Portfolio Changes:
Anglo American (NGLOY) MOVES FROM BUY TO HOLD
High Valuation vs. High Growth
I believe the market’s churn over the last month or so is understandable given its sharp rebound over the last year. Investors and analysts alike are now assessing valuations of stocks relative to expected growth. In some cases it is giving pause; in others it is spurring action.
Wall Street has finally woken up to Southeast Asia’s great promise. The region is more populous than the European Union or North America and western investors are now looking for a chance to invest in this dynamic region that’s home to almost 700 million tech-savvy consumers.
Specifically, they are hopeful of finding another Sea (SE), an Explorer recommendation based in Singapore that listed in New York in 2017 and has quintupled in the past year, to a mighty $125 billion market cap.
This brings us to last week’s recommendation of Altimeter (AGC), the special purpose acquisition company (SPAC) that is merging with a high profile growth story in Southeast Asia called Grab.
But the deal values the company at a staggering $40 billion. This is why I split my recommendation last week, giving AGC the green light for aggressive investors and a yellow light for conservative investors. And the stock did come back a bit over the last week, making it more attractive.
Southeast Asian fintech firms began modestly in their own niche before becoming “super apps.” Sea started out in gaming. Grab launched in 2012 as a taxi-hailing service in Malaysia. Gojek gave out smartphones to Jakarta’s moped drivers. Traveloka did airline bookings. Tokopedia was a digital marketplace.
While the valuations of these companies are quite high relative to sales and all of them remain unprofitable, high growth makes investors tolerant. This is why, since 2015, venture capitalists, tech groups (including Alibaba and Tencent, as well as Google and SoftBank) and Wall Street funds have poured $26 billion into the region, according to Dealogic.
Portfolio Updates
Altimeter Growth Corp. (AGC) shares drifted a bit lower, from 14 to 12.7, as expected in their first week in the portfolio due to concerns over the valuation of its target, Grab. I would be a bit more aggressive at this level.
Grab Holdings, Southeast Asia’s ride-hailing and food-delivery giant, is the first Southeast Asian tech unicorn to go public through a SPAC. Altimeter Capital, which organized the initial public offering of Altimeter Growth in September 2020, is putting $750 million into the deal. The combined entity’s stock will trade on the Nasdaq in the coming months under the ticker GRAB.
In an unusual and positive move, Altimeter has agreed to a three-year lock-up of their stock, signaling their confidence in Grab’s future value to other investors. Grab’s roughly $40 billion valuation is pricey. This is the only negative as far as I can discern.
Grab is present in eight countries offering food delivery, mobile payments, insurance, investments and health advice. Last year it launched corporate services such as fraud detection, digital maps and advertising; it also won the right to set up a digital bank in Singapore. BUY A HALF
Anglo American (NGLOY) shares were flat this week and I’m moving NGLOY to a hold due to the stock’s lack of momentum. This play on infrastructure basic materials is also 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. MOVE FROM BUY A HALF TO HOLD
Cloudflare (NET) announced this week it is opening its first office in Canada to follow up on a partnership with chipmaker Nvidia (NVDA), which will enable customers to build artificial intelligence-based apps that run on its security network. Cloudflare’s ability to speed up web applications and provide security on its global network will be enhanced by its partnership with Nvidia.
I’m going to keep this a hold and will watch the stock to see if it can build on this momentum. 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. We have already taken some profits but aggressive investors can purchase additional shares on dips. HOLD A HALF
Fisker Inc. (FSR) shares jumped 17% yesterday, reversing a pullback in line with SPAC related stocks’ overall performance, as described in the introduction. Electric vehicle stocks have come back a bit in the last month or two after a good run. The company will have little or no sales revenue in 2021 and the company’s first product will be the custom Ocean, a mid-priced SUV. If you have not yet purchased shares, I encourage you to do so at these levels. BUY A HALF
International Business Machines (IBM) shares advanced briskly this week from 133 to 144 after announcing enhancements to IBM Watson aimed to help businesses build reliable AI (artificial intelligence). The company also recently announced worldwide availability of its financial service-ready cloud platform to help decrease financial institutions’ risk. The cloud-computing platform is in collaboration with Bank of America, who first used the service in 2019.
Another reason to be bullish on IBM is quantum technology. IBM already has more than 20 quantum computers connected to the cloud and is offering free access to half of them so that researchers and the general public can experiment. Its higher-end quantum machines are available to corporate customers, including Goldman Sachs, Boeing, and Exxon Mobil.
IBM will continue to build supercomputers and operate IT systems but the key emerging growth driver in the company has become the hybrid cloud. This is a great core holding that’s performing well, with a dividend yield of 4.7%. BUY A HALF
Marvell Technology Group (MRVL) announced the completion of its acquisition of Inphi Corporation. The combination creates a U.S. semiconductor powerhouse positioned for end-to-end technology leadership in data infrastructure. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks. The company’s processors and products are cutting-edge and already generate $3 billion in annual sales
Marvell’s markets include drones, data integration and consumer and industrial robotics. These are all huge markets giving Marvell an opportunity 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. I suggest we take advantage of the pullback in tech stocks to begin with a half position. BUY A HALF
Paysafe (PSFE) will announce first-quarter 2021 financial results on Tuesday, May 11 prior to market open. Its core business is to enable businesses and consumers to connect and transact seamlessly through payment processing, digital wallets, and online cash solutions. With more than 20 years of online payment experience, Paysafe connects businesses and consumers across 70 payment types in over 40 currencies around the world. If you have not already done so, I recommend you purchase shares. BUY A HALF
Sea Limited (SE) shares were pretty steady this week in the 240s as the stock continues to be a sought after momentum play. Sea is led by its gaming group Garena which in the fourth quarter of 2020 grew bookings 111% year over year while the number of quarterly users grew 72% year over year to 610 million. The company is projected to double total year-over-year revenue again in 2021, and grow sales fourfold from that figure by 2024. Since mid-February 2019, Sea Limited’s shares have accelerated more than 1,400%, dwarfing the S&P 500’s roughly 50% return. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in the world’s fastest growth markets of Southeast Asia. BUY A HALF
Taiwan Semiconductor (TSM) produced 41% of its revenue from its newest high performance microchips in 2020. In terms of end markets, it generated 48% of its sales from the smartphone market. Its largest customer is Apple, which likely accounted for 25% of revenue last year. Apple could account for over half of TSMC’s high value chip production this year, according to Counterpoint Research.
I believe this is an excellent entry price if you have not purchased shares yet. Taiwan Semiconductor, usually referred to as TSMC, is dominant in the premium microchip sector. The company plans to increase its capital expenditures by up to 63% this year to upgrade its equipment and maintain its lead in the race to produce smaller and more powerful chips. BUY A HALF
Virgin Galactic (SPCE) shares were up 6% yesterday as the company announced that it is resuming testing next month. It will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing.
We need to monitor the situation carefully because while Virgin’s test-flight program in New Mexico remains on hold, its Texas rival, the private company SpaceX, is test-flying Starships at a rapid clip. SpaceX is further from commercialization than Virgin but it eventually will have a spaceship capable of flying 100 tourists at a time on dayslong excursions through space compared to Virgin’s six-seaters able to provide just a few minutes of weightless flight at a time. SpaceX may go public sometime in 2021.
We have taken profits several times, and the share price is almost four times our entry point, but is 67% off its all-time high so I’m keeping this stock a hold for now. HOLD A HALF
