Portfolio Changes
FANUC (FANUY) Moves from Hold to Sell
TRIP.COM (TCOM) Moves from Buy to Hold a Half
FedEx’s Upside Surprise is Encouraging
As we move into the third quarter, analysts at Goldman Sachs write that their baseline forecast is for the S&P 500 to gain 5% in the second half of the year. In their “vaccine upside” scenario, stocks rise by 14% from here; in the “virus downside” scenario, they drop 30%.
This is all speculative, of course. As companies begin releasing second-quarter earnings reports, we will find out just where things stand. According to FactSet, analysts estimate that profits at blue-chip American companies fell 44% in the second quarter.
On Wednesday, however, FedEx (FDX) shares were up 12% as the company posted earnings, the first since its split with Amazon. FDX earned $2.53 a share excluding adjustments, on revenue of $17.4 billion in its fiscal fourth quarter ended in May. This is down from adjusted earnings of $5.01 a share a year earlier, but almost a dollar more than the $1.58 a share that analysts were looking for.
FedEx is a good barometer of e-commerce, trade and industrial activity though it appears that in the most recent quarter, consumer e-commerce was the driver rather than business-to-business deliveries. The numbers are also an indicator that factories in Asia and Europe seem to be moving towards normal levels of activity.
After stocks’ swift recovery from March lows it seems likely that markets will be choppy as they digest which companies and sectors are coming back and at what pace.
In terms of countries, Europe may be an opportunity since its leading stocks are trading at sizable discounts to leading U.S. stocks. The Stoxx Europe 600 climbed almost 13% in the second quarter, after having seen 23% of its value wiped out in the first three months of the year.
Another opportunity is in emerging markets, which as a group have not come back from 2020 lows as fast as U.S. markets. I’ll have a new emerging markets idea for you next week as we put our cash position to work. As Howard Marks of Oaktree aptly put it, “Investors face not one but two major risks: the risk of losing money and the risk of missing opportunities.”
Finally, in a clear power shift, Chinese tech tycoons with companies trading in Hong Kong now have a combined net worth of $182 billion, more than the 10 richest people in Hong Kong, according to the Bloomberg Billionaires Index. For Chinese companies, Hong Kong is becoming increasingly appealing as companies listed in the U.S. face growing scrutiny and risk being delisted.
Position Updates
Alibaba (BABA) shares fell from, and then bounced back to, 222 this week as Jack Ma announced his determination to compete with Tencent in China’s $29 trillion mobile payments space. Alipay already has 900 million users but Ma wants Ant newly renamed Ant Technology to expand into a broad platform of apps and businesses from groceries to wealth management, and hotel booking to loan applications while providing technology solutions like artificial intelligence, blockchain and risk management. HOLD
Cloudflare (NET) shares continue to outperform, up another two points this week and up 27% over the last month. I upgraded the stock last week to buy a full position.
CEO Matthew Prince stated in an interview this week that over the last three months, global internet traffic is up more than 50% and NET blocks 400,000 attacks against political campaigns on a typical day. This is an aggressive web infrastructure and website-security firm gaining traction in this competitive high-growth sector. There is a lot of momentum here for the stock and the space. BUY
Global X Cybersecurity ETF (BUG) shares broke 20 this week and are up 14% so far in 2020. The formula driving this ETF forward is that higher activity online requires more cybersecurity measures. The companies in the BUG basket address online security as cybercrime, which has reached an all-time high. The top 10 companies in the BUG basket represent 56% of BUG’s market value. The stocks are not cheap and on average trade at more than six times book value. I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive industry. HOLD A HALF
DBS Bank (DBSDY) shares edged just over 60 and offer investors a 12.4% current dividend yield. My target price is 70, which is reasonable given the bank’s quality and book value of 55. DBS is perfectly position to exploit growth in Southeast Asia with its 640 million youthful and tech-savvy consumers. The bank also has a growing presence in mainland China and India. I encourage you to aggressively buy DBS shares at this price. BUY A HALF
Fanuc (FANUY) shares were flat again this week and are trading just below where they were a month ago. This is a great company but its lack of momentum causes me to move this to a sell. MOVE FROM HOLD TO SELL
Gilead Sciences (GILD) shares ticked up this week, fueled by an important announcement regarding its Covid-19 treatment remdesivir. The U.S. government will receive 500,000 treatment courses of Gilead’s remdesivir through September that can then be purchased by American hospitals. This means that the U.S. will receive 100% of Gilead’s total remdesivir production in July and 90% in August and September. A study found that patients receiving remdesivir were discharged from the hospital four days earlier than patients who didn’t get the drug.
