Portfolio Changes:
DBS Bank (DBSDY) MOVE FROM HOLD A HALF TO SELL
Gilead Sciences (GILD) MOVE FROM BUY A HALF TO HOLD A HALF
Apple (AAPL) Hits $2 Trillion - Sea Limited (SE) Becomes World’s Best Performing Large Stock
My presentation at the Cabot Wealth Summit yesterday was focused on the financial technology (fintech) sector and stocks with Singapore-based Sea Limited (SE) leading this group.
Sea Limited, the best performing large cap stock in the world over the past 18 months, reported $1.29 billion in revenue during the second quarter, up 93.4% year-on-year versus $665.4 in the same quarter last year. This stock is firing on all cylinders and in the below portfolio update section, I lay out more detail on another quarter of high growth.
2020 has surely been one for the record books—the sharpest selloff in history from a record high to a bear market and then the sharpest rebound in history from a bear market to a new record high.
As Apple hit a $2 trillion valuation and the S&P 500 reached new highs led by big data and tech, it’s important to note that the key reason why this snapback since March has been so powerful is the incredible amounts of fiscal and Fed stimulus.
In its annual report earlier this month, the IMF noted that the initial U.S. monetary base expansion was larger than for any other economy, at 8.46% of GDP, relative to the UK’s 3.5%, the Euro zone’s 1.7% and Japan’s 0.9%.
And according to data compared by J.P. Morgan Asset Management, U.S. government spending increases has also been the largest of any major economy, running to around 12.3% of GDP.
Moving to emerging markets, even as the U.S. dollar is trading at a two-year low, many emerging market currencies are sharply down so far in 2020. For example, the Brazilian real is down 25% and the South African rand is down 22%. This is partially due to the pandemic, which has hit these markets particularly hard.
Position Updates
Alibaba (BABA) reported this morning that earnings rose 15% to $2.10 a share in the fiscal first quarter as revenue climbed 34% to $21.76 billion, both accelerating from the prior quarter. Wall Street expected Alibaba earnings of $1.99 a share with revenue at $21.3 billion. Cloud computing revenue jumped 59%. Mobile monthly active users in China marketplaces rose to 874 million in June, up 28 million vs. March.
The biggest challenges for Alibaba going forward are that as a very large company it is difficult for it to post numbers that surprise the market especially given that e-commerce is no longer a two-horse race. JD.com (JD) is challenging them at the top end of the market, and Pinduoduo (PDD) is encroaching in many of the fast-growth lower tier markets which have been elusive to BABA, and is also aggressively expanding into higher tier cities and cross border. BABA remains a hold. HOLD
Cloudflare (NET) shares only grinded out a small gain this week to 39 after this cyber security company reported total revenue of $99.7 million—an increase of 48% year-over-year in the second quarter. Its 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. The consensus price target for NET is right around 50 so I encourage you to buy NET on an incremental basis if you have not done so. BUY
Global X Cyber Security ETF (BUG) gained a point this week as this ETF is now up 29% so far in 2020. I believe this sector will remain in favor and in an uptrend given that demand for cyber security matches or exceeds online activity. BUG is a basket of cyber security stocks with its top ten holdings representing 56% of the basket. Think of this as a conservative way to invest in a competitive fast-growing industry. You may also want to pair BUG with the above Cloudfare (NET) recommendation. HOLD A HALF
DBS Bank (DBSDY) shares lost a little ground this week after reporting last week that net earnings were down 22% year-over-year. Given that Singapore is in a recession and its stock market off 20% so far in 2020, I’m moving this from a hold to a sell. Still a great bank and we will be back to this quality SEA idea down the road. MOVE FROM HOLD A HALF TO SELL
Gilead Sciences (GILD) shares were off 5% yesterday after the company failed to win regulatory approval of an experimental arthritis drug that had been touted as the biotech’s next $1 billion blockbuster.
