Cabot Global Stocks Explorer 710

The market rebound continues as the Nasdaq 100 (QQQ) is now in positive territory for 2020 and the S&P 500 is up 32% from its March 23 lows. The Fed continues to insist it will accommodate any liquidity concerns and is now even investing in corporate debt. Japan’s central bank is going so far as to purchase Japan equity ETFs. Today, we follow up last week’s focus on big tech and big data with a cybersecurity theme and two new investment ideas.

Cabot Global Stocks Explorer 710

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Big Data & Big Tech = Cybersecurity
Last week, we discussed the rise of big data and big tech stocks and how giants such as Microsoft (MSFT) so dominate the indexes.

But often overlooked is that storing and protecting this data is big business as well.

Not too long ago, critical information like employee health records and company financial statements were stored in long rows of file cabinets or boxes sitting in musty warehouses.

Then came computers and the internet, and this data was stored digitally.

Data storage has exploded over the past several decades and is growing exponentially because of the emergence of new digital technologies, including:

1. the internet of things, which is connecting everyday devices from dishwashers to TVs to the internet to collect and transmit data;
2. cloud computing, offering cheap, scalable, and efficient data infrastructure; and,
3. machine learning and artificial intelligence, which makes data more valuable than ever before as it allows the mining of huge data sets.

As the world becomes digitized, protecting valuable and sensitive data is essential. As more valuable data is created, cybercriminals become increasingly motivated to steal the data and sell the data.

A single cybersecurity company can block over 100 million threats per day. That’s equivalent to more than one thousand threats blocked every second. But all it takes is one breach to cause severe damage for companies and users.

For example, in 2013-14, Yahoo had all 3 billion of its accounts hacked in two separate attacks, arguably the worst data breaches of the 21^st century.

In 2017, Equifax, one of the largest credit bureaus in America, announced a data breach that affected 143 million consumers, including social security numbers, birth dates and driver’s license numbers.

In late 2018, Marriott International announced a data breach that compromised 500 million accounts, including personal information like passport numbers.

Hackers sponsored by foreign governments such as China or Russia account for about 23% of global breaches while organized crime accounts for another 39% of data thefts.

Soaring Spending on Cybersecurity
Cybersecurity is one of the fastest-growing segments of IT spending. Chief Information Officers consistently rank cybersecurity as their top spending priority.

In 2019, the average total cost of a data breach for a company was $3.9 million, with 36% of the cost coming from the loss of customer trust.

Damages from cybercrime could cost the world $6 trillion annually by 2021, prompting individuals, companies, and governments to spend a bundle with cybersecurity firms to provide sophisticated software and services to protect proprietary data.

Cybersecurity is a powerful theme that will be further fueled by the growth of new technologies that offer connectivity to data, such as machine learning, cloud computing, and the internet of things.

Now, using my trademark “shotgun and rifle” strategy of combining an ETF with a specific stock pick, let’s take a look how you can profit from this cybersecurity theme.

New Explorer Recommendations
The Rise of Big Data = The Rise of Cybersecurity

Global X Cybersecurity ETF (BUG)
Cloudflare, Inc. (NET) for aggressive investors - please put in place a 25% trailing stop loss

Cybersecurity is the science of keeping digital data safe and only in the hands of, and in front of the eyes of, those who should have access. Cyber attacks on corporations aren’t slowing down, nor is corporate spending aimed at defending against those breaches.

Global X Cybersecurity ETF (BUG) is a basket of cybersecurity stocks of companies developing and managing security protocols to prevent intrusion and attacks on systems, networks, applications, computers and mobile devices.

This ETF has 29 holdings and the top 10 stocks represent roughly 60% of the total market value (see below chart) of the basket. Seventy-four percent of the companies are incorporated in America, followed by 13% in Israel and 8% in Japan.

Founded in 2005, it is one of the more established cyber pure plays on the market and has expanded its suite of services and warded off upstart disrupters by purchasing smaller start-ups. BUY A HALF POSITION

One of the top holdings in the BUG basket is Palo Alto Networks (PANW).

A smaller, more speculative cybersecurity play is Cloudflare, Inc. (NET). This company, founded in 2009 and headquartered in San Francisco, went public through an IPO last year and got its start offering internet security and website performance services. The decade-old company is growing fast and appears to be gaining market share. NET has high gross margins but is not yet profitable, though some analysts expect its revenue to double by 2022.

This off-the-radar company and potential takeover target provides cloud-based services to secure websites. It offers various products for performance and reliability, video streaming and delivery, advanced security, insights, Cloudflare for developers, domain registration and Cloudflare marketplace.

With most companies requiring employees to work from home in the midst of the COVID-19 pandemic, that has put a strain on security. Cloudflare is helping companies deal with hardships imposed by the pandemic, by making its product to support remote work free for small businesses through September 1, 2020.

