Portfolio Changes:
Cabot Corporation (CBT) Moves from Buy to Hold
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Markets Look Forward
After last weekend’s successful space flight of Sir Richard Branson, one would have expected Virgin Galactic (SPCE) stock to soar on Monday. Instead, it lost altitude. Sure, the announcement of a $500 million secondary offering leading to dilution was not welcome news, but part of the reason the stock fell is that investors asked, “what next?” and sold some shares. What comes next is indeed the right question since markets always look forward.
Credit Suisse’s Global Investment Returns Yearbook has come out with some interesting data. First, America remains the world’s largest equity market by a huge margin, and today accounts for 56% of the value of world stock markets. Japan (7.4%) is in second place, ahead of China (5.1%) in third place, and the U.K. (4.1%) in fourth position.
Second, the pandemic stock market crash was the most rapid in history, apart from the October 1987 Crash. The market fell 35% in just 23 trading days. Recovery, however, was also exceptionally swift fueled by massive fiscal and monetary stimulus; then later in the year, markets were driven higher by news of vaccines.
Third was data on the growth of emerging market stock markets relative to world markets. As recently as 20 years ago, emerging markets (EMs) made up less than 3% of world equity market capitalization and 24% of GDP. Today, they represent 14% of world equities and 43% of GDP. China’s weight in the MSCI Emerging Market index has grown rapidly from just 3% in the early 2000s to 39% today.
Finally, the report highlights that over long time frames equities beat bonds hands down. One dollar invested in stocks, adjusted for inflation, would have grown to $2,291 in 2020. One dollar invested in government bonds during this same period would have grown to just $12.50.
Portfolio Updates
Altimeter Growth Corp. (AGC) shares were up about 5% as this SPAC awaits a merger with Singapore’s Grab Holdings, expected in the fourth quarter. Grab is Southeast Asia’s leading super-app platform with over nine million users. Grab offers a wide range of on-demand services in Southeast Asia and India 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 were up marginally again this week.
While the company’s shares are up around 25% over the past six months, the last couple of months have been quiet. Cabot projects earnings of around $5 a share meaning that the stock is trading at just over 11 times forward earnings with a return on equity of 19%. The stock is an effective hedge on inflation and a play on economic recovery with exposure to the lithium-ion battery sector. Based on its lackluster performance, I’m moving this stock to a hold. MOVE FROM BUY A HALF TO HOLD A HALF
Cloudflare (NET) shares were up a point this week and 10 points over the last month. I would expect more from this growth stock given the importance of the cybersecurity sector but this is pretty much in line with tech stocks over the past month. This company provides network security, performance and reliability services to a growing portion of global web traffic. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF
Fisker Inc. (FSR) shares have come down sharply to 15 after briefly breaching 20 in late June. I believe aggressive investors should stay with this niche EV player for three reasons. Last week, it announced the official opening of several Fisker-dedicated operational areas at Magna’s world-class manufacturing facility in Graz, Austria, and will also be working with Taiwan’s Foxconn.
Second, its Ocean SUV’s solar roof, designed to increase range and efficiency by supplementing the normal charge, and other green energy perks are very much in vogue. Third, the Ocean’s sub-$40,000 retail price point makes it a more affordable EV option. We have to accept that the company will have little or no revenue in 2021 and the company’s first product will be launched in 2022. This is an aggressive stock but I believe the EV market has room for a limited number of custom EV players. BUY A HALF
International Business Machines (IBM) shares dipped this week and while the stock is up so far this year, it has recently lost momentum similar to other big-cap tech stocks. Last week, the company announced that IBM President and Red Hat CEO Jim Whitehurst is stepping down though he will remain a “senior advisor” to CEO Arvind Krishna and the rest of the executive team. No clear explanation for the unexpected exit was provided. IBM is trading at just 12 times forward earnings and 12 times free cash flows, with a 4.7% dividend yield. I encourage you to hold this stock as a long-term conservative play on key technology markets. BUY A HALF
Marvell Technology Group (MRVL) shares were up 23% in the first half of 2021. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks. Marvell’s Q2 outlook is $1.06 billion in revenue, up 46% year over year. BUY A HALF
Palantir Technologies (PLTR) shares were relatively quite this week after losing ground last week. The company’s software is used by government agencies in a wide range of applications and in its most recent quarter the company’s U.S. government revenue jumped 83% year over year. The company sees plenty of room to grow as 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
Pinduoduo (PDD) shares were up marginally this week after a sharp drop the previous week related to China stocks being under a bit of a regulatory cloud. I moved this stock to a hold last week pending some clarification on this issue and anticipating a bounce-back in the coming week.
