S&P 500 Nears Record as Chinese IPOs Continue
Markets are showing great resiliency as the S&P 500 nears a record and stocks have risen all but one day in August. Optimism about an eventual stimulus bill and the prospect of declining Covid-19 cases and a vaccine are still supporting the economy and markets.
However, deteriorating relations between the U.S. and China are raising investor concerns as President Trump signed an executive order banning American companies from working with both TikTok (the popular social-media site owned by Byte Dance) and the WeChat app, with 1.2 billion users owned by China’s Tencent (TCEHY). The WeChat app has expanded beyond voice messaging and texts with services that allow users to post photos and videos. The ban, which takes effect in six weeks, hit Tencent’s stock but it is still up around 40% so far in 2020.
The Trump administration has recommended that Chinese companies listed on U.S. exchanges be given until 2022 to comply with U.S. audit standards, and the U.S. Senate earlier this year passed legislation along those lines, currently being considered by the House. Investors seem to think some sort of compromise will be worked out, or the deadline will be pushed back.
While this cloud over Chinese stocks has to be taken seriously, it is not deterring Chinese companies eager to tap America’s deep financial markets. More than 20 companies from China have gone public so far this year in the U.S. raising $4 billion in total, according to Dealogic data. XPeng Inc., a Chinese rival to Tesla, filed a U.S. IPO application last week.
As U.S. stocks strongly rebound from March 2020 lows and continue their decade-long bull run, there is increasingly speculation as to when international markets will lead the way. Prompting increased interest in international stocks is the weakening of the U.S. dollar.
A reversal is overdue since in the last 10 years the S&P 500 returned 13.84% annualized, including dividends, compared to 5.3%, in dollar terms, for the MSCI World ex-USA Index, and just 3.7% for the MSCI Emerging Markets Index.
This is of course reflected in the valuations of these markets. While the forward price-to-earnings ratio, based on earnings estimates, is 23.8 for the S&P 500, it is a mere 18.5 for the MSCI World ex-USA Index, and just 15.8 for the MSCI Emerging Markets Index, according to Morningstar Direct.
Position Updates
Alibaba (BABA) shares pulled back a bit from 262 to 255, no doubt prompted in part by the executive order banning Tencent’s WeChat app. Alibaba is expecting positive news regarding its impending Ant IPO, and its next earnings report (expected around August 20) should be positive. Analysts expect Alibaba’s revenue to jump 46% in the quarter to $21.1 billion.
Ant owns the popular Chinese mobile payments network Alipay, which has more than 900 million active users in China, and handled nearly 54% of the country’s $29 trillion in mobile-payment transactions last year, according to market research firm Analysys. BABA remains a hold. HOLD A HALF
Cloudflare (NET) tumbled from 42 to 39 this week despite its recent quarterly report showing revenues jumping 48% to $99.7 million year-over-year due to strong growth in its paying customer base. The cloud networking and security solution provider’s paying user base increased 24%, mainly driven by elevated demand for cloud-based solutions amid the coronavirus-led work-from-home wave. NET’s total customer count is approaching 3 million, with roughly 89,000 paying customers across more than 160 countries. I encourage you to buy NET on an incremental basis if you have not done so. BUY
Global X Cybersecurity ETF (BUG) lost a point, going from 22 to 21, in line with the sector being a bit flat this week. I believe this sector will remain in favor and in an uptrend given that demand for cybersecurity matches or exceeds online activity.
I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive, fast-growing industry. You may also want to pair BUG with the above Cloudflare (NET) recommendation. HOLD A HALF
DBS Bank (DBSDY) reported, as expected, net earnings that were down 22% year-over-year but the stock rose slightly, from 59 to 61, highlighting the quality of this bank even in the face of a rather severe recession in Singapore. I moved this stock to a hold last week and we will keep it there as we assess just when Singapore and the Asian region will regain their momentum. This remains a very solid long-term holding but we may soon remove it from the portfolio to make room for new ideas.
