The Fed and Emerging Markets
Legendary investor Paul Tudor Jones doesn’t believe inflation risk is transitory. Jones told CNBC that if he were on the investment committee of a pension fund, he would “have as many inflation hedges on as I possibly could.”
The Federal Open Market Committee (FOMC) convened on Wednesday and Chairman Jerome Powell and colleagues seem to be inclined to raise benchmark rates sometime next year. At least for now, the Fed kept rates on hold and signaled it would continue its quantitative easing.
However, what spooked markets a bit was that according to the Fed’s new economic projections, seven of 18 officials now see an interest rate hike taking place by the end of 2022. I actually think this sort of signal was way overdue and can be good for markets, which can now focus on what’s far more important – growth, profits and valuations.
Some of you have been asking for more out-of-favor emerging market ideas that overall are trading at steep discount to the S&P 500 index. A good way to gain broad exposure to these markets is through an exchange-traded fund (ETF). Take a look at the WisdomTree Emerging Markets High Dividend Fund (DEM).
Emerging markets represent 85% of the world’s population, 60% of global GDP. Every day, approximately 160,000 people in emerging markets move from the countryside to cities in search of better jobs and living conditions.
This is driving the emergence of a new world middle class. The DEM ETF covers 19 emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries. This ETF holds the most inexpensive equities in the world and offers a 4% dividend yield.
The DEM is not a formal Explorer recommendation since it will change very little week to week. But it is a great core holding if you want some exposure to emerging markets.
Portfolio Updates
Altimeter Growth Corp. (AGC) shares have been bouncing around in the 11-12 range. Singapore’s Grab Holdings expects the completion of its merger with Altimeter in the fourth quarter as the company works on a financial audit of the past three years. Grab is the latest company to be affected by intensifying scrutiny from U.S. financial regulators on deals involving special purpose acquisition companies.
Grab is the leading super-app platform in Southeast Asia with users comprised of over nine million drivers and merchants. Grab offers a wide range of on-demand services in the region, including mobility, food, package and grocery delivery services as well as mobile payments and financial services in eight countries. I suggest you buy a half position here if you have not already done so. BUY A HALF
Cabot Corporation (CBT) shares have been as quiet as the market.
This specialty chemicals and materials firm is a combination of technical, commercial and manufacturing talent among the best in the industry. One of the company’s key growth end markets is material used to make lithium-ion batteries. Cabot recently reported its second-quarter results with earnings up a record 79% year over year.
For fiscal 2021, Cabot projects earnings of around $5 a share meaning that the stock is trading at just over 12 times forward earnings. The stock is an effective hedge on inflation and a play on economic recovery with exposure to the lithium-ion battery sector. BUY A HALF
Cloudflare (NET) shares continued their strong uptrend, advancing to 94, up about 30% over the last month. The company provides a broad range of network services to businesses in more than 200 cities and over 100 countries. It offers network security, performance and reliability to a growing portion of global web traffic.
Cloudflare offers a “freemium” model to get people in the door, which has proven to be a very effective customer-acquisition strategy. Their professional services are affordable, starting at $20 a month; for business plans, they start at $200. The company ended the first quarter with 119,206 paying customers, up 34% year over year. But 945 of those customers now pay over $100,000 each year, a 70% increase from the same period last year. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF
Fisker Inc. (FSR) shares were flat this week after rising 30% last week as the company announced its ambitious plan to produce what could be the world’s first “climate neutral” vehicle. Its shares have fallen from a high of around 28 in February to a low about a month ago of 10, and back up to about 18 recently. This is well above the 10 per share value at which Fisker’s SPAC deal was struck less than a year ago.
A key element to the Fisker story is that it won’t manufacture its own vehicles. Rather, it will use large contractors, such as Magna and Foxconn, to build its vehicles. We have to accept that the company will have little or no sales revenue in 2021; its first product will be the custom Ocean, a mid-priced SUV to be launched in 2022. This is an aggressive stock. BUY A HALF
International Business Machines (IBM) shares were off marginally this week but “Big Blue” is still trading just over 13 times forward earnings and 12 times free cash flow, bundled with a 4.4% dividend yield. I encourage you to hold this stock as a long-term conservative play on key technology markets.
