Stocks seemed to wobble a bit this week and yesterday there was a mild sell-off among some tech stocks. Still, of the 400 S&P 500 companies that have already reported earnings, 80% had beaten analysts’ expectations, according to FactSet. Overall, the Explorer portfolio has performed relatively well with Fisker (FSR) up 17% and Virgin Galactic (SPCE) doubling since the beginning of 2021. This week’s new recommendation is from a sector in an uptrend due to a combination of higher demand and tight supply.
Cabot Global Stocks Explorer 729
The Cruelest Tax of All
Congress is intent on pumping significant cash and liquidity into the economy and an accommodative Federal Reserve is signaling to markets continued low interest rates in an attempt to boost a pandemic economy. Meanwhile, some investors are bracing for the possibility that all this will lead to a surge in the cruelest tax of all – inflation.
The financial media mavens are abuzz about whether inflation is coming or not. Normally, it’s best to tune out these media-driven debates but there are some signs that pressures are building, albeit only in certain sectors.
The Financial Times reports that space on container ships costs 180% more than a year ago and a shortage of semiconductors caused by this year’s tech boom is disrupting the production of cars, computers and even smartphones. Higher shipping costs are having an impact on prices and wait times to move goods across the world.
Even if you are an inflation skeptic, why not at least hedge the possibility and make some money at the same time?
Perhaps the best inflation signal, and hedge, is commodities. Commodities are on the move after a 10-year bear market. The fuel of massive government spending and central bank easing will both boost commodity demand and weaken the U.S. dollar. And since most commodities are denominated in dollars, they will become cheaper for emerging markets, leading to further demand.
Our latest recommendation takes advantage of that trend.
New Explorer Recommendation
Anglo American (NGLOY)
Commodities have largely been in a bear market over the last decade and the pandemic led energy firms and miners to cut budgets. Capital expenditures fell about 40% in the first half of 2020. But now demand is rebounding and supply is scrambling, leading to an uptrend in commodity stocks seen as a hedge on inflationary pressures.
There are three excellent plays to consider: Freeport-McMoRan (FCX), Rio Tinto (RIO) and Anglo American (NGLOY). Freeport has already made a major move and it seems to me that Rio Tinto probably offers us less upside relative to risk, so I’m recommending Anglo American, which is in a strong uptrend and has a diverse portfolio of assets.
Anglo American is the largest producer of platinum with about 40% of the world’s output. It also engages in exploring, mining, and processing various other metals and minerals worldwide. The company explores for diamonds, copper, platinum group metals, coal, iron, nickel and manganese ores.
Anglo American plc was founded in 1917 and is headquartered in London, the United Kingdom. The company has a fascinating history, beginning as a gold company founded by Sir Ernest Oppenheimer with co-investments from JPMorgan and other U.K. and U.S. investors. Anglo American has a primary listing on the London Stock Exchange with a secondary listing on the Johannesburg Stock Exchange.
Anglo American is more diversified than either Rio Tinto or BHP Group, combining a large copper business with significant exposure to rare assets such as palladium, plus diamond assets, reflecting its ownership of De Beers.
Anglo is a big and expanding player in copper; its large project in Peru is one of the world’s few new copper mines. The commodities sector and Anglo seem to be coming out of pandemic-focused 2020 with some momentum.
Anglo reports that second-half 2020 production returned to 95% of 2019 rates, benefiting from strong performances in copper in Chile and in iron ore in Brazil. Anglo American’s diamond business has also recovered smartly after collapsing last March. Let’s begin with a half position.
BUY A HALF
|Hold a Half
|Anglo American (NGLOY)
|Buy a Half
|Cloudflare, Inc. (NET)
|Hold a Half
|Buy a Half
|Foley Trasimene Acquisition II (BFT)
|Buy a Half
|International Business Machines (IBM)
|Buy a Half
|Buy a Half
|NeoGenomics, Inc (NEO)
|NovoCure, Ltd. (NVCR)
|Sea Limited (SE)
|Hold a Half
|Taiwan Semiconductor (TSM)
|Buy a Half
|Virgin Galactic (SPCE)
|Hold a Half
NeoGenomics (NEO) Moves from Hold to Sell
Afterpay (APT.AX) shares retraced last week’s gains to close at 150.
This has been a great story and we have recently taken some profits. I’m going to keep this a hold for now as we await the next earnings report, due out a week from today, February 25. This momentum stock is growing fast but its valuation is quite rich. I suggest you take partial profits here if you have not already done so. HOLD A HALF
Cloudflare (NET) reported a quarterly loss of $0.02 per share with revenues of $126 million compared to year-ago revenues of $83.93 million. This week the stock pulled back from 95 to 84 but over the past 12 months shares have surged nearly 400%. I’m going to keep this stock a hold despite the fact that it is trading at 60 times trailing 12-month revenue—a fairly modest figure considering 2020 revenue was up 51% from 2019.
I see continued stellar growth for this company due to its proven strategy of offering its content delivery services for free, with users paying for upgrades and premium features. More than 50,000 new developers wrote and deployed their first applications using Cloudflare’s network in the fourth quarter alone, bringing its number of users to an impressive 3.5 million. Cloudflare ended 2020 with 111,183 paying customers – a 32% year-over-year increase as the company in 2020 offered dozens of new products and capabilities. Identity and security needs continue to make this a viable and even preferred cloud play. HOLD A HALF
ElectraMeccanica (SOLO) shares drifted a point lower over the last week as the company announced the expansion of its retail footprint into seven additional locations including its first venues in Colorado and Washington as well as additional locations in California, Arizona and Oregon. The company will then have a total of 20 locations in 10 major metropolitan areas in five states in the western U.S.
