Portfolio Changes:
Cloudflare (NET) FROM BUY A FULL POSITION TO SELL A HALF/HOLD A HALF
Swire Pacific (SWRAY) FROM BUY TO HOLD
Tech Volatility Likely to Stay
Markets were abuzz this week with talk of a “tech meltdown,” with Tesla (TSLA) getting hit rather hard on Tuesday, falling more than 20% before bouncing back 10% yesterday. What is left unsaid is that Tesla was up 74% in August alone. Don’t misunderstand me—I’m in no position to try to predict where the markets go next. But it seems the right time to take some profits and diversify into some areas outside of big tech, such as Explorer recommendations Virgin Galactic (SPCE), Taiwan Semiconductor (TSM) or Kirkland Lake Gold (KL).
As I’ve said before, it would be foolish not to take some profits in big tech after their snapback since March. Just take a look at this graph, which shows that the 2020 gain in market value for the leading five tech titans exceeds the gain of the entire 500 companies in the S&P 500 index.
The next couple of months are sure to be impacted by what is shaping up to be a turbulent election. The Explorer portfolio after today’s changes has a 25% cash position, which I’d like to keep, and perhaps increase a bit.
Position Updates
Alibaba (BABA) shares pulled back from 290 to 273 this past week, no doubt impeded by tech weakness. BABA was up 14% in August and on August 20 reported a solid first quarter, with revenue up 30%. The much-anticipated Ant IPO will be reviewed, and I’m sure approved, by the Shanghai Stock Exchange on September 18. The biggest challenges 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. BABA remains a hold.
HOLD
Cloudflare (NET) shares pulled back from 39 to 34, and while the fundamentals are strong, the stock does not look good from a technical point of view, having lost some momentum. Looking ahead, Cloudflare sees revenue growth in the range of 39% to 40% in the third quarter and 41% to 42% for the full year with international business accounting for over 50% of its revenue. It continues to invest in international growth as part of its strategy to expand its global customer base. Cloudflare’s revenue has grown at a compounded annual rate of 50% from 2016 through 2019 and the company currently has over 3 million customers.
Let’s lock in some profits by selling half our position and holding the balance. MOVE FROM BUY A FULL POSITION TO SELL A HALF/HOLD A HALF
Global X Cybersecurity ETF (BUG) shares performed in line with the market, as this ETF is now up over 35% so far in 2020. I believe this sector will remain in favor and in an uptrend given that current demand for cybersecurity matches or exceeds online activity. If you have not yet invested in this sector ETF, now would be a good time to do so. HOLD A HALF
Kirkland Lake Gold (KL) shares went from 51 to 54.5 this week, rebounding nicely yesterday. Based on the company’s aggressive buyback program, industry-leading margins and its stock trading at about 12 times estimated earnings, I think Kirkland should be a core gold stock.
Kirkland Lake is a company that excels at generating strong cash flow, producing $418 million in free cash flow through the first half of 2020.
The company also has a strong balance sheet that features a cash position of $537 million and no debt. BUY A HALF
NovoCure (NVCR) shares bucked the market this week, gaining a little ground and demonstrating impressive relative strength, going from 67 to 86 over the last two weeks. Its next quarter will be important to confirm strong top-line growth and that the company is close to turning positive on the profit front. 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 experienced some profit taking this week, closing yesterday at 142. If you have not yet done so, you should take some profits on this stock, which is up 250% in 2020 and has gone up 10X since it joined the Explorer portfolio in 2019. Sea has put up very impressive growth numbers but is not expected to be profitable until late 2022.
Sea’s rise has been supported by its stellar second-quarter growth, with revenue up 93.4% and active users increasing of 61% year over year.
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, with gross orders increasing by 150% year over year. I will keep this a hold. HOLD A HALF
Swire Pacific (SWRAY) shares were again flat this week, and while I knew some patience was necessary for this idea, I’m going to move this to a hold.
I don’t see much downside risk for this stock because it is a premium conglomerate trading substantially below its book (break-up) value. We may end up needing to move this out of the portfolio to make room for new ideas but I have to think that over time it will do well. MOVE FROM BUY to HOLD
Taiwan Semiconductor (TSM) shares held their ground this week as chip makers such as Nvidia (NVDA) and Advanced Micro Devices (AMD) took a tumble.
The company’s most recent earnings surged 81% on 29% higher revenue, as its margins climbed. Taiwan Semiconductor is producing chips at a scale of 5 nanometers. In comparison, Intel is making chips at 10 nanometers. Circuit widths on chips are measured in nanometers, which are one-billionth of a meter. Smaller circuits translate to faster, more power-efficient processors.
Taiwan Semiconductor hopes to stay ahead of rivals such as Samsung by starting to produce 3-nanometer chips in low volumes next year, with sizable production set for the second half of 2022. 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 seem to be facing some resistance at around 42 but I think this is a smart bet and hedge on rising tensions between the U.S. and China increasing the possibility of supply disruptions. 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 gained a point this week after selling off with tech on Tuesday, as UBS initiated coverage on the company with a buy rating and a $25 price target, stating that the company is uniquely positioned over the next five years. The UBS analyst believes that commercial space tourism could become a $38 billion-per-year business by 2030.
This follows Cowen Investment Banking picking up and recommending the stock last week. Based on a Cowen survey, analysts see a total potential market of 2.4 million people with a net worth of more than $5 million globally. It then estimates Virgin Galactic can potentially fly about 3,400 passengers per year to suborbital space by 2030.
In other news, Virgin Galactic announced plans to conduct its next crewed spaceflight test on October 22 from Spaceport America in New Mexico. The flight will be the first of two that the space tourism company has planned to complete testing of its SpaceShipTwo spacecraft system, and should have just two test pilots on board. If the next two test spaceflights succeed, Virgin Galactic has said it plans to fly founder Sir Richard Branson in the first quarter of 2021. I remain positive on this company and stock and suggest you build a full position. BUY
Visa (V) was added to the Explorer portfolio just last week and opened in a tough week for tech-related stocks, falling from 214 to 204. There are several reasons that I like Visa and encourage you to buy shares now if you have not already done so.
First, Visa could be seen as a fintech venture fund. Recent acquisitions include Plaid, Earthport, Verifi, Payworks, and Bell ID. All this has enabled Visa to deepen and broaden its suite of products. Second, Visa does not lend any money or take any credit risk.
Next, Visa’s markets are almost infinitely scalable. Between 2008 and 2018, Visa expanded its share of credit card-based network purchase volume in the U.S. from 42% to 53%. More than half (55%) of its net revenue generated in the most recent fiscal year came from international markets.
Despite being a massive company in a stable product category of financial services, Visa is still putting up double-digit top-line growth numbers, with revenue up 11.5% in fiscal 2019 to $23 billion. And in each of the past seven years, Visa’s operating margin has been above 60%, leaving plenty of cash flow to fund new products and services.
The chart for Visa also looks great, with the stock in a nice uptrend and the stock trading at a lower price-to-earnings multiple than MasterCard.
The clincher for me is that Visa is a bridge between the online and offline, digital and cash. Globally, more than 80% of all transactions are still being conducted in cash. This means regions like Southeast Asia, Africa, and the Middle East can offer double-digit long-term growth potential. BUY
