Portfolio Changes
Sell Direxion Daily FTSE China Bull 3X Shares (YINN)
The Potential of Sector/Trend Investing
The Cabot Global Stocks Explorer portfolio did well this past week even though markets were a bit choppy, in line with mixed data and expectations about how fast growth will return. China’s economy expanded 3.2% in the second quarter from the same period a year earlier while retail sales fell 1.8% in June from a year earlier, falling short of economists’ expectations. Markets pulled back so we are selling last week’s leveraged trading bet on the continuance of the uptrend in Chinese stocks.
Global investors are piling into bullish bets on copper prices, sparking the quickest rally in the industrial metal in years, but many remain wary of a second pandemic wave.
We’ll stay the course with selective trimming and adding new positions in sectors that are demonstrating relative strength. When you step back and look at markets since the March lows, one takeaway is unmistakable. The market is particularly rewarding investors who invest in certain high-growth sectors. The Explorer portfolio will seek to take advantage of that momentum as it focuses in on a number of promising global trends.
A good example of this strategy is Singapore, which has been in a bit of a slump over the past couple of years and saw its GDP plunge at an annualized rate of -41% in the second quarter. Meanwhile, our Sea Limited (SE) recommendation, because of the three secular trends that fuel its growth, has soared from 15 in early 2019 to 112 yesterday.
Electric vehicles are another strong growth sector, led by Tesla and including the whole ecosystem, from the automakers to batteries to the critical materials that go into the batteries and motors. Nio (NIO) is part of that trend, more than doubling in the last month. This story goes well beyond China as, supported by sizable subsidies, EV sales in Europe during the first five months of 2020 are up 55%, according to commodity research firm Roskill.
Some additional sectors and trends we will explore are the commercialization of space, the advance of drones and artificial intelligence, the rapid growth of fintech, digital payments and cybersecurity, and of course e-commerce. Another area is specialty and technology materials, which are the oil of the 21st century.
Geographically, the center of gravity is shifting to Asia and the Indo-Pacific, though this comes with new risks as the U.S.-China rivalry and tensions increase, making judgment calls all the more important.
Next week, I will have a new idea for you, most likely in the electric vehicle sector.
Position Updates
Alibaba (BABA) shares retraced this past week from 262 to 249 even though speculation swirled that Alibaba’s 33%-owned Ant Financial may soon go public. Part of this may be due to Jack Ma reducing his stake in BABA from 6.2% to 4.8% over the past year. In other news, citing the company’s cloud computing potential, KeyBanc raised its BABA price target from 255 to 285. Alibaba recently announced plans to invest an additional $28 billion in cloud technology over the next three years, including operating systems, servers, chips and network. The investment is equivalent to about half of Alibaba’s revenue in fiscal 2019. This is a big number considering that its cloud business represented just 6.6% of the company’s overall revenue in fiscal 2019. The segment has been growing at an average of 100% annually over the past five years. HOLD
Cloudflare (NET) shares have gone from 24 to 36 since being added to the Explorer portfolio. In the first quarter, Cloudflare’s revenues surged 48%, reaching $91.3 million as it added 250,000 new customers in the quarter, putting the company’s total customer count at 2.8 million. Sales grew 44% year-over-year in America, and an even more impressive 58% in Europe. JP Morgan has a 52 price target for NET citing Cloudflare’s easy-to-use single platform and freemium option, which allows customers to use the Cloudflare solution for free before deciding on premium options. This strategy is working and I encourage you to buy NET if you have not done so. BUY
Global X Cybercecurity ETF (BUG) lost a point this week but is up 29% so far in 2020. Fueling this ETF forward is higher activity online that requires more cybersecurity measures. The companies in the BUG basket address online security and cybercrime, which has reached an all-time high in the midst of Covid-19. 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 were flat this week and have gone from 50 to 63 since being added to the Explorer portfolio. While below my expectations, this is pretty impressive given that Singapore’s GDP fell in the second quarter at an annualized rate of 41%.
