Most positions are up 5%-6% for the week. The exceptions? Virgin Galactic (SPCE) is up 15%, and Luckin Coffee (LK) shares were put on an exchange-mandated trading halt yesterday morning at 4.39 (see more in the portfolio update section).
There will be a key meeting of OPEC today at 10 a.m. ET. The spotlight will be on whether Russia, Saudi Arabia and the non-participant U.S. will agree to cut crude production amid plunging prices and a lack of storage capacity.
A Note of Caution and Conviction
Two people I really listen to regarding markets are Mark Mobius and Howard Marks.
Mobius took over the emerging markets portfolio from John Templeton and his renowned Templeton Growth Fund, and now has his own fund. I worked with him to launch a new Asia frontier fund while on the board of the Asian Development Bank. Howard Marks is probably the best value investor out there, and runs Oaktree Capital Management.
Both of them believe it is likely that we will re-test the March lows of the Dow (18,900) and the S&P 500 (2,281), based on history.
Mobius points out that historical bear markets on a global scale have averaged a larger 30% to 50% drawdown spread out over the span of roughly two years. To those that are more optimistic based on our sharp but compressed pullback, he quotes the late John Templeton: “The most expensive words in the world are, ‘This time is different.’
Mobius concedes that emerging markets are very cheap and is fine with investing here but advises keeping most of your powder dry.
Marks, in a recent memo, agrees with the above sentiment but he goes on in the memo to make two trenchant comments worth repeating:
“But no one can tell you this is the time to buy. Nobody knows.”
And…
“So it’s my view that waiting for the bottom is folly. What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap — based on the relationship between price and intrinsic value — you should buy, and if it cheapens further, you should buy more.
“It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor’s greatest aspiration … All great investments begin in discomfort.”
How to Handle Micro-cap Stocks
As a change of pace, I would like to offer you a strategy that looks at micro-cap stocks in a different way.
In short, it is putting a limited amount of capital in a high-risk, high-reward situation.
It is a little bit like a call option trade so it is clearly not for everyone.
Micro-cap stocks are speculative and oftentimes trade thinly. But you can also occasionally find promising opportunities that trade completely under the radar.
Since there are so many of these lower-priced stocks out there, the best way to learn of one is from a trusted friend. That’s how I learned about Kraken Robotics Inc. (KRKNF), in which I currently own a small position. The stock trades right at a mere 0.28 a share so you still need to carefully weigh the chances of this micro cap becoming a small-cap stock.
Here are five key questions that you need to ask yourself before considering investing in a micro-cap stock.
Is the company producing revenue at an accelerating rate with sizable gross margins?
Is the management team and board of high quality with a proven track record?
Does the stock have decent trading volume and liquidity?
Does the company have a credible list of customers and partners?
Does the company operate in a growth industry and could the company be acquired?
Kraken Robotics (https://krakenrobotics.com) incorporated in Canada in 2008, is a marine technology company that designs, manufactures, and sells software-centric sensors and underwater robotic systems for unmanned underwater vehicles used in military and commercial applications. In a way, you can look at Kraken as a nautical drone company though their breakthrough technology allows high-resolution images of the sea floor with greater speed and lower cost.
Kraken produces underwater sensors, batteries and robots used to image and map the seabed for both military and commercial clients. The company exports to 10 nations and closed a series of sizable contracts in 2019 and has an impressive list of customers and partners. Most importantly, global maritime robotics is a $3 billion market and the industry is consolidating.
A couple of things to watch out for with micro-cap stocks is that the management team usually owns a significant stake, in this case 21%. It is also nice to see that a seabed exploration company called Ocean Infinity has a 15% equity stake. Kraken has about $2.7 million in cash, though it has a credit line that has not been tapped.
While many of these companies will not be profitable, check to make sure they are selling product at an increasing rate with credible companies and organizations with sizable gross margins. Kraken prices its products at a 50% gross margin.
Also, it is important to check the management team to make sure they have the appropriate experience and stature. Kraken CEO Karl Kenny has three decades of technical and executive experience in communications, electronic navigation systems and digital imaging. He founded Telepix Imaging Inc., which was bought out by a European photo equipment manufacturer for more than $50 million.
Vice Admiral Michael J. Connor (retired), who was the Commander of the United States Submarine Forces, is a Board Director and well connected to allied militaries. A founder of Thayer Mahan also sits on the board.
Like all micro caps, Kraken is a speculative idea that is not for everyone, and I am therefore not adding it to the Cabot Global Stocks Explorer portfolio. But if you invest only a small amount and treat it as an option and fully appreciate the risks, it could make sense for your personal portfolio.
Position Updates
Alibaba (BABA) shares were up 5% in the past week, jumping from 187 to 196.
On a price-to-earnings basis, BABA is trading at 21 times forward earnings versus 82 times for Amazon. This despite the fact that BABA’s revenue growth is trouncing Amazon’s.
BABA’s revenue for last quarter’s core commerce business revenue 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%.
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
British Petroleum (BP) shares held at 25 this week as oil prices firmed up. 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 10.3%. 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.
