Portfolio Changes:
Special Bulletin sent out July 26 – Pinduoduo (PDD) Moved From Hold to Sell
Chinese Stocks in the Crosshairs of Regulators and Investors
Chinese stocks were hit this week both on American exchanges and overseas as Chinese regulators ratcheted up the pressure through antitrust and regulatory steps that caught many executives and investors off guard. The Golden Dragon index of Chinese technology stocks fell by 15% in two days before rebounding after regulators tried to reassure markets.
The legal status of U.S.-listed Chinese stocks is the most important issue on the table. What is referred to as the Variable Interest Entity (VIE) structure has long been used by almost all of China’s major companies to bypass China’s foreign investment restrictions. Essentially, the Chinese company forms an offshore company that serves as a proxy for the company incorporated in China. Beijing could conceivably force VIEs to breach their contracts with their foreign-owned entities.
The second source of regulatory pressure is from the U.S. Congress. The Holding Foreign Companies Accountable Act passed last December empowers the SEC to require foreign companies to disclose shareholder information and auditing records to the Public Company Accounting Oversight Board. Three consecutive years of noncompliance will force a delisting. The Chinese government has consistently opposed complying with this requirement. Washington has already delisted China’s three big telecommunications companies, China Telecom Corp., China Unicom and China Mobile Ltd., on the ground that they have Chinese military ties.
Here is a table of Chinese companies listed on the NASDAQ (starting on page 3), New York Stock Exchange and NYSE American. As of May 5, 2021, there were 248 Chinese companies listed on these U.S. exchanges with a total market capitalization of $2.1 trillion. This is about 4% of the total value of U.S.-listed stocks.
While do doubt there will be some trading opportunities as all this somehow gets worked out, I highly recommend buying Chinese stocks through the Hong Kong exchange, the Hang Seng Index.
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Portfolio Updates
Altimeter Growth Corp. (AGC) shares broke above 11 briefly as Grab Holdings Chief Executive Officer Anthony Tan said he’s confident the merger of the ride-hailing and food-delivery giant and a U.S. blank-check company will be completed by year end. Grab is Southeast Asia’s leading super-app platform with over nine million users in Southeast Asia, offering them a wide range of delivery, mobile payments, and financial services. I suggest you buy a half position here if you have not already done so. BUY A HALF
Cloudflare (NET) shares had another nice week, going from 112 to 119.
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 finished up this week in choppy trading after the company announced that it plans to make a $10 million private investment supporting the planned merger of leading European EV charging network Allego with Spartan Acquisition Corp. III (SPAQ), a publicly-listed special purpose acquisition company. Fisker is the exclusive electric vehicle automaker in the deal and will have a strategic partnership to deliver a range of charging options for its customers in Europe.
Fisker’s Ocean EV has a sub-$40,000 retail price point, making it a more affordable EV option. We have to accept that the company will have little or no sales revenue in 2021 and that the company’s first product won’t be launched until 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 were flat this week. Thanks to booming cloud services, cash flow in the first six months of the year was $2.56 billion, easily covering the $1.47 billion it paid out in shareholder dividends. IBM has also spent $2.87 billion on cash acquisitions so far this year. IBM is trading at just over 13 times forward earnings and 12 times free cash flows, with a 4.6% dividend yield. I encourage you to buy this stock as a long-term conservative play on key technology markets. BUY A HALF
Marvell Technology Group (MRVL) shares recovered from a weak performance on Tuesday and were up 24% 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 outlook for the second quarter is $1.06 billion in revenue, up 46% year over year. I’m fine buying this stock at the current price. BUY A HALF
Palantir Technologies (PLTR) shares finished the week above 22 as Peter Thiel and other Palantir co-founders fired back in Delaware at claims that their “class F” stock – a “flexible” security with voting power adjusted to give them a 49.99% say in any decision – illegally made them the company’s “emperor for life.” The company’s software and data platform is primarily 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. I encourage you to buy shares if you have not already done so. BUY A HALF
Pershing Square Holdings (PSHZF) shares were flat in their first week as an Explorer recommendation. Bill Ackman, a well-known value investor, founded Pershing Square Capital Management in 2004 with $54 million, much of it his own money. Pershing Square Holdings shares trade at around a 27% discount to their net asset value. The firm has a concentrated portfolio of about 10 stocks, such as Lowe’s (LOW), Hilton Worldwide (HLT), Chipotle (CMG), Howard Hughes (HHC) and Domino’s Pizza (DPZ).
One major positive is that Ackman is the largest holder of Pershing Square Holdings, with a 21% stake worth $1.5 billion. One drawback with Pershing Square Holdings is that it is classified as a passive foreign investment company, which requires U.S. holders to file an IRS form 8621. This could cause some tax hassles for investors. BUY A HALF
Pinduoduo (PDD) shares were moved to a sell through a special bulletin on Monday morning because of increased scrutiny by both Chinese and U.S. regulators, causing considerable uncertainty. MOVE FROM HOLD TO SELL
Porsche (POAHY) shares were flat in their third week as an Explorer recommendation as it was announced that Isar Aerospace, a German entry into the private space race, secured $75 million in a funding round supported by investors including Porsche, which is still controlled by the Porsche family.
Porsche has a controlling interest in Volkswagen, a leader in electric vehicles. While competitor Ferrari’s (RACE) U.S.-listed shares trade at about 41 times forecast 2021 earnings, Porsche trades at less than seven times consensus forecast earnings for 2021. The stock 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 recovered most of the ground after an 8% drop on Tuesday on no news except overall weakness in the market. I 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; (3) opportunity of growth through Sea Money fintech operations and geographically in India. I would be an incremental buyer of this stock but long-time holders should take partial profits from time to time. BUY A HALF
Taiwan Semiconductor (TSM) shares followed the same pattern of Sea Limited this week even though the company doesn’t share the issues that confront U.S.-listed stocks. The company has significant strengths as it predicts the chip shortage will abate going into the end of the year. First, it dominates the premium, big-profit part of the microchip business. It has a diversified suite of products providing a stable 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 were slightly off this week in the wake of rival Blue Origin’s successful space journey. We are still about 5X from where we got into Virgin so given that this space is getting increasingly more crowded and competitive, I suggest you consider taking some partial profits. HOLD A HALF
