Keep Calm and Carry On
This week is a reminder that markets don’t always go up. The big surprise was that it took so long for global markets to wake up to the threat.
When you think about it, this pullback just brings the S&P 500 index back to where it was on Thanksgiving Day. It’s not the end of the world, but we do need to keep our eye on the ball.
After this week’s changes, the Cabot Global Stocks Explorer portfolio is 60% invested in stocks, 30% in cash and 10% allocated to an inverse China ETF.
Our aggressive play on Mexico tripped its stop loss and was sold on Monday.
That misfire is somewhat offset by our inverse hedge on China that goes up when the Chinese market goes down.
A World Health Organization (WHO) expert delegation that just returned from China claims that the coronavirus epidemic there has peaked, even as a global pandemic looms over markets.
Regarding China, one key issue is when its nearly 300 million migrant workers are able to get back to the cities after returning to their hometowns for the Lunar New Year.
Last week, I recommended selling around one-third of our stake in Virgin Galactic (SPCE) to lock in some profits. You’ll find some important updates on the company in the portfolio update section below.
Summing up, this week highlights that we all need to have a plan to manage risk and build diversified portfolios with quality ideas that produce consistent returns. This allows us to keep calm moving forward while the financial media panics.
I’ll have a new recommendation for you next week.
Portfolio Changes
On February 25, Direxion Mexico 3X Bull ETF (MEXX) Moved from Buy to Sell
Marvell Technology Group (MRVL) - Move from Buy to Sell
Position Updates
Alibaba (BABA) recently reported a strong quarter but this week retreated from 221 to 208 amid the coronavirus turmoil.
BABA’s revenue for last quarter’s core commerce business increased 38% while Lazada (Southeast Asian e-commerce business) posted a 97% year-over-year increase.
Taobao increased monthly active users by 100% year-over-year and Alibaba’s cloud segment increased revenue by 62% year-over-year. Tmall Global, which imports products from international brands, saw growth of 45%. This is all impressive for a company the size of Alibaba.
On the other hand, the company’s view is that the outbreak of the coronavirus over the past three weeks has affected it 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.
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 pulled back from 21 to 19 despite last week’s financial report for fourth quarter 2019 showing gross profits up 38% and net revenue up 46%.
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. Earnings could more than double this year.
If you have not yet done so, I recommend you put some Cosan in your portfolio. BUY A HALF
LexinFintech (LX) shares fell from 13 to 12 this past week, underlining that perhaps this stock will be the China stock least impacted by the virus. This is because it has no deliveries and is technology driven.
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.
LX sells for 14 times trailing earnings and between five and six times prospective earnings. LexinFintech earned almost $2 a share in 2019 and that number could potentially grow by 50% or more in 2020. BUY A HALF
Luckin Coffee (LK) shares rebounded yesterday, but for the week fell from 42 to 39.
The company also announced that it ended 2019 with about 4,500 outlets—more than Starbucks.
It’s been 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 LK stock. I have been recommending that you take some Luckin profits off the table but see no reason not to keep this stock a buy if you don’t yet own it. BUY A HALF
Marvell Technology Group (MRVL) shares sank from 25 to 23 and given weakness in the semiconductor market and Marvell’s supply chains in and sales to China, I’m moving this from a buy to a sell. MOVE FROM BUY A HALF TO SELL
NovoCure (NVCR) shares, after leaping from 85 to 93 last week, gave it all back and more this week, plummeting to 79.
This is disappointing to say the least. If we don’t see a rebound in the coming week, I will likely move this stock to a hold.
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. BUY A HALF
Ping An (PNGAY) shares held pretty firm this week, only losing a point which is what I would expect from this quality blue-chip company that we 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: recent 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.
The next earnings report is expected March 10. I recommend you begin a full position in Ping An. BUY
Rio Tinto (RIO) shares are fighting a headwind of slower China growth, which means weaker copper prices, all reflected in the stock moving from 54 to 50.
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 longer-term oriented members to buy a full position in Rio if you have not yet done so. BUY
Sea Limited (SE) shares lost all the previous week’s gains following positive news on gaming revenues and profitability following the success of “Free Fire”, Sea’s first self-developed game. Earning are expected on March 3.
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. BUY A HALF
Virgin Galactic (SPCE) shares, after rising more than 200% in 2020, were hit pretty hard yesterday and for the week were down from 37 to 29.
I suggested last week that owners sell one-third of their shares to lock in some profits so we locked in some gains, which puts us in a position where all remaining shares represent profit.
Virgin Galactic reported a loss of $72.8 million for the fourth quarter, including $48 million in costs tied to its public offering. This all needs to be balanced out against the company having no debt, $480 million in cash and ready access to capital markets.
SPCE still plans to make its first commercial space-tourism flight this year, and took a step toward resuming ticket sales for jaunts expected to cost upward of $250,000. The company said on an investor call Tuesday that it’s focused on working through testing and approval for its space launch system.
More than 600 potential customers have already paid a collective $80 million in deposits for the flight and the company has in its sales funnel 2 million prospects with liquid assets of $10 million or more.
Those customers will eventually board a six-passenger plane that will be carried aloft by a larger jet before being released and using its own rocket to reach the edge of space. Passengers on the 90-minute flights will experience three to four minutes of weightlessness. Expensive.
Furthermore, beyond space tourism, the company is taking dead aim at a global commercial aviation market worth $900 billion and could potentially land a defense contract. Those would include a proposed hypersonic jet that could in theory travel from London and New York in an hour.
Boeing last year invested $20 million in the company, in part to support the hypersonics effort and to work on urban mobility initiatives.
CEO George Whitesides said the company was focused on the commercial launch and had completed 20 of the 29 approvals required to validate the commercial license it received from the Federal Aviation Administration in 2016. He also stated that Virgin Galactic’s use of a reusable plane made its “orders of magnitude” cheaper than the space capsules developed by Blue Origin.
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.
This stock has had an incredible run this year and after selling just one-third of our position, our remaining shares are all potential profit. This week’s pullback offers aggressive investors a chance to buy more shares. BUY A HALF
ProShares Short FTSE China 50 (YXI) moved from 18 to 19 as the Chinese market faced considerable turbulence.
This exchange-traded fund (ETF) moves opposite (inverse) of the leading China index, thereby hedging the coronavirus impact on our three China positions. BUY
WATCH LIST
Nokia (NOK), added to the watch list last week, is an interesting 5G telecom opportunity that was up 6% yesterday. I’m looking into its Chinese exposure and potential upside. Stay tuned.