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 as U.S. officials are leaning on Saudi Arabia to cut production levels.
If you have not bought this stock, consider buying at these extreme lows. BUY A HALF
DBS Bank (DBSDY) added 6% this week, reaching 53. DBS is one of the largest banks in Southeast Asia, with a presence in 18 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index.
The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore.
DBS has a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India.
It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.
Its tentacles reach out through 200 branches in 50 cities. DBS produces steady profit margins, revenue, and earnings and is increasing market share in consumer and corporate banking. Wealth management is also a strategic priority and a growing part of its business.
Why buy DBS right now? The stock has come back from a 52-week high of 93 to trade at just below 50—a price at which it has not traded since 2016.
Yes, it has deferred (not cut) its dividend until it is able to have its annual meeting but this is already priced in. In short, this is an opportune time to tuck this quality conservative bank into your portfolio. BUY A HALF
LexinFintech (LX) shares advanced only marginally this week, closing at 8.9.
LX’s earnings for the full year of 2019 were released last week with loan origination volume increasing 90.6% year-on-year and revenue increasing 39.6% year-on-year.
In the fourth quarter, LX loan volume was up 104% year-on-year with gross profit up 59.7% and net income of RMB518 million. LX’s continued investment allowed for registered user numbers to increase 96.5% year-on-year and new active users to increase 244%.
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 an excellent risk-reward opportunity and recommend you buy LX if you have not yet done so. BUY A HALF
Luckin Coffee’s (LK) stock trading has been suspended at a price of 4.39 pending further information.
This is a very unfortunate situation that we need to deal with the best we can.
Luckin attracted major investors such as BlackRock and Singapore’s sovereign wealth fund even before it came public last May at 17 and in the last year rose sharply to a high of 51 on January 17, making it one of our best-performing stocks. While I advised several times selling a part of your LK position to lock in profits, this does not take away the sting of its sharp fall due to Luckin’s COO misreporting sales and expense figures.
As much as we wish we all exited at the high, there is no going back now. The easy thing to do is to sell whatever number of shares you still own, and for some of you that may be the best course you can take.
However, my risk-reward analysis suggests holding Luckin Coffee shares.
The chief operating officer Jing Liu is at the center of the accusations for this scandal, and he has been suspended along with several employees reporting to him.
A special committee has been formed to oversee the investigation and to recommend appropriate actions against the perpetrators.
A restatement to the financial reports published in 2019 is now certain, and that could trigger another sell-off, but these events may not push the company to bankruptcy as long as its reported balance sheet numbers are accurate.
For instance, the company had $775 million in cash and liquid investments at the end of September 2019, which I believe will be used to scale up the company.
Here are a few other positive factors to consider.
Keep in mind that that the coffee chain’s unit expansion story is not impacted by this financial fiasco. And the company didn’t overstate the number of stores it has opened and Luckin has still gone from nine coffee houses at the end of 2017 to 4,500 at the end of 2019.
In the statement issued regarding the scandal on April 3, Luckin Coffee suggests that both operating expenses and revenue were inflated.
In short, we need more facts, so it does not seem wise to completely write off a comeback from Luckin. HOLD
Ping An (PNGAY) shares continued to hold firm at just under 20 this week.
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.
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 eight times trailing earnings and seven times projected earnings.
Ping An is in the top 10 in the Global 500 2020 rankings released by the leading brand valuation consultancy Brand Finance, climbing five places to number nine among global brands. It ranked first among global insurance peers and second among global financial peers.
PNGAY stock has held up very well despite all the turbulence, and I recommend you buy a full position if you have not already done so. BUY
Sea Limited (SE) shares tacked on two points to close at 45.
The company released its quarterly and full-year financials a couple of weeks ago with adjusted revenue of $909 million, up 133.5% year-on-year from the fourth quarter of 2018.
Sea’s Shopee Mall, the largest e-commerce platform in Southeast Asia, continues to see healthy growth in stores ahead of peers in ASEAN – online stores in Indonesia have grown by 30% in three months, for example. Our analysis indicates widespread mall and store closures in ASEAN. Prolonged store closures could support adoption of e-commerce.
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.
All indications point to Sea having the potential to be an enduring growth stock. BUY A HALF
Virgin Galactic (SPCE) shares were up 9% yesterday and up 15% for the week to break 15.
The company announced that it plans to report its financial results for the first quarter 2020 following the close of the U.S. markets on May 5.
Morgan Stanley came out recently with a buy rating, valuing SPCE’s space tourism business at $14 a share and the hypersonic flight opportunity at $10 a share to arrive at a current composite target price of $24.
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 Virgin Galactic and CEO George Whitesides said the company was focused on 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 Daily 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 thus as the market rallied it fell from 29 to 26. Unless you have strong conviction that the market will not test its recent lows I advise keeping a small position in your portfolio. BUY UP TO 10% of YOUR PORTFOLIO
Watch List
JP Morgan (JPM) shares made a strong move this week, going from 83 to 93. We’ll continue to keep an eye on it.
