Portfolio Changes:
Gilead Sciences (GILD) MOVE FROM HOLD A HALF TO SELL
BABA Surges on Anticipated Ant IPO; Could Be Blockbuster
The Cabot Global Stocks Explorer portfolio had another good week, with Alibaba (BABA), NovoCure (NVCR), Sea Limited (SE) and Taiwan Semiconductor (TSM) all making major moves.
Last week at our virtual Cabot Wealth Summit, I outlined just why financial technology (fintech) stocks have gained so much momentum this year. This week, quite a bit of media attention is being paid to the upcoming Ant Group IPO on both the Hong Kong and Shanghai exchanges.
The date of the IPO is not yet set and because it will not be listed in the U.S., the Cabot Explorer will not formally recommend it. However, I have an idea that might give you some exposure to Ant’s mega-IPO.
Interestingly, CICC, Citigroup, JPMorgan and Morgan Stanley are sponsoring Ant’s IPO in Hong Kong. If you have brokerage accounts with these firms, you might be able to get an allocation of the Ant IPO.
Here is a brief overview of Ant, which has changed how many Asians spend, borrow, save and invest. The biggest risk for Ant is regulatory risk, as its operations are coming under greater scrutiny despite the fact that it’s more of a financial platform than a financial company.
Ant was spun out of Alibaba (BABA) in 2014, which still has a 33% equity stake in the company.
The Ant Group (formerly Ant Financial) is already the world’s largest fintech company and is being branded as the PayPal (PYPL) of Asia. But it is so much more. The company is built around the Alipay online and mobile payments service, which is used by just about everyone in China as a digital payments platform. Alipay has more than 1.2 billion users, roughly 900 million from China and the other 300 million from other Asian markets. That’s a huge number since PayPal has just 325 million active accounts.
Super app Alipay handled $16 trillion of transactions last year in a country where the use of cash and credit cards are seen as quaint. The company also has relationships with a stunning 80 million merchants.
You can think of the Ant Group as a massive fintech ecosystem – a financial supermarket on a mobile phone. These financial services include wealth management, micro-financing, insurance as well as payments. And unlike a lot of fintech stocks that are soaring, the Ant Group is already profitable. Its prospectus cites revenues of $17 billion last year, up 40% over the previous year, and net profits of $2.5 billion.
The pre-IPO valuation of Ant Group is purported to be at least $200 billion, which is roughly $40 billion less than PayPal but bigger than Goldman Sachs and Morgan Stanley combined.
If you are unable to get Ant IPO shares, you can wait for the aftermarket or
you might get some exposure to the Ant IPO through the Renaissance International IPO ETF (IPOS), a fund that invests in international IPOs.
This ETF is rather small, with just $18 million in assets that are highly concentrated, with its top five holdings representing 45% of total assets and the remaining 55% spread across 35 other stocks. Half of the companies in this ETF basket are based in Hong Kong, with Japan at 10% and Europe at 28%. IPOS is up 26% in 2020 and it stands to reason that they will get some sort of allocation from the Ant IPO in Hong Kong.
Again, the Ant Group is not a formal Cabot recommendation because it will trade only in Hong Kong and Shanghai and IPO shares will be hard to come by. I’m also not adding IPOS to our portfolio, but if you want some exposure to the Ant IPO, that’s the best way to do it.
Take Some Profits Off the Table
Back to markets in America, my only advice is to take advantage of this sharp recovery by taking some profits in the leading tech stocks if you were lucky enough to invest in them as stocks plummeted in March.
While a continued recovery in markets is very possible with interest rates so low and the powerful stimulus of the Fed and Federal spending, this is somewhat offset by frothy valuations.
The price/earnings ratio on the S&P 500, measured against the past 12 months of earnings, stands at 25.26, according to FactSet. That is the highest level since 2002. The forward P/E, measured against earnings expectations for the next year, is at 25.98 – a mark last hit in September 2000. In short, stay the course but it is always a good ideas to take partial profits off the table.
Position Updates
Alibaba (BABA) made a major move this week from 256 to 292 on the back of the formal filing of the Ant IPO. This highly anticipated IPO will be good for Alibaba since it has a 30% stake in Ant.
The Ant IPO comes right on the back of Alibaba’s impressive recent quarterly report, with revenue climbing 34% to $21.76 billion, accelerating from the prior quarter.
The biggest risks for Alibaba going forward are that 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 that have been elusive to Alibaba, and is also aggressively expanding into higher tier cities and across the border. BABA remains a hold. HOLD
Cloudflare (NET) shares recovered ground from a sharp pullback last Friday to finish flat for the week, just under 40.
It is a bit puzzling why the stock has been lackluster given the recent increase in revenue of 48% year-over-year in the second quarter. Its user base also increased 24%, mainly driven by elevated demand for cloud-based solutions amid the coronavirus-led work-from-home wave. I encourage you to buy NET on an incremental basis if you have not done so. BUY
Global X Cybersecurity ETF (BUG) grounded out another gain of a point to reach 23 this week as this ETF is now up over 30% so far in 2020. I believe this sector will remain in favor and in an uptrend given that demand for cybersecurity matches or exceeds online activity. You may also want to pair BUG with the above Cloudflare (NET) recommendation. HOLD A HALF
Gilead Sciences (GILD) shares have lost momentum over the last month and are likely dead money 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.
With plenty of alternatives out there, I’m moving this stock from hold a half to a sell. MOVE FROM HOLD A HALF TO SELL
Kirkland Lake Gold (KL) shares have done well over the last quarter but the stock has been choppy over the last month in line with overall gold prices.
Last week’s announcement that Kirkland inked an agreement with Newmont Corp. (NEM) to jointly evaluate exploration opportunities is a positive development. 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 made a nice move from 67 to 80 this week as the company is turning the corner on profitability. The company recently reported quarterly net revenues of $115.9 million, representing 34% growth versus the second quarter of 2019 and 14% growth versus the first quarter 2020. 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) shares continue their amazing run, going from 110 to 159 over the last month, and are now are up more than 10X from the price at the time of our recommendation last year. Sea’s momentum has been supported by its recent stellar quarterly growth, with $1.29 billion in revenue during the second quarter, up 93.4% year-on-year versus $665.4 in the same quarter last year.
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.
Sea has become the best-performing stock in the world over the last 18 months. I will keep this a hold. HOLD A HALF
Swire Pacific (SWRAY) shares are doing better over the last few weeks as Asian economies rebound from the shutdown and after an announcement that Coca-Cola (KO) 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 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 jumped this week from 76 to 82.
TSM is the world’s largest semiconductor manufacturer, with 56% market share. Its most recent earnings surged 81% on 29% higher revenue, and its margins climbed. 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 a 20% trailing stop loss in place. BUY A HALF
VanEck Rare Earth/Strategic Metals ETF (REMX) shares didn’t do much this week despite rising tensions in both the South China and the East China Seas. 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 have been resilient despite the company’s timetable being pushed back to early 2021. Its shares are up 65% so far in 2020. A recent share offering priced at $19.50 raised capital but diluted shareholders. While the space economy could generate $800 billion in annual revenue by 2030, the supersonic jet gives Virgin an opportunity to disrupt the much larger conventional airline industry. I remain bullish on this company and the stock. BUY A FULL
