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The World’s Best Stocks

Cabot Global Stocks Explorer 711

Markets have pulled back a bit over the last few days as investors hit the pause button to digest a Nasdaq in the black for 2020 while the real economy struggles to reopen. Congress begins work on the next stimulus spending bill and international stocks come under consideration, as they have not rebounded anywhere near as much as U.S. markets.

Our emerging market (EEM) momentum timer has turned positive by the slightest of margins as we replace one China idea with another.

Cabot Global Stocks Explorer 711

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Why Markets Have Moved Ahead of the Real Economy
Let’s begin with a quick review of some of the more important developments in the Cabot Global Stocks Explorer portfolio this week.

As I anticipated, Richard Branson’s Virgin Group announced plans to sell a portion of its ownership in Virgin Galactic (SPCE) to raise cash for some of his other ventures that are under pressure due to Covid-19. Thinking that this was probable is why I recommended selling half your shares a couple of weeks back for a 146% gain.

Sea Limited (SE) continues to move ahead, and after selling half our shares a couple weeks ago to lock in profits of 310%, we can let it run a bit.

Our new cybersecurity recommendation, Cloudflare (NET), is off to a good start on solid first-quarter results, and Luckin Coffee’s (LK) board fired its CEO and COO and is cooperating closely with both U.S. and Chinese regulators. Finally, we are selling Ping An (PNGAY) this week due to lack of relative strength as it has repeatedly failed to break through resistance, and replacing this quality Chinese blue chip with a new recommendation, described below.

The Explorer portfolio is now at 40% invested, 60% in cash, offering us plenty of room to invest in new ideas or current recommendations in the coming weeks.

Now let’s move on to the most common question I get lately which is how the stock market can be rebounding so sharply from its March lows while the real economy is really struggling.

There are multiple reasons—with the first (and usual) being the fact that markets are a forward-looking indicator, always looking ahead around the corner, in this case to a recovery later this year and into 2021.

The second reason is the giant tech companies that lead the S&P 500 index, like Apple and Amazon, largely escape the negatives and some would argue benefit from the lockdown. In fact, the top five tech companies represent 20% of the market value of all of the 500 stocks in the index. This tech advantage extends well beyond the top five companies as the Nasdaq 100 index of leading growth companies is already in the black for 2020.

In contrast, all of the energy stocks (down 35% in 2020 as a group) represent only 3% of value of the index.

The third reason for the sharp recovery in stocks is the fear by big institutional investors that they would miss out on the rebound if they sat on the sidelines and waited for an uptrend to develop. This is known as FOMO - the “Fear Of Missing Out”.

Then there is the power of TINA - “There Is No Alternative” to stocks. This mantra means that with a strong dollar and rock-bottom interest rates, there is no alternative for big investors than to invest in stocks.

Finally, there is the unprecedented amount of appropriations from Congress that has and will be thrown at stimulating the economy, not to mention the historic steps by the Fed to inject liquidity any way it can without restraint. All this acts as a backstop to markets and encourages flows into stocks.

In China, so far the central bank and government’s response to the virus crisis has been much more muted than it was in the 2008-2009 global financial crisis. That may change soon as word is it’s about to launch some stimulus measure to spark more growth.

One of the likely beneficiaries of a more open and faster-growing China is our newest recommendation.

New Explorer Recommendation
The Expedia of China Group (TCOM)

Our new contrarian recommendation is known as the “Expedia of China” and, as you might guess, its stock has been struggling since January, going from 38 to 23 – a decline of roughly 40%.

It seems to me that much of the downside risk has been wrung out of this stock, and as China gets up and running faster than much of the world, domestic travel and services will lead and potentially surprise on the upside in a significant way.

The company is a travel service provider that specializes in ticketing, reservations, and tours as well as aggregating hotel and transport information. Trip began 2020 with a strong tailwind as its fourth-quarter 2019 net income soared from $161.7 million to $1 billion.

Trip’s CEO Jane Sun believes the Chinese domestic travel market could get back to normal within months. If she and other analysts are right, the stock could be poised to rebound.

The company recently released its 2020 May Day Tourism Trends Report for the Chinese market, revealing a significant increase in bookings over the period, and tendencies toward a particular mode of domestic travel in the country, where the company is the largest travel services provider. According to this report, the five-day May Day holiday is expected to mark the first peak for travel in 2020, with travel figures possibly doubling those of the three-day holiday in April.

The company has enormous reach and scale in China as well as with overseas partners.

It provides reservation services for more than 1.4 million hotels and hostel properties, and more than 1.2 million vacation rental properties around the world. Ticketing services including air, train, bus tickets and other transportation services.

TCOM’s platforms cover more than 2 million global air routes connecting over 5,000 cities in over 200 countries and territories, train tickets across 33 countries, and bus tickets connecting more than 3,000 bus stations in China.

The company sees booking numbers for smaller (3-6 participants), shorter and local group tours, using private cars and tour guides, increasing exponentially. Car rental reservations to date have reached 70% of the same figure last year, owing to the privacy, cleanliness and freedom of car travel. Younger travelers have emerged as the driving force over the May Day holiday, comprising 57% of total bookings.

