Portfolio Changes
Per special bulletin from Tuesday afternoon, sell half your position in Virgin Galactic (SPCE) at market for 142% gain.
Sea Limited (SE) closed at all-time high of 54 for gain of 306% - sell half your position.
Move Alibaba (BABA) to the Watch List.
Taking Some Profits Off the Table
What we may see developing in markets is a rather broad trading range – say from 21,000 to 25,000 in the Dow. This could be our reality until we work our way through the real but uncertain impact of the shutdown on the economy.
On Tuesday afternoon, I sent out a special bulletin recommending that owners of Virgin Galactic (SPCE) sell half their shares to lock in a 142% gain.
This is not a reflection of the SPCE story but rather my concern that the stock might suffer some collateral damage from CEO Richard Branson’s and Virgin’s other brands, such as Virgin Australia airlines.
Unfortunately, no news on Luckin Coffee (LK) in terms of when it will resume trading.
I was a buyer of LK at a bit over 7 (it’s now stalled at 4.39) so I share your concern. There are undoubtedly enough negatives about the situation that you are well aware of, but also one positive one that might have not come to mind—that China may do whatever it takes to avoid Luckin Coffee being a permanent stain on its reputation.
Alibaba (BABA), on the other hand, has a fine reputation, and it’s been a long-term core position that is of course a bellwether for Chinese stocks. But I don’t think the story changes much week to week so I’m going to remove it from the Explorer portfolio and move it to our Watch List to free up cash and make room for new ideas.
Lynas (LYSCF), the Australian rare earths producer that I highlighted in a special report, received notice yesterday that it is being awarded a contract by the U.S. Department of Defense to be a partner in building a rare earths refining facility in Texas. Details and time table are unknown but this news sent the stock up 24% yesterday.
More stock updates below but let’s first look at one of the powerful themes driving markets – big tech and big data.
U.S. Big Tech & Data Stocks Dominating the Market
One significant trend is how America’s biggest U.S. tech and data companies are dominating world markets. You know the names - Microsoft, Apple, Amazon, Alphabet (Google) and Facebook.
The stocks of these companies proved their resiliency even in the midst of the coronavirus, snapping back quickly while together making up more than 20% of the value of all the companies in the S&P 500 index.
The market value of Microsoft alone comes close to equaling the entire value of the 100 companies that make up London’s FTSE 100, which represents the 100 largest companies trading on the London Stock Exchange. These are companies like Royal Dutch Shell, HSBC and Unilever.
The financial weight of the leading tech giants is remarkable. The top 10 companies in the Nasdaq 100 index make up 55% of this basket’s market value.
Apple, Microsoft and Amazon alone represent about 33% of the market value of the 100 companies in this basket.
There are some good reasons for this superior performance. These companies have rock solid balance sheets and are sitting on piles of cash. Microsoft alone has more than $130 billion in cash. That kind of firepower gives these dominators the ability to snap up talent as well as any pesky competitors.
They dominate their markets and exploit many of the trends that have accelerated during this global shutdown, such as online shopping and video streaming.
Take a quick look at MSFT and the first thing you will notice is a beautiful chart (see below) - a long, steady uptrend going back to 2013. Presently at 167, it started this year at 160, went to 187 in February and hit its low at of 135 in February. In retrospect, 135 looks like a great entry point.
It looks a bit expensive trading at 28 times forward earnings. But there is a lot to offset this premium price, such as net profit margins of 33%, a return on equity of 44%, and a strong balance sheet.
It is easy to grasp why MSFT is a darling of big institutional investors.
Microsoft made a shrewd public relations and business move on April 21, joining a fledgling movement to liberate the world’s data. Among other things, the company plans to launch 20 data-sharing groups by 2022 and give away some of its digital information.
The Economist notes that the OECD (Organization for Economic Cooperation and Development), a club with clout made up of 36 developed countries, estimates that if data were more widely exchanged, many countries could enjoy growth gains worth between 1% and 2.5% of GDP.
Brad Smith, Microsoft’s president, frames this step as spreading economic power, but MSFT makes most of its money not by extracting advertising value from big data through targeted advertising like Google but by selling services and software to help others process digital information.
I’m not currently adding Microsoft to the Cabot Global Stocks Explorer portfolio. However, MSFT should be a welcome addition to your portfolio as a core, long-term holding and should also be on your list of buy ideas in case it gets anywhere close to its 135 February low.