The rheumatoid arthritis drug filgotinib was seen as a bright spot in the pipeline so the negative letter from the U.S. Food and Drug Administration throws Gilead’s future growth back into question. This stock has lost its momentum and with plenty of alternatives out there, I’m moving it to a hold. MOVE FROM BUY A HALF TO HOLD A HALF
Kirkland Lake Gold (KL) shares jumped earlier this week after and announcement that it inked an agreement with Newmont Corp. (NEM) to jointly evaluate exploration opportunities around the former’s Timmins properties and Kirkland’s Holt Complex. 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. Gold prices will likely go higher and are a good hedge on a weaker U.S. dollar, increased geo-political tensions and the potential negative impact of government deficit spending. BUY A HALF
Novocure (NVCR) shares this week regained some momentum as it is turning the corner on profitability. The company recently reported quarterly net revenues of $115.9 million, representing 34% growth versus the second quarter 2019 and 14% growth versus the first quarter 2020.
A key benefit is that Novocure’s main cancer treatment product Optune is that its devices work in patients undergoing other forms of cancer treatment, including radiation, chemotherapy and immunotherapy. Each of these other three methods has advantages and disadvantages. I estimate that earnings could surge from $0.18 a share this year to nearly a dollar a share in 2021. As doctors become better educated about the effectiveness of the Optune system, sales and profits at Novocure will soar. And so should the stock. Novocure has 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) reported stellar second quarter growth as its shares reached 150 but high sales and marketing expenses still keep this company unprofitable. Sea Limited reported $1.29 billion in revenue during the second quarter, up 93.4% year-on-year versus $665.4 in the same quarter last year.
In the digital entertainment business, adjusted revenue reached $716.2 million, up 61.6% year-on-year, while adjusted EBITDA grew 65.4% to $436.2 million. Quarterly active users reached 499.8 million, an increase of 61%. Paying users grew by 91.2% year-on-year to 49.9 million. According to App Annie, Free Fire continued to be the top-grossing game in both Latin America and Southeast Asia.
Shopee registered accelerating growth during the second quarter, gross orders increased by 150% year over year to reach 615.9 million. Finally, mobile wallet total payment volume increased to more than $1.6 billion in the second quarter versus nearly $1 billion in the first quarter. Quarterly paying users grew by about 50% quarter-on-quarter to more than 15 million.
Sea has become the best performing stock in the world over the last eighteen months. I will keep this a hold but will take a closer look at earnings and consider moving to a buy over the next few weeks. HOLD A HALF
Swire Pacific (SWRAY) shares responded positively to an announcement from Coca-Cola (KO) that it is moving ahead with its plans for Swire Coca Cola to open half a dozen new production facilities in China before the end of 2020. The new bottling capacity will cost approximately $36 million to complete, while the facilities are expected to crank out $244 million worth soft drinks per year. This blue chip is trading way off its 52-week high primarily due to the issue of 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) shares were flat as IBM announced it was launching its advanced Power10 chip to focus on the enterprise hybrid cloud computing market. Samsung Electronics—TSM’s chief competitor, will fabricate this chip. TSM is the world’s largest semiconductor manufacturer, with 56% market share. Its most recent earnings surged 81% on 29% higher revenue, as it margins climbed.
Apple accounts for 23% of TSM revenue last year and the company decided to replace Intel’s chips in its Macs with advanced chips designed by Apple and manufactured by Taiwan Semiconductor. These high performance chips are linked to some power growth trends such as robotics, artificial intelligence, and Internet devices. This is a well-managed 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 in place a 20% trailing stop loss in place. BUY A HALF POSITION
Van Eck Strategic Metals ETF (REMX) shares were flat this week though Japan, concerned about China and fragile supply chains, announced it is increasing its strategic stockpile of these vital materials from 30 days of use to 180 days of use. 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 are up 65% so far in 2020 but have been treading water over the last two weeks due to a recent quarter with little revenue, a new share offering priced at $19.50, and the pushing back of its inaugural flight from 2020 to early 2021. Evolving the company’s technology to enable two-hour hypersonic business flights between distant cities like New York and Sydney has been Virgin’s long-term pitch to investors. While the space economy could generate $800 billion in annual revenue by 2030, the supersonic jet gives Virgin a claim on disrupting the much larger conventional airline market. BUY
