Portfolio Changes:
LogiQ (LGIQ) Moves from a Buy to a Sell
Afterpay (APT.AX) Moves from Hold to Sell
Fisker Inc. (FSR) Moves from a Hold to Buy
One Year Out, Markets Pause
It has been one year since the S&P 500 hit bottom and since the then the blue-chip index has roared back nearly 75%. Just imagine if we would have had a pile of cash and the guts to jump in.
For some tech stocks, the returns have been spectacular. Tesla’s stock, for example, is up more than 650% even after coming back over the last couple of months. Over the last few weeks though, it seems that markets are hitting the pause button. Tech stocks are struggling a bit. A rotation into more cyclical, economically sensitive stocks seems to be an emerging trend but is running into the question of just when this will all happen.
Tech stocks, high-flying electric vehicle stocks, as well as China-related stocks all pulled back over the last month or so. Thus, we are selling a couple of our weakest stocks this week and will deploy the capital in new ideas.
Investors are weighing all the concerns regarding over-the-top valuations, rising federal spending, interest rates creeping up, and the fear of incipient inflation. In a way all this is good because a sense of complacency would be the telltale sign that we are at the end of a bull market.
John D. Turner and William Quinn of Queen’s University Belfast recently co-wrote a book titled, Boom and Bust: A Global History of Financial Bubbles. They believe that to form a bubble you need three key ingredients: ease of trading, access to credit, and mass speculation. I would add to this a sense of complacency.
One market that is in correction territory is Hong Kong’s Hang Seng Index.
The leading companies on today’s Hong Kong stock exchange are very different from when I used to visit Hong Kong every three months. Then, local companies dominated, but now Chinese giants such as Tencent and Alibaba are the heavyweights in the index. Hong Kong’s Hang Seng Tech Index is down 27% from its peak in February and a basket of 48 Chinese companies trading as ADRs on U.S. exchanges is down 23% in the last five weeks.
The investment flow from Mainland China into Hong Kong remains robust. There are now more than 2,000 Chinese mainland mutual funds that can invest in Hong Kong stocks, a number that increased 268% in 2020. And Chinese mainland investment into Hong Kong stocks was up 170% in 2020.
Position Updates
Afterpay (APT.AX) shares have lost considerable momentum since early February after a significant run in 2020. Part of this may be new competitors that are emerging to capture the growth of the “buy now, pay later” trend as well as the normal post-holiday lack of attention to some of these payment stocks. While Afterpay’s balance sheet and business model remain strong, I can’t fight the market any longer so I’m moving this to a sell. MOVE FROM HOLD TO SELL
Anglo American (NGLOY) shares were relatively firm in a tough week but the stock seems to be facing some resistance even though copper recently reached its highest price level since 2011 and prices of even iron ore are also moving briskly. The company is the largest producer of platinum, with about 40% of world output, and explores for diamonds, copper, platinum group metals, coal, iron, nickel, and manganese ores. I recommend you buy a half position if you have not already done so. BUY A HALF
Atlas Corp. (ATCO) shares drifted slightly lower this week, from 14.7 to 13.9. Atlas charters a fleet of 118 containerships and the pandemic has led to distorted trade flows and a worldwide container shortage crisis. Demand for these shipping containers is surging, and supply is frozen so shipping rates are skyrocketing. Atlas posted in its last reported quarter operating margins of 40% with revenue increasing for the quarter, year over year, 36.6% and earnings growing 96.6%. I view Atlas as a trading position with a target price of 20. BUY A HALF
Cloudflare (NET) shares have been struggling despite the company’s very effective business model and the strong secular growth trend underlining online security. Given the fact that we have taken some profits off the table, I’m going to keep this a hold and will watch the stock to see if it forms a base and then a new uptrend. Cyber is still a strong power trend and Cloudflare has built a global cloud platform that delivers a broad range of network services making them more secure, and eliminating the cost and complexity. I suggest we stick with this stock. Aggressive investors can purchase additional shares incrementally. HOLD A HALF
