Turbulence Continues, but Blue Chip with 9.4% Dividend Yield Added to Explorer Portfolio
Ironically, China’s blue-chip CSI 300 Index hit its highest point this week since February 2018. This is reflected to a degree in our China position Ping An (PNGAY), though Alibaba (BABA) was off 5% this week.
But part of this is due to China’s leaders leaning on major investors not to sell stocks.
China appears to be beginning to return to normal after weeks of lockdown due to the coronavirus. Although the streets of major cities aren’t anywhere near as crowded as before, people are coming out again and offices and factories are starting to spring back to life.
Don’t confuse this with normal. Life in China is still happening under the shadow of the virus, with temperature checks, app monitoring, and other biosecurity measures. That includes a just-announced 14-day quarantine period for all international arrivals at Beijing’s airports. Apple’s sales of iPhones in China in February were about half the normal monthly rate.
Investors looking for safety are pushing government bonds yield to historic low levels. The yield on 10-year American Treasuries dipped below 0.5% for the first time ever. Gold rose this week above $1,700 an ounce for the first time in seven years. The backdrop is of course growing anxiety about global recession and falling oil prices as COVID-19 spreads.
Going forward, we will be need to be opportunistic expecting continued volatility and some sort of trading range developing over time. Our full position in the S&P 500 Inverse ETF (SPDN) moved up from 25 to 28 this week. It helps a bit in a down market as sort of a stock absorber.
I know everyone is used to a new recommendation every other week but we will need to be more flexible going forward. Our Cabot Global Stocks Explorer portfolio is now 55% invested in stocks, 35% in cash with 10% in our S&P 500 inverse ETF.
I believe our new idea today is timely, with an almost 10% dividend yield and near-term upside potential.
New Recommendation
BRITISH PETROLEUM (BP)
Sam Zell, the great value investor based in Chicago, says he isn’t finding a ton to buy even with the sharp coronavirus pullback, excepting the energy space, where valuations have been “unjustifiably killed.”
He didn’t disclose any names, but says he’s been putting a lot of money to work in the sector. One advantage, says Zell, is that he wasn’t long energy on its long journey down.
These comments by Zell caught my eye since I had been working last weekend on researching British Petroleum (BP).
Like all oil majors, BP is a mixed bag of assets and debt. It has both an impressive portfolio of assets and a current dividend yield of 9.4%. I don’t think the dividend is vulnerable but I do think the company’s share buyback program will be suspended.
In 2019, BP generated $28 billion in operating cash flow; $7 billion went to dividends and $2 billion to share repurchases.
BP stock is well below its 52-week high and while the Saudi-Russia fight over pricing will weigh on the stock for a while, I’m looking further out and the high dividend is more than enough of a return for waiting. Keep in mind that the day I recommended BP, oil prices had plunged to $28, about where they bottomed in 2008 during the global financial crisis. Since then, Brent crude oil prices have moved into the low $30s.
For perspective, BP stock was trading at 44 a year ago and is now at 25.
My price target over the next six months is 35.
Another positive for British Petroleum is that it is ahead of its rivals in diversifying into green energy and, for this reason, has become a darling of the clean energy crowd. This insulates it a bit from funds that are eliminating fossil fuel companies from their portfolios.
Adding a half position of BP to the Explorer portfolio is a smart, opportunistic play in a difficult market. BUY A HALF
Model Portfolio Changes
Sell Rio Tinto (RIO) (alert on 3.9.20)
Sell Cosan Ltd. (CZZ) (alert on 3.9.20)
Buy British Petroleum (BP) (alert on 3.9.20)
Remove Nokia (NOK) from Watch List
Position Updates
Alibaba (BABA) shares moved last week from 205 to 212 but gave all of this and more back to close yesterday at 199.
BABA’s revenue for last quarter’s core commerce business increased 38% while Lazada (its 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.
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. For longer-term investors, I would be a buyer at these levels. BUY
Cosan (CZZ) recently posted a financial report for fourth-quarter 2019 that showed gross profits up 38% and net revenue up 46%. Despite these and other strong numbers, Cosan’s perception as a commodity play forces me to sell this to raise some cash.
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. MOVE FROM BUY A HALF TO SELL
LexinFintech (LX) shares moved from 11 to 9.7 this week as it, like most fintech stocks, flies above the real economy since 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 lenders.
LX sells for between 5-6 times prospective earnings. LexinFintech earned almost $2 a share in 2019 and that number could potentially grow by 50% or more in 2020.
I believe LX offers us the best risk/reward opportunity and recommend you buy LX if you have not yet done so. BUY A HALF
Luckin Coffee (LK) shares lost ground over the last week going from 40 to 35 compared to the all-time high of 50 they hit in January.