My near-term target price is 70, which is reasonable given the bank’s quality and book value of 55. DBS is perfectly positioned to exploit growth in Southeast Asia with it 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
Direxion Daily FTSE China Bull 3X Shares (YINN) Our trading idea put forward last week of taking a small stake in this leveraged China ETF is not working so I suggest we cut losses quickly and exit the position. Our goal was to capitalize on the recent uptrend in Chinese markets that based on history could have been the beginnings of an enduring bull market. Unfortunately, Beijing poured cold water on the China rally and protests in Hong Kong re-ignited, leading to pushback from Australia, the U.K. and America. Given the uncertainty, I think its best to sell this small position for a 10% loss. SELL
Gilead Sciences (GILD) shares were up slightly this week, though there was some encouraging news regarding its experimental COVID-19 drug remdesivir. Gilead announced comparative analysis results from its phase 3 clinical study of severely ill COVID-19 patients: 12.5% of patients who were hospitalized but did not receive remdesivir died within two weeks; that number was 7.6% for those who did receive it. Additionally, patients who took remdesivir had faster recovery times than patients who didn’t.
The U.S. government has purchased Gilead’s entire stockpile of 500,000 vials of remdesivir. At $390 per vial, that meant $195 million in new revenue. Gilead plans to produce up to 2 million treatment courses (each containing six vials) by the end of the year. At 12 million vials costing $390 each, that’s $4.7 billion in potential revenue, compared with a research and manufacturing cost of about $1 billion to develop the drug. If you haven’t yet purchased GILD shares, I encourage you to buy a half position. BUY A HALF
Kirkland Lake Gold (KL) reported very positive second-quarter gold production numbers as the stock is up nearly 20% over the last month. Gold production was up 54% and gold sales totaled 341,390 ounces at an average realized gold price of $1,716/oz, much higher than the $1,586/oz reported in Q1 2020. Kirkland Lake’s balance sheet is among the strongest in the industry as it benefits from a large net cash position and zero debt.
The miner says it ended the quarter with $537 million in cash and no debt. If you have not yet invested in Kirkland, I encourage you to buy a half position. BUY A HALF
Sea Limited (SE) shares pulled back a bit this week on profit taking but are still up about 180% so far in 2020. Sea’s second-quarter earnings report is expected in August, though the company hasn’t announced a date yet. The consensus among analysts is for revenue to increase 70% and for its loss per share to narrow from $0.52 to $0.48. Sea’s internet market is large and growing fast. 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. Southeast Asia has 416 million internet users and fourth-quarter 2019 e-commerce growth was 37%, or more than three times the rate of increase in the United States. Again, I encourage owners of Sea to take some profits if they have not already done so, and only the most aggressive investors to buy at these levels. HOLD A HALF
Swire Pacific (SWRAY) was largely unchanged in its first week in the Explorer portfolio.
Founded in 1816 and headquartered in Hong Kong, Swire is active in a wide range of commercial activities throughout Asia including aviation, property and retailing. Swire owns and manages significant commercial property, the premier airline Cathay Pacific, 18 Coca-Cola plants and distribution rights in Hong Kong and parts of China and Southeast Asia, plus extensive retail businesses in fashion, food and auto. This Hong Kong blue chip is trading way off its 52-week high and substantially below its book (break-up) value, and I encourage you to buy a full position. BUY
Trip.com (TCOM) shares were moved to a hold last week because they were underperforming the Chinese market but the stock was up 7.4% yesterday so we will give the shares more time. Trip.com is a bet on a recovery in the Chinese economy and thus Chinese domestic travel. The company has recently announced a number of ambitious marketing initiatives, a flex booking guarantee and launched its international initiatives with over 30,000 hotels in 180 countries. HOLD A HALF
VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) shares jumped last Friday but then pulled back to where they started the week. Still, shares have moved from 35 to 39 over the last month. This ETF basket has positions in 20 strategic metal and rare earths companies, with about half of them based and listed in China. These materials are vital to a wide range of advanced technology and defense applications and China has a quasi-monopoly position on many of them. For example, Roskill reported that China is continuing its dominance of rare earth production, accounting for 87% of global production. I encourage you to buy a half position if you have not already done so. BUY A HALF
Virgin Galactic (SPCE) shares look like they will open this morning a bit over 19; our entry price was around 7. Alembic is the third Wall Street firm to pick up coverage of SPCE with a buy rating and a 23 price target. One attraction Alembic noted is that there are more than two million people with a net worth exceeding $10 million and that Galactic only needs about 300 customers a year to hit its initial targets. I reaffirm that SPCE is a strong buy for aggressive investors. This is a fascinating concept stock with a quality management team in a potentially high-growth market. The huge hypersonic point-to-point travel market and Virgin Galactic’s partnerships with Boeing and NASA add considerable credibility to the story. BUY