Position Updates
Alibaba (BABA) shares were flat this week.
Following a boom in demand for business software as the coronavirus outbreak peaked in China, BABA announced plans to invest $28 billion in its cloud infrastructure over the next three years. Fourth-quarter cloud revenue climbed 62% as Alibaba had a commanding 46.4% of China’s cloud market, according to research firm Canalys.
Alibaba is a great long-term China core position and is of course a bellwether for Chinese stocks, but I don’t think the story changes much week to week so I’m moving it to our watch list to free up cash and make room for new ideas. MOVE TO WATCH LIST
DBS Bank (DBSDY) lost a point this week to close at 52. This is a conservative proxy for Southeast Asia and China that is trading substantially off its highs for the year.
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.
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.
In addition to being the largest and strongest bank in Southeast Asia, DBS is the leading consumer bank in both Hong Kong and Singapore. DBSDY stock has come back from a 52-week high of 93 and has not traded at this price since 2016. I encourage you to buy DBS at these levels. BUY A HALF
Fanuc (FANUY) shares edged up in their first week in the Explorer portfolio.
Headquartered in the shadow of Mount Fuji, Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots. Fanuc claims to be the only company that uses robots to make robots.
I have been following Fanuc’s stock for some time but it always seems expensive.
With the pullback in the market, now is a great entry point at the stock is trading just over 13, the lowest in a decade, and down from a 52-week high of 19.
Fanuc offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive and the company also bought back 72 million shares last month. In short, Fanuc is a high quality play on what seems to be an unstoppable trend. BUY A HALF
LexinFintech (LX) shares are underperforming and have lately been a disappointment despite the company’s solid numbers in China’s high-growth financial service sector.
In its last quarter, LX loan volume was up 104% year-on-year and 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 4-5 times prospective earnings. LexinFintech earned almost $2 a share in 2019 and that number could potentially grow by 50% or more in 2020.
At this price level, I believe LX offers an excellent risk/reward opportunity and recommend aggressive investors buy LX if you have not yet done so. BUY A HALF
Luckin Coffee (LK)’s stock trading has been halted at a price of 4.39 pending further information.
Keep in mind that that the coffee chain’s unit expansion story is not impacted by this financial fiasco. In the statement issued regarding the accounting fraud on April 3, Luckin Coffee suggests that both operating expenses and revenue were inflated.
Unfortunately, there’s no news on when LK will resume trading. I was a buyer of LK a bit over 7 so I share your concern. There are undoubtedly enough negatives about the situation that you are well aware of, but there’s one positive development that might have not come to mind. It’s that China may do whatever it takes to avoid this stain on its reputation.
Regardless, 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 went public last May at 17, and in the last year rose sharply to a high of 51 on January 17, making it one of the Explorer’s best-performing stocks as I advised multiple times selling a part of our LK position to lock in profits.
I will pass on information on LK as it is released. HOLD
Ping An (PNGAY) shares breached 20 this week but continue to underperform on a relative basis, which is puzzling given its solid financial results.
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 trading at a mere eight times trailing and projected earnings.
We will give this quality stock a bit more time and I recommend you buy a full position if you have not already done so. BUY A FULL POSITION
Sea Limited (SE) shares closed at an all-time high of 54 to give us a gain of 306%. Thus, I recommend that you sell half your position.
Sea’s Shopee Mall continues to see healthy growth in stores ahead of peers in ASEAN – online stores in Indonesia have grown 30% in three months.
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 up 107% year-on-year and quarterly active users up 64% year-on-year.
All indications point to Sea having the potential to be an enduring growth stock but I would be reluctant to buy new shares at these levels. SELL HALF YOUR POSITION – HOLD THE BALANCE
Virgin Galactic (SPCE) shares have done very well but my concern is that the stock might suffer some collateral damage from Virgin’s other brands under stress, such as Virgin Australia airlines.
So I recommend that you sell half your position in Virgin Galactic (SPCE) at market for a 142% gain.
The company announced that it plans to report financial results for the first quarter 2020 following the close of 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.
We will be a buyer again on any weakness. SELL HALF YOUR POSITION – HOLD THE BALANCE
Direxion Daily S&P 500 Bear (SPDN) was flat for the week. 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 an insurance policy if markets pull back.
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