The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks.
In fact, it’s been reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue and this issue may impact LK as well. I have been recommending that some of you should take some Luckin profits off the table but see no reason not to keep this stock a buy for more aggressive investors.
BUY A HALF
NovoCure (NVCR) shares are significantly off their high of 93 about a month ago, closing yesterday at 67.
This is, of course, very disappointing and also in sharp contrast to the financials released last week showing a 300% earnings surprise on a 42% jump in net revenue. Gross margins were 75% and the balance sheet is strong with $313 million in cash.
Based in Israel, NovoCure sells a medical device that uses low-voltage electric fields to successfully treat the most aggressive forms of cancer. The technology has succeeded in every clinical trial. The Food and Drug Administration (FDA) has approved it and Medicare now covers it.
The core product is called Optune – its Tumor Treating Fields delivery system – and it was launched in 2011 for glioblastoma, the most common primary brain cancer and one of the most difficult cancer types to treat. Optune is sold in the U.S., Germany, Austria, Switzerland, Sweden, Israel and Japan.
Optune also uses low-intensity electrical fields to treat mesothelioma, a tumor of the tissue that lines the heart, lungs, stomach and other organs. However, studies are underway with other brain cancers as well as pancreatic, ovarian, liver and lung cancers, with key results due over the next few months.
If you own NovoCure, I would hold it. If you don’t own it, I would be a buyer.
BUY A HALF
Ping An (PNGAY) shares held firm again this week, which is what I would expect from this quality blue-chip company.
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.
The next earnings report is expected any day. I recommend you buy a full position if you have not done so. BUY
Rio Tinto (RIO) shares were up 8% the previous week but this stock is very sensitive to copper prices and overall global growth so I moved this to a sell this Monday.
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. MOVE FROM BUY TO SELL
Sea Limited (SE) shares were off modestly this week, moving from 51 to 48.
Last week the company released of its quarterly and full-year financials. Total adjusted revenue was $909 million, up 133.5% year-on-year from the fourth quarter of 2018.
Sea’s self-developed global hit game, “Free Fire”, was the most downloaded mobile game globally in 2019, according to App Annie, and recently hit a new record of 60 million peak daily active users. “Free Fire” was also the highest grossing mobile game in Latin America and in Southeast Asia in the fourth quarter and for the full year of 2019.
Adjusted revenue for digital gaming was $479.9 million, up 107% year-on-year.
Quarterly active users reached 354 million, an increase of 64% year-on-year.
The company also owns Shopee, the largest Southeast Asia e-commerce platform by orders. It registered over 188 million orders in the fourth quarter, or a daily average of over 2 million orders, an increase of 124.6% year-on-year.
More conservative investors may want to take some partial profits but all indications point to Sea having the potential to be an enduring growth stock. BUY A HALF
StoneCo (STNE) was added to the portfolio last week and had a rough start, going from 42 to 36.
Based in Sao Paulo and founded in 2000, StoneCo is a digital payments company providing financial technology solutions for merchants to conduct electronic commerce across in-store, online, and mobile channels in Brazil.
It distributes its solutions, principally through proprietary Stone Hubs, which offer hyper-local sales and services, and technology and solutions to digital merchants.
This week the company released fourth-quarter 2019 financials with revenue up 48% year-over-year and adjusted net income jumping 76%. Digging deeper, total payment volume improved 51% and StoneCo’s active client base surged 84%.
For the quarter, costs as a percentage of revenue were 39.6%, down about 3% compared to the prior-year quarter, as the company invested heavily to expand its operations. This resulted in net margins that improved to 31%, up from 19% in the year-ago quarter, and the best profit margin in StoneCo’s history.
In the full-year 2019, StoneCo’s client base grew 84% year-over-year, with greater than 60% growth in 26 out of 27 Brazilian states. BUY A HALF
Virgin Galactic (SPCE) shares have lost momentum going from 22 to 16.
In retrospect, I wish we sold more than the one-third position I recommended when the stock was in the mid-30s. Even though we are at least break even, this pullback has been painful.
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 it was 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.
Furthermore, beyond space tourism, the company is taking dead aim at a global commercial aviation market worth $900 billion and could potentially land some defense contract. Those would include a proposed hypersonic jet that could in theory travel from London to New York in an hour.
Boeing last year invested $20 million in the company and 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.
The stock’s pullback over the last few weeks offers more aggressive investors a chance to buy more shares. BUY A HALF
Direxion S&P 500 Bear (SPDN) The SPDN is an exchange-traded fund (ETF) that moves opposite (inverse) of the S&P 500 index. It serves as a portfolio shock absorber and moved up this week from 25 to 28. BUY