Fisker Inc. (FSR) shares were down sharply yesterday and have retraced after surging to 31 in early March. In part, this is due to a pullback in EV stocks in general. Foxconn announced it plans to build Fisker’s second generation electric vehicle, a development that captured quite a bit of media attention, though the company will have little or no sales revenue in 2021. Luxury auto veteran Henrik Fisker heads up Fisker and the company’s first product is the Ocean, a mid-priced SUV. I’m moving this to a buy given its lower share price. MOVE FROM HOLD A HALF TO BUY A HALF
Foley Trasimene Acquisition II (BFT) shares are flat so far in 2021 but the stock is fairly valued and we need to let the SPAC merger move forward. Foley Trasimene is merging with Paysafe Group 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. I still rate this stock a buy and recommend you purchase shares if you have not already done so. BUY A HALF
International Business Machines (IBM) shares are in a gentle uptrend and are a welcome blue chip in a market struggling for direction. IBM is a conservative, quality play on the high-growth markets of quantum computing software and cloud computing. IBM trades at just 11 times prospective earnings and seven times the company’s cash flow guidance. Plus, IBM is sitting on $13.8 billion of cash even after paying off $3.9 billion in debt in last year’s fourth quarter. As a bonus, IBM delivers a 5% current dividend yield. BUY A HALF
LogiQ (LGIQ) shares moved lower from 7.5 to 6.9, over the last week, continuing the stock’s relatively volatile pattern of trading. Given its strategy and target markets, I had thought that we might have another Sea (SE) on our hands but the numbers prove otherwise, so I am moving this stock to a sell. MOVE FROM BUY A HALF TO SELL
QuantumScape (QS) shares were hit hard this week as the company surprised markets with a secondary offering that dilutes shareholders just seven months after being acquired by a SPAC. This was an unfortunate move by management but it does not change that QuantumScape is working on some breakthrough electric vehicle battery technology.
QuantumScape’s solid-state battery can achieve greater range, superior reliability and a longer life than their lithium-ion cousins. In addition, they’re also capable of charging to 80% in as little as 15 minutes, half the time the fastest Tesla Supercharger can charge in. Even better, these batteries will be much cheaper than lithium-ion ones once production scales up because of fewer and cheaper materials.
In 2020, Volkswagen invested $300 million in QuantumScape, securing 20% equity ownership of the company. When Volkswagen’s QuantumScape batteries go operational, Volkswagen and its brands such as Audi, Porsche and Bentley could offer cars with 450- to 500-mile range batteries.
I recommend that you purchase shares if you have not already done so. BUY A HALF
Sea Limited (SE) shares are under some pressure and are down significantly from their high, though Sea’s strategy and numbers remain impressive. Sea’s gaming group continues to grow its user base. Sea has 610 million quarterly active users and is growing at an annual rate of 120%. The company’s Free Fire game is often voted the number one most downloaded game in the world.
E-commerce is Sea’s second growth engine, with gross merchandise value of $12 billion last quarter and a billion orders last quarter. We have taken profits several times over the remarkable rise of this stock but with this sharp pullback, I upgraded this stock back to buy from a hold in last week’s issue, and we’ll maintain that buy rating. BUY A HALF
Taiwan Semiconductor (TSM) shares over the last month have fallen from 129 to 108 and I believe this is an excellent entry price if you have not purchased shares yet. Taiwan Semiconductor is dominant in the premium microchip sector and the company recently announced it will raise capital expenditures to $28 billion in 2021, a 47% year-over-year increase. I have argued and am convinced that Taiwan Semiconductor is the most strategically important company in the world. BUY A HALF
Virgin Galactic (SPCE) shares, after a rebound last week, came back a bit this week and are trading at about half of their 2021 high. Given that the company has faced delays due primarily to the pandemic, that we have taken profits several times, and that the share price is four times our entry point, I’m keeping this stock a hold. The company is spending around $16 million per quarter and has over $660 million in cash, counterbalancing concerns that the company’s next test flight will not take place until May. HOLD A HALF
