Cash, Caution & Opportunity
The market seems to be a bit complacent given the risks of the virus spreading rapidly in China and elsewhere but we need to remain a bit cautious. There is some suspicion that China is downplaying the numbers.
How long this will continue is anyone’s guess.
At the same time the situation reminds us all of the value of cash when great stocks are on sale.
Some recent moves in response to the spreading virus could hit some stocks hard. Starbucks is temporarily closing more than half of its 4,300 stores in China as a result of the coronavirus outbreak.
And the White House told airline executives it is considering suspending all U.S. flights to and from China as the number of confirmed cases rose to near 6,000—already surpassing the SARS pandemic.
Due to this uncertainty, I’m keeping the China inverse ETF I recommended in a special bulletin sent out to you on Monday. In addition our emerging market timer (EEM) has moved to negative and is in a short-term downtrend. We need to be a bit cautious right now.
This virus scare is a good backdrop to just how you should react to a bolt out of the blue such as an epidemic.
To begin, avoid panic mode by which I mean selling many of your favorite stocks that have great fundamentals and growth prospects.
Next, assess the cash situation in your portfolio. There is nothing like a pullback in markets to highlight why keeping some cash on hand is so important.
Cash is obviously very useful—especially if you want to buy something or invest in something. Cash gives you options, flexibility, mobility, and perhaps most importantly, peace of mind and patience.
And aren’t these the very characteristics of the world’s greatest investors and businessmen. Aren’t they what separates the tycoons from the grey flannel suits?
For example, most investors think they can handle market volatility pretty well but the data shows they tend to be panic sellers. At bottoms in particular, they are raising cash when they should be investing it.
If these investors had the foresight to have an ample cash position in hand, perhaps they wouldn’t panic but calmly scoop up blue chip bargains that are on their buy list.
As Howard Marks of Oaktree put it; “investors face not one but two major risks: the risk of losing money and the risk of missing opportunities.”
It is really a matter of judgment.
My recommendation right now is to do little and keep your powder dry as this virus scare plays out.
It could really ramp up or, as we all hope, be contained soon with complete international cooperation.
EXPLORER PORTFOLIO UPDATE
Alibaba (BABA) was flat this week amidst the virus scare but has been in an uptrend since last August.
The next earnings release is particularly important because it will show results for the most important quarter of the year. Because of the seasonality of shopping, Alibaba generates approximately 30% of yearly profits in the fourth quarter.
For a company of its size, BABA is a remarkable growth stock and is a great core holding for those looking for exposure to the rising Chinese consumer class. I would still be a buyer at these levels. BUY.
Cosan (CZZ) shares have not done much for us but I’m inclined to show more patience with this stock based on its fundamentals.
Cosan, based in Brazil, offers a diversified portfolio of fuel distribution, sugar production, ethanol and electricity, rail transportation and warehousing as well as the distribution of natural gas.
For starters, Cosan has delivered average growth in earnings per share of 73% over the last four years with a 22% return on equity.
In the most recent period of financial results, profits surged 790% on a 20% increase in sales.
Some estimate that Cosan earned around $1.30 a share in 2019. But earnings could more than double this year. That means the stock is selling for just eight times forward earnings.
Three things could cause this stock to really move. The first is a significant rally in emerging markets, which is both expected and overdue.
The second is a rise in commodity prices after some weakness in 2019. This includes natural gas, sugar and ethanol.
The third is a stronger U.S. dollar, which would both boost revenue and reduce costs.
If you have not done so, I recommend you put some Cosan in your portfolio. BUY A HALF.
Luckin Coffee (LK) shares moved from 43 to 37 this past week and were down 4% yesterday. It is reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue.
I have been recommending that you take some Luckin profits off the table as it has roughly doubled in the last six months.
The company recently announced Luckin Coffee Express, a vending machine for brewed coffee and snacks. The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks stores.
Most of you should sell about half your shares at this point but more aggressive investors should keep all their shares. BUY A HALF.
Marvell Technology Group (MRVL) shares continue to underperform but we’ll give it some time as we await earnings.
Our 5G play Marvell recently sold its Wi-Fi business to NXP but remains a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware.
New markets are emerging in which Marvel has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics. This is a quality company operating in high growth strategically important markets and the company is boosting its stock buyback program.
I recommend that you buy a half position if you have not already done so. BUY A HALF.
NovoCure (NVCR) shares had a bad week going from 94 to 87 on no news.
