Asia – with the Russian ruble and Mexican peso dropping almost 20%.? But keep in mind much the same happened during the global financial crisis of 2008 and emerging markets were the first to snap back.

British Petroleum (BP) really stumbled out of the gate and now has a current dividend yield over 15%. BP Chief Financial Officer Brian Gilvary said the British major could curb spending by as much as 20% this year. I’m inclined to give it another week or two to get back to 20 or more. BP has not traded at this level since January 1994.

Today, I’m selling my fintech idea, StoneCo (STNE), and bumping up our Direxion S&P 500 Bear ETF (SPDN) from 10% to 15% of the portfolio but will release this inverse position as soon as the situation stabilizes. This puts us at 45% in stocks, 40% in cash and 15% in the SPDN.

This week, the stocks in our Cabot Global Stocks Explorer portfolio lost ground but, for the most part, outperformed on a relative basis.

Lexinfintech (LX) fell from 9.5 to 8.8, Ping An (PNGAY) from 20 to 19, Sea Limited (SE) from 44 to 42, Luckin Coffee (LK) from 31.4 to 27.6 and Alibaba (BABA) from 188 to 180.

Virgin Galactic (SPCE) has fallen all the way back to where we started a couple of months ago and this week went from 13.6 to 10.6. Obviously, I wish we had sold more than one-third back when it was in the mid-30s. This is a hard lesson to take more profits off the table.

I’m also adding JPMorgan (JPM) to the watch list. JPM, the most profitable big bank in the U.S., is trading at just 7.8 times trailing earnings and just over book value. It has a return on equity of 14% and a cash position equal to $285 per share – more than three times the current share price of 83. It also has a sustainable dividend of 3.8%.

The speed at which the market is moving back and forth is partly a symptom of more computerized trading. When I got started in the business, it was all about fundamentals.

Model Portfolio

Portfolio Changes
Sell Stoneco (STNE)
Increase Direxion S&P 500 Bear (SPDN) to 15%
JPMorgan (JPM) to Watch List

Updates
Alibaba (BABA) shares fell from 188 to 180 on Wednesday.

BABA’s revenue for last quarter’s core commerce business revenue increased 38% while Lazada (its Southeast Asian e-commerce business) posted a 97% year-over-year increase. Taobao increased monthly active users by 100% year-over-year and Alibaba’s cloud segment increased revenue by 62% year-over-year. Tmall Global, which imports products from international brands, saw growth of 45%. This is all impressive for a company the size of Alibaba.

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. For longer-term investors, I would be a buyer at these levels. BUY A FULL POSITION

British Petroleum (BP) really stumbled out of the gate after we recommended it last week, declining from 24 to 16, and now has a current dividend yield over 15%. BP Chief Financial Officer Brian Gilvary said the British major could curb spending by as much as 20% this year. I’m inclined to give it another week or two to get back to 20 or more.

I believed this was a solid pick as oil prices pulled back sharply to $26 a barrel for Brent crude. BP has not traded at this level since January 1994 so if you have not bought this stock, consider buying at these extreme levels. BUY A HALF

LexinFintech (LX) shares moved from 9.7 to 8.8 this week as it, like most fintech stocks, flies above the real economy since it has no deliveries and is technology driven.

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 lenders.

LX sells for between 5-6 times prospective earnings. LexinFintech earned almost $2 a share in 2019 and that number could potentially grow by 50% or more in 2020.

I believe LX offers us the best risk/reward opportunity and recommend you buy the stock if you have not yet done so. BUY A HALF

Luckin Coffee (LK) shares held up well until Wednesday when they fell sharply from 32 to 27.6, sliced nearly in half from the all-time high of 50 they hit in January.

The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks.

In fact, it’s been reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus and this issue may impact LK as well. I have been recommending that some of you take some Luckin profits off the table but see no reason not to keep this stock a buy for more aggressive investors. BUY A HALF

NovoCure (NVCR) shares began the week at 67 before losing ground to finish the week at 58.

This is, of course, very disappointing and also in sharp contrast to the financials released recently showing a 300% earnings surprise on a 42% jump in net revenue. Gross margins were 75% and the balance sheet is strong with $313 million in cash.