Gilead also announced pricing for remdesivir; the drug will cost $2,340 for a 5-day course of treatment, with the cost of treatment for people who have commercial health insurance at $3,120. In early May, Gilead donated more than 100,000 doses of remdesivir to the U.S. government. Keep in mind that Gilead generated $5.5 billion in first-quarter revenue, the majority of which came from HIV treatments that patients take on a recurring basis. If you haven’t yet purchased GILD shares, I encourage you to buy a half position. BUY A HALF
Kirkland Lake Gold (KL) shares were up 7% in their first week in the portfolio.
Kirkland offers us a blend of rising gold prices, superior profit margins and a strong balance sheet. The company ended the most recent quarter with $531 million in cash equivalents and has no debt and exceptionally low production costs. Kirkland’s latest quarter delivered 40% profit margins, 14.7% return on assets and 22.9% return on equity. Yet the stock price is pretty much where it was a year ago while gold has gone from $1,300 to just under $1,800 an ounce. If you have not yet invested in Kirkland, I encourage you to buy a half position. BUY A HALF
Sea Limited (SE) shares were up 6.7% yesterday (another 3% in early Thursday trading) on the heels of Stephens analyst Jeff Cohen initiating coverage with an overweight rating and a price target of 130. Cohen noted the favorable demographics in Southeast Asia, with high economic growth and internet penetration. He also sees potential for strong expansion across all three of Sea’s core business lines: gaming, mobile payments, and e-commerce.
Sea is strategically positioned to take advantage of this growth in part due to its partnership with China’s Tencent. According to Bain & Company, the digital economy in Southeast Asia has tripled in the past five years to $100 billion and is expected to triple again by 2025 to $300 billion. The stock has nearly tripled this year and we have already taken some profits. Only very aggressive investors or new subscribers should chase it here. HOLD A HALF
Trip.com (TCOM) shares were flat this week on no significant news.
Trip.com has recently announced a number of marketing initiatives, a flex booking guarantee and launched its international “Travel On Sale,” giving customers access to exclusive discounts of up to 60% with over 30,000 hotels in 180 countries. TCOM has not moved much in the last month but we’ll give it more time to get some traction. Let’s move TCOM to a hold and see how it performs this week. MOVE FROM BUY A HALF TO HOLD
VanEck Rare Earth/Strategic Metals ETF (REMX) shares pulled back last week and since then have steadily come back. REMX is a basket of companies involved in rare metals and rare earths, collectively referred to as strategic materials. This ETF is primarily a play on the strategic importance of these materials as well as an effective hedge on the risks around rising U.S.-China tension. America is highly dependent on China for rare earths in particular, which have important commercial and defense applications. BUY A HALF
Virgin Galactic (SPCE) shares are up 11% since Monday as Vertical Research Partners analyst Darryl Genovesi reiterated his buy rating. A call he had with Chief Executive George Whitesides supported his bullish stance as Genovesi maintained his stock price target at 29, which is 89% above current levels.
Last week SPCE signed a Space Act agreement with NASA for private orbital spaceflights to the International Space Station (ISS). Under terms of the agreement, Virgin Galactic will develop a private orbital astronaut readiness program, including identifying people interested in buying private missions to the ISS. SPCE is up 46% so far in 2020 and we already booked some sizable profits on SPCE earlier this year. I rate it a strong buy for aggressive investors. BUY A FULL POSITION
