Portfolio Changes
Direxion Daily S&P 500 Bear (SPDN) Sell
Ping An (PNGAY) Moves from Buy to Hold
Markets Pause and Consolidate
The S&P 500 paused its recovery over the past week, moving sideways over the past five days. Here is my take on the market.
First, after April’s strong bounce in global stock markets, we are on the tail end of a relief rally that has clawed back more than halfway from its March market lows – with the Nasdaq already back in the black for 2020.
We now know the world is not ending. Volatility is more muted and the market has entered a period of consolidation and perhaps some sort of trading range.
Emerging markets, and many developed international markets, have not bounced back anywhere near what the Nasdaq or S&P 500 have during the past couple of months. This gap is an opportunity for us, but risk is still high so we need to be selective and try to wait for uptrends to develop.
Second, we have just entered the season of the weakest returns of the year for stock markets. Historically, almost all of the gains in the Dow have come from the six-month period between November and the end of April. So we should expect some choppiness over the next few months.
Finally, with interest rates at zero and governments and central banks around the world doing “whatever it takes” to boost liquidity, stock markets should have some support.
This past week not much happened to the portfolio though Sea Limited (SE) surged again, Virgin Galactic (SPCE) jumped yesterday on some encouraging news and our new cyber recommendations got off to a good start. No news on our Luckin Coffee (LK) imbroglio, unfortunately.
While I am no gold bug, one thing I am researching is gold stocks. Many have developed strong uptrends that may not be factoring in production interruptions due to Covid-19.
Major gold stocks have broken out and many investors have little exposure so there may be significant running room ahead given the rapid expansion of debt and Fed stimulus. I’ll have more for you on this topic in the coming weeks.
Today, I’m selling our Explorer position in the S&P 500 Index Inverse ETF (SPDN) under the assumption that markets have consolidated and that some exposure to gold down the road should provide a replacement “shock absorber” that’s so important to any portfolio these days.
Position Updates
Cloudflare, Inc. (NET) shares were up nicely in their first week in the portfolio as the company releases first-quarter earnings today.
This aggressive cybersecurity recommendation went public through an IPO last year and got its start offering internet security and website performance services. The decade-old company is growing fast and appears to be gaining market share. NET has high gross margins but is not yet profitable though some analysts expect its revenue to double by 2022.
This off-the-radar company and potential takeover target provides cloud-based services to secure websites. It offers various products for performance and reliability, video streaming and delivery, advanced security, insights, Cloudflare for developers, domain registration and Cloudflare marketplace.
If you have not yet invested in NET, I suggest you do so and consider pairing it with the below more conservative cybersecurity play, the ETF BUG. BUY A HALF
Global X Cybersecurity ETF (BUG) gained modestly in its first week as it reflects a basket of cybersecurity stocks of companies developing and managing security protocols to prevent intrusion and attacks on systems, networks, applications, computers and mobile devices.
This ETF has 29 holdings and the top 10 stocks represent roughly 60% of the total market value of the basket. Seventy-four percent of the companies are incorporated in America followed by 13% in Israel and 8% in Japan. BUY A HALF
DBS Bank (DBSDY) shares are sitting at 54, only seven points above its March lows, giving the stock plenty of upside potential.
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, being India.
I encourage you to buy DBS at these levels. BUY A HALF
Fanuc (FANUY) shares increased marginally over the past week but the stock is up double digits since being added to the Explorer portfolio a few weeks ago.
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 as the stock is trading right around 16, 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 Fanuc has also bought back 72 million shares last month. In short, Fanuc is a high quality play on what seems to be an unstoppable trend. I encourage you to buy this conservative robot play if you have not already done so.
Fanuc is a high quality Japanese conservative play on robotics and I would be a buyer at current prices. BUY A HALF
Luckin Coffee (LK)’s stock trading has been halted at a price of 4.39 pending further information.
China Securities Regulatory Commission has been cooperating with the SEC to look into the Luckin Coffee situation. More than a dozen officers from State Administration for Market Regulation visited the headquarters in Xiamen on Sunday, marking the most significant action so far by Chinese authorities.
Since Luckin is listed in the U.S., China’s securities regulator has limited supervisory authority. Luckin said in a statement on its official Weibo account that it is “actively cooperating” with the market regulator and providing information about its business. The company added that its stores across the country are operating normally.
Keep in mind that that the coffee chain’s unit expansion story is not impacted by this accounting fraud. I will pass on information on LK as it is released. HOLD
Ping An (PNGAY) shares were (again) flat this week, contrasting sharply with its financials and growth prospects. 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 is ranked 29th on the Fortune Global 500 list. And despite a drop-off in earnings in the latest quarter like most companies, the company still provides a 17% return on equity and has a trailing price-to-earnings ratio of just 11.
We will give this high-quality story a bit more time to develop but I’m moving to this to a hold based on its relatively weak performance. HOLD
Sea Limited (SE) shares surged 12% this week, reaching 62. We are in a strong position, having sold half our position two weeks ago at 55 for a gain of 310%.
Sea’s self-developed 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 were up 64% year-on-year.
All indications point to Sea having the potential to be an enduring growth stock.
HOLD REMAINING HALF
Virgin Galactic (SPCE) shares pulled back late last week but rebounded 11% yesterday to finish up for the week on the back of its first-quarter financial report.
Virgin reported that it lost $60 million, or 30 cents a share, in the first quarter, compared with a loss of $42.5 million, or 22 cents a share, in the first quarter of 2020. Revenue fell to $238,000 from $1.78 million a year ago. Virgin said it had a “strong” cash position, with cash and cash equivalents of $419 million as of March 31. Virgin said it and a subsidiary had entered an agreement with NASA to develop technologies for high speeds for civilian applications.
SPCE still plans to make its first commercial space-tourism flight this year, and took a step forward with two test flights from its New Mexico spaceport in the first quarter. During the quarter, the company also launched an initiative for tourist-astronauts to reserve a refundable place in Galactic’s flight queue, attracting commitments for up to $100 million in sales. Also, SPCE received an additional 400 deposits representing an increase of 67% over the 600 prior reservations.
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.
After selling half our position in Virgin Galactic (SPCE) two weeks ago at market for a 146% gain, we are in a good position to profit from this remarkable story. We will be an active buyer again on any pullbacks. HOLD REMAINING HALF
Direxion Daily S&P 500 Bear (SPDN) has served its purpose as a portfolio shock absorber during this period of volatility but we are selling it today with the goal of adding a gold stock in the near future. MOVE FROM BUY TO SELL
WATCH LIST
Alibaba (BABA) shares lost ground this week going from 205 to 195.
BABA launched a new luxury platform called Luxury Soho, targeting younger consumers with the additional aim to help high-end brands shed excess inventory built up during the global coronavirus lockdown. Chinese shoppers account for more than a third of global luxury goods spending.
Alibaba also recently announced plans to invest $28 billion in its cloud infrastructure over the next three years. Its fourth-quarter cloud revenue climbed 62% as Alibaba had a commanding 46.4% of China’s cloud market, according to research firm Canalys.
Alibaba (BABA) is a long-term China core position and a bellwether for Chinese stocks.