HOLD A HALF
Gilead Sciences (GILD) shares were flat this week as the company announced it was seeking complete Food and Drug Administration approval for its drug Remdesivir, which is being used in the treatment of COVID-19. Last week Gilead reported earnings of $1.11 a share and revenue of $5.1 billion for the second quarter. Gilead also increased its earnings guidance for 2020, saying it now expects sales of between $23 billion and $25 billion, up from its original estimate of $22 billion. It expects earnings per share as much as $7.65, up from its earlier top estimate of $6.45. If you haven’t yet purchased GILD shares, I encourage you to buy a half position. BUY A HALF
Kirkland Lake Gold (KL) shares pulled back this week in line with gold prices, which fell three days in a row after seven straight days of appreciation. Investors likely took profits on the precious metal after a rally that has pushed gold to record highs near $2,100 per ounce. Factors pushing gold prices upward include the weakening of the U.S. dollar, concerns about U.S. government finances, and rising tensions in Asia. If you have not yet invested in Kirkland, I encourage you to buy a half position given its strong balance sheet, high value properties and quality of management. BUY A HALF
NovoCure (NVCR) shares fell from 78 to 75 this week after reporting last week quarterly net revenues of $115.9 million, representing 34% growth versus the second quarter 2019 and 14% growth versus the first quarter 2020. Sales growth in China and Japan were particularly strong. NovoCure is well positioned in the cancer treatment niche and the company’s product, Optune, is not a drug; rather, it uses specially tuned electrical fields (Tumor Treating Fields) to disrupt the growth and division of cancer cells in tumors. NovoCure is a still a relatively small company with significant growth potential. I still rate the stock a buy and encourage you to buy shares if you have not done so. BUY
Sea Limited (SE) shares encountered some profit taking this week but recovered 5.5% yesterday to settle at 127. Sea’s first self-made mobile game, Free Fire, has attracted as many as 80 million daily active users in more than 130 markets, and the company’s e-commerce and financial services units are now also important engines of its growth story. Feel free to sell some shares to lock in profits, but we will continue to hold a half position. HOLD A HALF
Swire Pacific (SWRAY) shares were up 4.8% yesterday and offer a 7.8% dividend yield. This Hong Kong deep value play goes back to 1816 and is active in a wide range of commercial activities throughout Asia including aviation, property and retailing. This blue chip is trading way off its 52-week high primarily due to the issue of its struggling Cathay Pacific airlines. The stock is trading substantially below its book (break-up) value and I encourage you to buy a full position with a 6-12 month time frame. BUY
Taiwan Semiconductor (TSM) was just added to the Explorer portfolio last week. It is the world’s largest semiconductor manufacturer, with a 56% market share. This means that it’s helping drive the chip revolution and it will likely continue to for years to come, as some of the biggest and most innovative names in the market turn to TSM to manufacture their chips. Its most recent earnings surged 81% on 29% higher revenue, as its margins climbed.
Apple accounted for 23% of Taiwan Semiconductor’s revenue last year as its largest customer. Apple’s first 5G iPhones, which may launch this September and boost its smartphone chip revenues, accounted for 47% of TSM’s top line last quarter. In addition, Apple recently decided to replace Intel’s chips in its Macs with advanced chips designed by Apple and manufactured by Taiwan Semiconductor. Another reason to buy TSM is that it generated 33% of its revenue from the high-performance computing (HPC) market last quarter, which translates to higher profit margins. These high performance chips are linked to some power growth trends such as robotics, artificial intelligence, and internet devices.
The consensus expects Taiwan Semiconductor’s revenue and earnings to rise 28% and 34%, respectively, this year, which are impressive growth rates for a stock which trades at just 25 times forward earnings. This is a dominant company in a critical area of advanced tech supply chains selling at a reasonable valuation. I recommend you start with a half position and put a 20% trailing stop loss in place. BUY A HALF
VanEck Rare Earth/Strategic Metals ETF (REMX) shares, after peaking at 44, came back to 42 this week but are still performing well overall as concerns are rising over fragile supply chains for these strategic rare earths and technology materials that are primarily sourced and refined in China. I encourage you to buy a half position as both a hedge on U.S.-China tensions and growth in advanced technology, if you have not already done so. BUY A HALF
Virgin Galactic (SPCE) shares took a breather this week as the company sold 23.6 million shares in a secondary offering priced at $19.50 a share, raising about $460 million. This is a good development for the company since it has had to push back the timeline for the beginning of trips to space to the first quarter of 2021. In other positive recent news, the company continues to expand its waiting list for space flights, unveiled plans for a Mach 3 delta-wing aircraft, and signed a memorandum of understanding with Rolls-Royce, one of the world’s leading aircraft engine makers. Take advantage of this week’s small pullback to buy more shares. BUY