Pinduoduo’s edge in China’s discount marketplace is a platform that allows shoppers to team up for group discounts and the company continues to post impressive growth. Pinduoduo’s revenue surged 97% in 2020, then jumped another 239% year over year in the first quarter of 2021 to reach $3.3 billion. We need to watch this stock carefully to see if it can recover some ground this week as Chinese stocks are coming under increased scrutiny. HOLD A HALF
Porsche (POAHY) shares were up in their first week as an Explorer recommendation.
With electric vehicles under investors’ spotlight, Volkswagen has been much talked about as an excellent conservative EV play. Porsche Automobil Holding (POAHY) has a controlling interest in Volkswagen. And with typical Teutonic complexity, Porsche, in turn, is one of the many divisions of this auto giant, along with VW and Audi, and owns prestigious names including Bentley, Lamborghini and Bugatti.
Porsche recently announced a joint venture with Customcells to produce high-performance batteries that will significantly reduce charging times.
While competitor Ferrari’s (RACE) U.S.-listed shares trade at about 41 times 2021 estimated earnings, Porsche trades at just over seven times consensus forecast earnings for 2021.
Last quarter’s earnings were up sharply from their previous pandemic comparison, with the stock nearly doubling since last September. Still, POAHY trades at just 73% of book value and has only $37 million in debt. I encourage you to buy a half position if you have not already done so. BUY A HALF
Sea Limited (SE) shares this week increased from 261 to 275 and over the last six months have zoomed from 196 to as high as 289.
Sea’s share price rally since January 2019 (up >20x vs. the MSCI EM ETF) or January 2020 (up 500% vs. the MSCI EM ETF) reflects the step-change in gaming revenues and re-rating of Shopee, in our view. We see further upside potential to Sea’s share price from: (1) strong momentum in its gaming portfolio; (2) the ramp-up of e-commerce revenues with wider adoption of online services and market share gains by Shopee; (3) major game launches; (4) scope for a material increase in the total addressable market with the launch of high-spec games catering to high-end gamers and efforts to stimulate revenues in India; and (5) publishing rights in new geographies (e.g., India). BUY A HALF
Taiwan Semiconductor (TSM) shares jumped from 117 to 124 this week. The geopolitical rivalry between the U.S. and China is a bit of a headwind but this company has significant strengths.
First, it dominates the premium, big-profit part of the microchip business. It has a diversified suite of products providing stable a revenue base. And most importantly, Taiwan Semiconductor has the capital required to maintain its lead in advanced chips. I encourage you buy this dominant, strategic semiconductor stock if you have not already done so. BUY A HALF
Virgin Galactic (SPCE) shares ran up 217% in the two months in anticipation of Sir Richard Branson’s successful space flight last weekend on board the VSS Unity, with three Virgin Galactic employees and two pilots. This hour-long flight reached a peak altitude of 57 miles above the Earth’s surface.
Since Monday, shares have pulled back sharply, from 48 to 33. The announcement of a $500 million secondary offering on Monday morning leading to dilution was not welcome news, but part of the reason the stock fell is that investors thought, “what next?” and sold some shares. We are still about 5X higher than where we got into SPCE. If this weakness continues, I will likely upgrade to a buy for this aggressive concept stock. HOLD A HALF