Based in Israel, NovoCure sells a medical device that uses low-voltage electric fields to successfully treat the most aggressive forms of cancer. The technology has succeeded in every clinical trial. The Food and Drug Administration (FDA) has approved it and Medicare now covers it.

The core product is called Optune – its Tumor Treating Fields delivery system – and it was launched in 2011 for glioblastoma, the most common primary brain cancer and one of the most difficult cancer types to treat. Optune is sold in the U.S., Germany, Austria, Switzerland, Sweden, Israel and Japan.

Optune also uses low-intensity electrical fields to treat mesothelioma, a tumor of the tissue that lines the heart, lungs, stomach and other organs. However, studies are underway with other brain cancers as well as pancreatic, ovarian, liver and lung cancers, with key results due over the next few months.

If you own Novocure, I would hold it. If you don’t own it, I would be a buyer. BUY A HALF

Ping An (PNGAY) shares held firm again this week losing only a point to go from 20 to 19, which is what I would expect from this quality blue-chip company. No doubt the mandarins in Beijing are cautioning asset managers in China not to sell but in this case with good reason.

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.

Ping An is a dominant player in this space with over 200 million retail customers and ranked 29^th on the Fortune Global 500 list. The latest numbers for Ping An are encouraging: 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 times projected earnings.

This stock has held up very well despite all the turbulence, and I recommend you buy a full position if you have not done so. BUY A FULL

Sea Limited (SE) shares were off modestly this week moving from 44 to 42.

Recently, the company released its quarterly and full-year financials. Total adjusted revenue was $909 million, up 133.5% year-on-year from the fourth quarter of 2018.

Sea’s self-developed global hit game, “Free Fire”, was the most downloaded mobile game globally in 2019, according to App Annie, and recently hit a new record of 60 million peak daily active users. “Free Fire” was also the highest grossing mobile game in Latin America and in Southeast Asia in the fourth quarter and for the full year of 2019.

Adjusted revenue for digital gaming was $479.9 million, up 107% year-on-year.

Quarterly active users reached 354 million, an increase of 64% year-on-year.

The company also owns Shopee, the largest Southeast Asia e-commerce platform by orders. It registered over 188 million orders in the fourth quarter, or a daily average of over 2 million orders, an increase of 124.6% year-on-year. All indications point to Sea having the potential to be an enduring growth stock. BUY A HALF

StoneCo (STNE) shares have not fared well in the last two weeks despite great numbers so we are unfortunately forced to remove this from the portfolio.

Based in Sao Paulo and founded in 2000, StoneCo is a digital payments company providing financial technology solutions for merchants to conduct electronic commerce across in-store, online, and mobile channels in Brazil. In full-year 2019, StoneCo’s client base grew 84% year-over-year, with greater than 60% growth in 26 out of 27 Brazilian states. MOVE FROM BUY A HALF TO SELL

Virgin Galactic (SPCE) shares have rounded the bases and are just where we started a couple of months ago at just over 10 a share.

In retrospect, I wish we sold more than the one-third position I recommended when the stock was in the mid-30s. Even though we are at a nice profit above break even, this pullback has been painful.

SPCE still plans to make its first commercial space-tourism flight this year, and took a step toward resuming ticket sales for jaunts expected to cost upward of $250,000. The company said on an investor call Tuesday it was focused on working through testing and approval for its space launch system.

More than 600 potential customers have already paid a collective $80 million in deposits for the flight and the company has in its sales funnel 2 million prospects with liquid assets of $10 million or more. Furthermore, beyond space tourism, the company is taking dead aim at a global commercial aviation market worth $900 billion and could potentially land some defense contract. Those would include a proposed hypersonic jet that could in theory travel from London to New York in an hour.

Boeing last year invested $20 million in the company and CEO George Whitesides said the company was focused on the commercial launch and had completed 20 of the 29 approvals required to validate the commercial license it received from the Federal Aviation Administration in 2016.

The stock’s pullback over the last few weeks offers more aggressive investors a chance to buy more shares. BUY A HALF

Direxion S&P 500 Bear ETF (SPDN)
The SPDN is an exchange-traded fund (ETF) that moves opposite (inverse) of the S&P 500 index. It serves as a portfolio shock absorber and moved up this week from 25 to 28. BUY A FULL – INCREASING TO 15% of OUR PORTFOLIO

The next Cabot Global Stocks Explorer issue will be published on April 2, 2020.

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