This is an aggressive idea with considerable uncertainty but I believe there is enough evidence of a rebound in domestic travel to warrant a half position in (TCOM) to take advantage of the 40% reduction in price of this leading player in China’s travel sector. BUY A HALF


Model Portfolio

StockPrice BoughtDate BoughtPrice 5/13/20ProfitRating
Alibaba (BABA)1021/27/1719996%Watch
Cloudflare, Inc. (NET)244/30/202816%Buy a Half
DBS Bank (DBSDY)504/2/20559%Buy a Half
Direxion S&P 500 Bear (SPDN)Sold
Fanuc (FANUY)134/16/201723%Buy a Half
Global X Cybersecurity ETF (BUG)174/30/20173%Buy a Half
Luckin Coffee (LK)186/13/194.39-76%Hold
Ping An (PNGAY)241/9/2020-17%Sell
Sea Limited (SE)152/8/1962317%Hold Half Group (TCOM)New23Buy a Half
Virgin Galactic (SPCE)7.3412/5/1917125%Hold Half

Portfolio Changes
Sell Ping An (PNGAY)

Cloudflare (NET) shares began the week at 26 and breached 30 before coming back with the market to 27.

Last week, the company reported strong first-quarter numbers. Total revenue was $91.3 million, increasing 48% year over year, and its gross margin was 77%. The company’s loss from operations due to higher development spending was $36.1 million, compared to $17.1 million in the first quarter of 2019.

The company’s net loss per share was -$0.11, compared to -$0.20 in the first quarter of 2019, as it reported a cash and equivalent position of $588 million.

Geographically, sales in the U.S. region climbed 44% year over year and represent 40% of total revenue. The company recorded a 62% year-over-year surge in its international business, mainly driven by a 58% increase in Europe.

In addition, during the first quarter, the company added 250,000 new customers, bringing the total free and paying customer count to 2.8 million, representing a year-over-year jump of 40%.

This aggressive cybersecurity recommendation, which went public last year, got its start offering internet security and website performance services. The company is growing fast and appears to be gaining market share and some analysts expect its revenue to double by 2022.

If you have not yet invested in NET, I suggest you do so and consider pairing it with the below more conservative cybersecurity play, the ETF BUG… BUY A HALF


Global X Cybersecurity ETF (BUG) was flat this week as it reflects 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 of the basket. Seventy-four percent of the companies are incorporated in America, followed by 13% in Israel and 8% in Japan.

This ETF can be seen as a more conservative play on cybersecurity, and can be paired with the above more aggressive Cloudfare (NET) recommendation for the best of both worlds. BUY A HALF


DBS Bank (DBSDY) shares traded back and forth this past week in line with Southeast Asian markets.

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 and believe this stock has considerable upside potential since it is still trading below its 2020 high by a wide margin and is widely considered on of the highest quality banks in Asia. BUY A HALF


Fanuc (FANUY) shares gained only a little ground this week as a stronger yen may have weighed on prospects for exports.

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 more than a decade and it has always demanded a premium to the market in terms of its price-to-earnings ratio and book value. With the pullback in the market, now is a great entry point for this robotics leader.

Fanuc offers investors a pristine balance sheet with zero debt and a sizable $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


Luckin Coffee (LK) stock trading has been halted at a price of 4.39 pending further information. The company is cooperating with both American and Chinese regulators to assess to what degree the company inflated both sales and expenses.

In further news this week, the Luckin board fired its CEO and COO.

Beijing-based Luckin listed on the Nasdaq in May of last year with a market value of $4.2 billion after pricing its IPO at $17 and raised another $1.1 billion in a secondary offering in early January.

Luckin, which is backed by BlackRock and Singapore’s powerful sovereign wealth fund, estimates coffee consumption in China will rise to 15.5 billion cups by 2023, nearly 80% higher than last year’s record levels. Luckin also points out that the company’s stores throughout China remain open. I will relay any news on this unfortunate situation as it is released. HOLD


Ping An (PNGAY) shares have not demonstrated any relative strength and have been unable to break through resistance levels so I’m removing it from the portfolio despite the company’s high quality and strong market position.

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. MOVE FROM HOLD TO SELL


Sea Limited (SE) shares continued their upward trend this week and are up 54% so far in 2020. We are in a strong position, having sold half our position three weeks ago at 55 for gain of 310%

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.

After locking in some profits a few weeks ago, I have Sea rated a hold but we will be buyers if it comes back with the market. HOLD THE BALANCE


Virgin Galactic (SPCE) shares pulled back in the last couple of days after Richard Branson’s Virgin Group announced plans to sell up to 12% of its ownership in Virgin Galactic to raise cash for some of his other ventures that are under pressure due to Covid-19. Anticipating something like this development is why I recommended selling half your shares a couple of weeks back for a 146% gain.

Despite this news, the SPCE story remains intact.

Perhaps more important to its future than space tourism is its plan to launch point-to-point hypersonic flights. Last year, Boeing invested $20 million in SPCE in a deal focused largely on aiding development of high-speed transportation, and Virgin Galactic announced Tuesday that it signed a deal last week with NASA to aid that effort. This agreement will allow Virgin Galactic to share science and resources with the space agency, enabling it to provide insight into NASA’s work over the past half century as they both work to develop a new commercial aviation vehicle.

The company is still in the very early stages of designing a new vehicle for hypersonic travel. Rockets and aircraft use very different technologies, but CEO George Whitesides pointed out that Galactic has experience in both areas. Its six-seater space plane, SpaceShipTwo, begins its journey strapped to a jet engine-powered mothership. Galactic engineers are currently envisioning a next-generation supersonic airliner with 50 to 200 seats. Challenges remain such as safety, the environment, regulatory roadblocks, and cost.

After selling half our position in Virgin Galactic (SPCE) three weeks ago at market for a 146% gain, we are in a good position to profit from this remarkable story. I’ll be closely watching how the stock reacts to the unwelcome news of the Virgin Group’s plan to reduce its ownership in SPCE and will meanwhile keep it at hold. HOLD THE BALANCE


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 28, 2020.

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