I encourage you to take advantage of this pullback if you have not yet bought shares.
NVCR is a unique company in the biotech space marketing what is actually a device, Optune, to treat cancer in a revolutionary way by mechanically disrupting cancer cell division.
This process uses electrical fields to non-invasively disrupt cancer cell division and growth. Sales are expected to be up 30% in 2020 with positive earnings.
In its most recent quarter, gross margins were firm at 75% and the balance sheet is strong with $313 million in cash. I encourage you to begin with a half position if you have not already done so. BUY A HALF.
Ping An (PNGAY) is off a point since being added to the portfolio three weeks ago though the recent Chinese stock weakness in wake of virus scare was not helpful.
Ping An provides financial products and services for insurance, banking, and asset management but is best known for its life, health and property insurance business.
It is also evolving into more of a financial technology (fintech) play and its Co-CEO, a former McKinsey consultant, is heading up the effort to transform the company into more of a blend of financial services and technology.
Ping An is a dominant player in this space with over 200 million retail customers and ranked 29th on the Fortune Global 500 list.
The numbers for Ping An are encouraging; last quarterly earnings were up 49.7%, the company delivers a 24% return on equity and the stock is only trading at fourteen times trailing earnings and nine times projected earnings.
I recommend you begin a position in high quality Ping An. BUY.
Rakuten (RKUNY) shares were flat this week and have been lackluster since the company delayed the rollout of 5G services into 2020. Next earnings are due out February 13th but I think we are all losing patience with this idea despite its high quality and attractive valuation.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank and #1 credit card.
This stock is cheap, trading at just under nine times trailing earnings but pending an uptrend, I’m keeping it a hold. HOLD A HALF.
Rio Tinto (RIO) shares were off 5 points this week as investors worried about China which is a big buyer of Rio’s copper and other commodities.
London-based Rio is one of the world’s premier multinational mining and commodity firms. Operating across 35 countries, it supplies the world with gold, diamonds, copper, titanium, iron ore and other industrial metals.
As some key commodities such as copper seem to be beginning an uptrend, Rio offers good value currently trading for about seven times earnings and offers a current dividend yield of 5.8%.
I encourage you to buy a full position in Rio if you have not yet done so. BUY.
Sea Limited (SE) shares added a point this week to reach 45. This is remarkable given the volatility in Asia shares.
Sea’s gaming group Garena, has acquired 100% of Phoenix Labs, an independent game developer. This is a welcome development, as it will diversify its gaming revenue.
Garena continues to do well in India and Latin America. Its lead independent game, Free Fire, continues to maintain its position as the #1 or #2 grossing game on the Google Playstore in India,
Sea has tripled in the last year and is an aggressive idea focused specifically on Southeast Asian markets representing 650 million consumers.
The company is primarily known for gaming and its e-commerce platform Shopeem which is being deeply discounted despite gaining market in the fast-growing Southeast Asian market.
More conservative investors may want to take some partial profits in Sea while aggressive investors should keep all shares. This company has the potential to be an enduring growth stock but you may wish to put in place a trailing stop loss of 20% to protect profits. BUY A HALF.
Virgin Galactic (SPCE) shares were off slightly last week but so far in January have moved from 11.5 to 17.5.
The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue. Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021.
The big payoff is down the road with hypersonic point-to-point travel. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at five times the speed of sound could make the same journey in just two hours.
Media attention to the private space race highlight Jeff Bezos, who founded Blue Origin, in 2000; Elon Musk’s SpaceX, which was founded in 2002 with colonizing Mars as its ultimate mission; and of course Branson, who started Virgin Galactic in 2004.
This is an aggressive idea that has made a strong move since being added to the Explorer portfolio but I believe there is more upside as the company stays in the media spotlight throughout 2020.
This stock has a lot of momentum behind it and management is very media savvy.
BUY A HALF.
EXPLORER ETF POSITIONS
Direxion Mexico 3X Bull ETF (MEXX) This aggressive play on Mexico, which moves 300% up and down relative to the underlying index, was up 4% yesterday and is unchanged since being added to the portfolio last week. This position is only for more aggressive investors and I suggest a trailing 20% stop loss. BUY A HALF.
ProShares Ultra Short China (FXP) I added FXP on Monday to hedge the impact of the virus on Chinese stocks including the 20% allocation to Chinese stocks that we presently have in the Explorer portfolio. I will review this position week to week and remove it when the virus is contained. BUY A HALF.