Like many electric vehicle plays, this stock is ahead of the fundamentals, which is why I have recommended taking some profits. This is a speculative idea that will attract some serious media attention in 2021. HOLD A QUARTER
Fisker Inc. (FSR) shares were up 17% this past week as Morgan Stanley issued a buy rating stating that Fisker stands out “as one of the more de-risked and strategically underpinned business models.” The company will report its fourth-quarter and full-year 2020 financial results after the market close on February 25. The company is named after its leader, luxury auto veteran Henrik Fisker, and its first product is the Ocean, a mid-priced SUV with modern, upscale styling and flair, and full of recycled materials and the latest gadgets. A production-intent prototype is slated for a summer 2021 unveiling.
I like this company and stock for three reasons. First is its price point, starting at $37,500, which seems to be a sweet spot for a midsized five-person EV SUV. Second, Fisker has logged over 10,550 reservations for the Ocean already and has $1 billion in the bank to fund its launch in the second half of 2022. Third, I like its Apple-like model of outsourcing the production of the EV to Magna much like Apple lets Foxconn assemble the iPhone.
If you haven’t yet done so, I recommend that you purchase a half position. BUY A HALF
Foley Trasimene Acquisition II (BFT) (merging with Paysafe) shares were flat this week on no news. This company is a Special Purpose Acquisition Company (SPAC) formed in October 2020 by Bill Foley.
Late last year, Foley Trasimene signed an agreement and plan of merger with Paysafe Group. Upon closing of the transaction, the newly combined company will operate as Paysafe and plans to list on the New York Stock Exchange under the symbol PSFE. Founded in 1996, Paysafe, based in London, is a payments platform that connects businesses and consumers across 70 payment types in over 40 currencies globally. This SPAC will receive more attention as it nears the merger with Paysafe. I would add that this an aggressive idea so I would suggest you put in place a 20% trailing stop loss. BUY A HALF
International Business Machines (IBM) shares fell from 123 to 120 this week even after the company announced that it has made significant improvements to its quantum computing software. The company suggested that it would see performance increase by a factor of 100. In other words, IBM expects its software to perform 100 times better on its existing quantum computing hardware.
This follows the company’s announcement last October that it will spin off a $19 billion technology consulting business so it can focus more intently on cloud computing and artificial intelligence. “IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” Chief Executive Arvind Krishna said in written remarks with the restructuring announcement.
IBM stock is trading at just under 11 times projected earnings, which is less than half the average for the S&P 500 index. This is a solid, conservative growth play to begin 2021 and on top of all this, IBM offers a 5.4% current dividend yield. I encourage you to buy IBM as a great core holding if you have not yet done so. BUY A HALF
NeoGenomics (NEO) shares were flat this week and given the extended outlook for the pandemic, I believe the stock may continue to perform in a lackluster fashion. Let’s take our profits and move to another opportunity. I will keep an eye on this stock as we may come back to it later this year. MOVE FROM HOLD A HALF TO SELL
LogiQ (LGIQ) shares traded unevenly this week and have not yet developed an uptrend in 2021 after a strong performance in 2020. LogiQ is a New York-based leading global provider of e-commerce, mobile commerce, and fintech business enablement solutions for three big markets: Southeast Asia, Europe and the United States. LogiQ’s stock is an aggressive idea that is trading at just 2 times trailing 12-month revenue. I would be a buyer here but only incrementally and if it doesn’t start showing some momentum, I will likely move this to a hold. BUY A HALF
NovoCure (NVCR) shares gave back a portion of their major gains over the past month. Three weeks ago, the company released preliminary numbers for calendar 2020 with $494 million in net revenues, representing 41% annual revenue growth. NovoCure launched three new clinical trials, expanding its development pipeline to include eight ongoing global studies. Yet this is still a relatively small company and its Tumor Treating Fields delivery system – for glioblastoma, the most common primary brain cancer is gaining traction. I reiterate a buy rating for this stock for long-term investors that have not yet purchased shares. BUY A FULL
Sea Limited (SE) shares sold off a bit yesterday amidst a broader sell-off in tech stocks. Year-to-date, however, the shares have gone from 196 to 268 and the stock is up five-fold from its March 2020 low. The company’s net loss in the first quarter of 2020 was $0.52 per share. But total adjusted revenue was up 58% year over year. A key question is whether Sea can replicate this growth in Latin America and India. The company continues to pour capital into marketing expenses. In the last reported quarter, sales and marketing expenses jumped 87% and research and development soared 139%. It helps that Sea’s gaming arm, Garena, produced substantial free cash flow but Sea has also issued a lot of new shares. HOLD A HALF
Taiwan Semiconductor (TSM) gained marginally this week as Trend Force reported that the company controls more than 50% of the almost $70 billion third-party fabrication market. The stock returned an impressive 238% during the last year on revenues increasing 33%. Taiwan Semiconductor is the undisputed leader in this sector and announced it will raise capital expenditures to $28 billion in 2021, a 47% year-over-year increase. The company delivered an impressive return on equity of 31% with operating margins in excess of 40% in its most recent quarter. I maintain a buy rating on the stock. BUY A HALF
Virgin Galactic (SPCE) shares have more than doubled so far in 2021 and we are up 7X since we added the stock to the Explorer portfolio.
We recently sold a half position and will let the remaining half position ride. The stock may very well be ahead of itself. On the positive side, publicly traded companies in the space sector are limited and there are three ETFs being planned for this sector, which will clearly generate demand. Given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I will keep this stock a hold but you should feel free to sell some shares based on your time horizon and risk tolerance. HOLD A HALF
The next Cabot Global Stocks Explorer issue will be published on March 4, 2021.
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