Coronavirus Has Yet to Infect Markets
The markets are demonstrating impressive resiliency in the face of the coronavirus. You can’t fight the market but I remain a bit more guarded since this disruption will have to hit profits down the road for some companies.
It was a good call last week to drop the China inverse ETF as Beijing pulls out the stops to try to keep growth above 5%.
The central bank’s pumping of $170 billion of stimulus into the economy says it all about the pressure for Chinese policymakers to calm markets.
The downside? Debt will continue to pile up, for companies and the government.
One thing good that has come from the Wuhan virus is the calming of the U.S.-China trade conflict.
The Cabot Global Stocks Explorer portfolio is doing well but a few positions are treading water, which I know is a bit frustrating.
Virgin Galactic (SPCE) made another nice move this week from 18 to 23 and has more than doubled since being added to the portfolio.
Luckin Coffee (LK) has shrugged off the virus and short sellers to climb four points this week; Sea Limited (SE) jumped from 40 to 47; and our Mexico leveraged ETF (MEXX) is up 15% over the last three weeks.
We should be seeing some earning reports coming out over the next week with Alibaba (BABA) and Rakuten (RKUNY) expected today.
Don’t forget to have some bonds or fixed-income/bond ETFs in your portfolio. Since 2010, more than three times as much money has flowed into bonds as into stocks – $1.5 trillion vs. $428 billion.
During that time, the value of stock funds held by investors has gone from $5.7 trillion to $14 trillion, while the value of bond fund holdings has gone from $2.7 trillion to $5.7 trillion, per Lipper Fund Research.
China’s loss over the last year has been Vietnam’s gain, accelerating a long-term trend of Chinese factories moving to Vietnam and other Southeast Asian countries where labor costs are lower.
Vietnam’s apparel trade with the U.S. has been growing for years, and clothing made up about a third of the $66 billion in imports from Vietnam last year.
But other categories of purchases from Vietnam are growing rapidly—cell phone imports rose by about $6 billion, while telecom equipment and computer chips each saw a $2 billion increase in sales to America.
EXPLORER PORTFOLIO UPDATE
Alibaba (BABA) shares again moved ahead in a tough environment with earnings expected out later today.
The company’s view is that the outbreak of the coronavirus over the past three weeks has affected BABA in two ways: 1) Consumer sentiment on buying discretionary products has been dampened; 2) Delivery and its logistic network have been impacted due to the tight control measures by many cities, so many orders still are not fulfilled.
Today’s earnings release is particularly important because it will show results for the most important quarter of the year. Due to the seasonality of shopping, Alibaba generates approximately 30% of its 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 be a buyer at these levels. BUY
Cosan (CZZ) shares edged higher this week as the company approaches an earnings report expected on February 19.
Cosan, based in Brazil, offers a diversified portfolio of fuel distribution, sugar production, ethanol and electricity, rail transportation, warehousing, as well as natural gas distribution.
Analysts note that Brazilian sugar and ethanol companies are likely entering their best season in a long time, with favorable weather boosting new-crop prospects and an all-time low local currency increasing returns on exports.
For starters, Cosan has delivered earnings per share growth of 73% on average over the last four years, with a 22% return on equity. 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. If you have not yet done so, I recommend you put some Cosan in your portfolio. BUY A HALF
LexinFintech (LX) is the newest addition to the Explorer portfolio.
Based in Shenzhen, LexinFintech is an online consumer finance platform for young adults in China.
The company owns and operates Fenqile, a popular online consumer finance platform that offers installment loans and also matches borrowers with other lenders.
Despite stellar numbers, LX sells for 14 times trailing earnings and between 5-6 times prospective earnings. LexinFintech earned almost $2 a share in 2019 and this could potentially grow by 50% or more in 2020.
In addition, given its growth and rising profile, LX seems to me to represent an ideal takeover candidate. I could easily see a large bank or other financial institution going after LX to strengthen its position with young, high quality consumers.
LX is an aggressive idea and I recommend beginning with a half position. BUY A HALF
Luckin Coffee (LK) shares shrugged off short sellers and virus concerns, increasing from 35 to 39.
The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks stores.
It is reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue. This and the emergence of short sellers have impacted the stock. I have been recommending that you take some Luckin profits off the table. I would still be a buyer of LK at 40, which is 10 points below its recent high. BUY A HALF
Marvell Technology Group (MRVL) shares followed last week’s jump by moving sideways as a Cowen analyst reduced its rating for the semiconductor stock. We have a long wait for earnings on March 4.
Our 5G play, Marvell is 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 Marvell 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 showed some strength this week, leaping from 85 to 93.
NVCR is a unique company in the biotech space marketing a device called Optune to treat cancer in a revolutionary way by mechanically disrupting cancer cell division using electrical fields.
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) shares have been relatively quiet since this blue chip company was added to the Explorer portfolio about a month ago.
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 latest 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 14 times trailing earnings and nine time projected earnings.
Next earnings report is expected March 10. I recommend you begin a full position in Ping An. BUY
Rakuten (RKUNY) shares showed a little life this week, breaching 8 yesterday, as earnings are due out today, February 13.
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 very cheap, trading at just under nine times trailing earnings, but pending an uptrend developing, I’m keeping it at hold. HOLD A HALF
Rio Tinto (RIO) shares, after last week’s rally, were flat this week.
Some investors are likely concerned 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.
Rio offers good value, currently trading for about seven times earnings, and boasts a current dividend yield of 5.5%. I encourage you to buy a full position in Rio if you have not yet done so. BUY
Sea Limited (SE) shares, after a fantastic 2019, started 2020 slow but have picked up a full head of steam in the last month, jumping from 40 to 47.
The recent rally in Sea’s share price reflects the step-change in gaming revenues and profitability following the success of Free Fire, Sea’s first self-developed game.
I see further upside potential to Sea’s share price based on better e-commerce numbers, the introduction of its “Battle Pass” game and expansion into India.
Garena, Sea’s gaming group, 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 Play Store in India.
The company is primarily known for gaming and its e-commerce platform Shopee 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 and is expected to report its next earnings on March 3. BUY A HALF
Virgin Galactic (SPCE) shares continue to roll, moving from 18 to 23 over the past week, and have more than doubled in just a couple of months.
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 has centered on Jeff Bezos, who founded Blue Origin, in 2000, 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 is likely to remain in the media spotlight throughout 2020.
This stock has a lot of momentum behind it. BUY A HALF
Direxion Mexico 3X Bull ETF (MEXX) This leveraged ETF position pulled back with emerging markets early in the week and then recovered to where I recommended it a week ago.
This aggressive play on Mexico, which moves 300% up and down relative to the underlying index, is up 15% over the last three weeks. MEXX is only for more aggressive investors and I suggest a trailing 20% stop loss. BUY A HALF