One of IBM’s attractions is that while IBM isn’t just a hardware company anymore, hardware is still a key component of the company’s top line. Its software and services are largely a means of supporting sales of hardware.
The hybrid cloud computing market is a trillion-dollar opportunity when factoring in all the support, service, and software needed to power it – a figure that market research outfit McKinsey and others confirm. BUY A HALF
Marvell Technology Group (MRVL) shares advanced three points this week as the company reported net revenue of $832 million, up 20% year over year and above expected earnings, on the back of demand for its infrastructure semiconductor solutions including its networking and storage products. Within the data center market, Marvell perceives the cloud data center to be “significantly bigger” than its 5G opportunity and has forecast it growing at a compounded annual growth rate (CAGR) of 19% to about $5 billion by 2023.
Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks. These connected devices will talk to each other – in a process called machine-to-machine communication – and act on the information they get from one another.
Marvell’s key growth markets include drones, data integration and consumer and industrial robotics. The company expects to post double-digit growth in both sales and net profit in 2021. Despite these high-growth markets, the stock is trading at a reasonable 22 times earnings. BUY A HALF
Palantir Technologies (PLTR) shares were up modestly in their second week as an Explorer recommendation. Revenue growth for the company remains strong, and its bread-and-butter governmental business continues to rack up contract wins such as last week’s signing worth $111 million with the United States Special Operations Command (USSOCOM).
Palantir is a software company specializing in big data analytics. According to IBM, 90% of the entire world’s data has been generated just in the past two years. Palantir offers those companies cutting-edge help as its software formats an organization’s data into a single, easily understood language that people can use to make decisions and instantly track their impact.
Its software is used by government agencies in a wide range of applications and the company sees plenty of room to expand into the commercial sector; Palantir’s has just 149 customers and the private sector currently represents just 44% of its business.
I encourage you to buy shares if you have not already done so. BUY A HALF
Sea Limited (SE) shares tacked on another five points this past week.
Sea Money, Sea’s fintech division, saw adoption accelerate throughout the quarter. Mobile wallet payments volume more than tripled year over year to $3.4 billion, while quarterly paying users grew 145% to 26 million. We have taken profits several times over the past two years with this impressive growth stock. It benefits greatly as a fintech leader in the fast growth markets of Southeast Asia. BUY A HALF
Taiwan Semiconductor (TSM) shares were a bit choppy this week as the market sorts out the semiconductor shortage being driven by the auto sector. The company’s strength and profits primarily come from high-end processors where it has pricing power due to its dominant position.
Recently, the company announced it has started construction at a site in Arizona where it plans to spend $12 billion to build a computer chip plant on track to start production of chips using the company’s 5-nanometer production technology starting in 2024. I’d be a buyer of this dominant, strategic semiconductor stock. BUY A HALF
Virgin Galactic (SPCE) shares held pretty firm this week after more than doubling over the last month. Next up is a second test flight, and a third flight will include founder Richard Branson, with sales of seats to private astronauts reopening around the same time. The space sector is becoming increasingly crowded so I’m keeping this stock a hold for now but depending on when you purchased the stock, feel free to take partial profits after this 2X move in one month. HOLD A HALF
XP Inc. (XP) picked up a point in its first week as an Explorer recommendation. XP is a leading technology-driven platform providing services in Brazil such as securities brokerages, private pension plans, investment banking, lending, foreign exchange markets and capital markets services and advisory and wealth management services for investors and institutional clients.
In its latest quarter, XP reported a more than doubling of adjusted first-quarter profit as the company added about one million active customers in the first three months of 2021, a 47% jump, while assets under custody surged 96%. Adjusted net income rose 104% to the equivalent of $155.6 million.
This is an aggressive pick in a growth sector that is somewhat insulated from the political and economic turbulence in Brazil. I encourage you to begin a position if you have not already done so. BUY A HALF