But it has a nice backstop: Cloudflare, Inc. has a strategic agreement with Baidu, Inc, China’s multinational artificial intelligence and internet giant.

Cybersecurity is a growth theme worth investing in via these two complementary ideas. BUY A HALF POSITION

Model Portfolio

Portfolio Changes
Sell LexinFintech (LX)

Updates
DBS Bank (DBSDY) shares added two points this past week as it reported earnings in line with other major banks such as JP Morgan.

Southeast Asia’s largest lender posted net income of $829 million in the three months ending March 31. Year over year, this was a decrease of 29% due to the bank increasing its provisions for bad debts as the impact of trade, oil prices and pandemic take a toll on growth.

DBS is one of the largest banks in Southeast Asia with a presence in 18 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index.

DBS has a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, being India.

I encourage you to buy DBS at these levels. BUY A HALF

Fanuc (FANUY) shares increased 15% this week in its second week in the Cabot Global Stocks Explorer portfolio.

Headquartered in the shadow of Mount Fuji, Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. Fanuc claims to be the only company that uses robots to make robots.

I have been following Fanuc’s stock for some time but it always seemed expensive.

With the pullback in the market, now is a great entry point even as the stock has leapt from a low of 11 in late March up to 16 this week—a price that’s still well below its 52-week high of 19.

Fanuc offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive and Fanuc also bought back 72 million shares last month. In short, Fanuc is a high-quality play on what seems to be an unstoppable trend. I encourage you to buy this conservative robot play if you have not already done so. BUY A HALF

LexinFintech (LX) shares were up a bit this week but have been underperforming despite posting solid numbers in China’s high-growth financial service sector. That said, the stock is down more than 25% since we recommended it, so I need to remove LX from the portfolio. MOVE FROM BUY A HALF TO SELL

Luckin Coffee (LK)’s stock trading has been halted since April 7 at a price of 4.39 pending further information.

China Securities Regulatory Commission has been cooperating with the SEC to look into the Luckin Coffee situation. More than a dozen officers from State Administration for Market Regulation visited the headquarters in Xiamen on Sunday, marking the most significant action so far by Chinese authorities.

Since Luckin is listed in the U.S., China’s securities regulator has limited supervisory authority. Luckin said in a statement on its official Weibo account that it is “actively cooperating” with the market regulator and providing information about its business. The company added that its stores across the country are operating normally.

Keep in mind that that the coffee chain’s unit expansion story is not impacted by this accounting fraud. I will pass on information about LK as it is released. HOLD

Ping An (PNGAY) shares moved upward only marginally this week as its continues to underperform on a relative basis, which is puzzling given its solid financial results.

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 is ranked 29^th on the Fortune Global 500 list. The latest numbers for Ping An are encouraging: quarterly earnings were up 49.7%, the company delivers a 24% return on equity and the stock is only trading at eight times trailing and projected earnings. We will give this high-quality story a bit more time to develop. BUY A FULL POSITION

Sea Limited (SE) shares closed Wednesday just above 55, giving us a gain of 310%! As I recommended last week, please sell half your position.

Sea Ltd’s (SE’s) Shopee Mall continues to see healthy growth in stores ahead of peers in ASEAN – online stores in Indonesia have grown by 30% in three months

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 up 107% year-on-year and quarterly active users 64% year-on-year.

All indications point to Sea having the potential to be an enduring growth stock but I would be reluctant to buy new shares at these levels. We will move SE back to a buy on any pullbacks. SELL HALF YOUR POSITION – HOLD THE BALANCE

Virgin Galactic (SPCE) shares tacked on a point this week to breach 18.

I repeat my recommendation from last week to sell half your position in Virgin Galactic (SPCE) at market for a 146% gain.

The company announced that it plans to report its financial results for the first quarter 2020 following the close of U.S. markets on May 5. Morgan Stanley came out recently with a buy rating valuing SPCE’s space tourism business at $14 a share and the hypersonic flight opportunity at $10 a share to arrive at a current composite target price of $24.

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.

We will be an active buyer again on any pullbacks as this is a great story. SELL HALF YOUR POSITION – HOLD THE BALANCE

Direxion Daily S&P 500 Bear (SPDN) lost a point this week as the market advanced. 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 an insurance policy if markets pull back, so I continue to recommend that you buy a position in SPDN that amounts to 10% of your portfolio. BUY 10% POSITION

Watch List
Alibaba (BABA) shares showed little movement this week, falling from 209 to 207.

BABA recently announced plans to invest $28 billion in its cloud infrastructure over the next three years. Its fourth-quarter cloud revenue climbed 62% as Alibaba had a commanding 46.4% of China’s cloud market, according to research firm Canalys.

Alibaba is a great long-term China core position and is of course a bellwether for Chinese stocks.

The next Cabot Global Stocks Explorer issue will be published on May 14, 2020.

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