Portfolio Changes:
Global X Cybersecurity ETF (BUG) from hold to sell
30% cash position
Tech Pulls Back as Market Wobbles; Emerging Markets Are Cheap
That tech stocks would cool a bit has been one of my key themes over the past few issues; and September has seen it come to pass. The S&P 500 has fallen 9.6% from its September 2 peak and the Nasdaq is down 11.8%. Though it may fall further still, you might think of this more as a market reset. We will likely see a broader market advance going forward.
But the markets are a bit wobbly here and that includes Asia, as uncertainty regarding the upcoming election, the pandemic and economic recoveries in key nations increases. Gold is also off due to lower expectations of inflation.
After taking some profits from your winners and weeding out a few poor performers, you likely have some cash available to put to work. If you have a little bit of patience, you could do worse than exploring emerging markets. These countries contain about 80% of the world’s population and almost 60% of GDP, more than double their share from two decades ago.
Take, for example, the WisdomTree Emerging Markets High Dividend Fund (DEM). This ETF covers 17 different emerging markets and gives broad exposure with a strong value tilt. The stocks in this basket tend to be conservative with high dividends.
These stocks as a group look incredibly cheap right now. The fund’s average holding has a price-to-earnings ratio of 7.9, a price-to-sales ratio of 0.6, a price-to-book value of 0.87 and a 5.7% yield. Contrast this with the S&P 500 index, which has a price-to-earnings ratio of 22.6, a price-to-sales ratio of 2.1, a price-to-book value of 3.3 and a dividend yield of 1.8%.
This is the sort of ETF that you could tuck into your portfolio and forget about. Meanwhile, I’ll be putting forth some specific emerging market stocks in the coming weeks for our Explorer portfolio.
Position Updates
Afterpay (AFT.AX) shares moved from 74 to 78 in their first few days in the Explorer portfolio – before sinking back to 74 today. Founded in Australia in 2017, Afterpay has experienced heady growth with revenue going from $23 million in 2017 to $218 million in 2019.
This company is revolutionizing the retail payment industry by effectively enabling interest-free loans at a growing number of retailers. With Afterpay, a consumer pays 25% of the purchase price, and Afterpay covers the rest. No wonder the company has almost 10 million active customers around the world, and 55,000 retailers participating in its network.
This stock has been a rocket but recently a new development has caused it to pull back, providing us with an attractive entry price. Take advantage of this pullback in Afterpay’s share price to build a half position in this momentum stock. BUY A HALF
Alibaba (BABA) shares pulled back sharply late last week but rebounded nicely to close Wednesday trading at 272. It is important to note that Alibaba’s core commerce business, which generated 87% of its revenue last quarter, is its only profitable unit. So e-commerce subsidizes unprofitable businesses such as its cloud, digital media and entertainment units. Still, for such a big company, it is posting some nice numbers and analysts expect its revenue and earnings to rise 37% and 24%, respectively, in 2020. Its cloud business growth is really impressive and it seems to be having some success pushing into lower-tier cities to push back smaller rival Pinduoduo. BABA remains a legacy hold. HOLD A HALF
Cloudflare (NET) shares had a great week, jumping from 35 to almost 40, which is more in line with the company’s strong fundamentals. Cloudflare’s management projects revenue growth of 40% in the third quarter and for the full year with international business accounting for over 50% of its revenue. Cybersecurity is still very much a strong secular growth trend and Cloudflare currently has over 3 million customers. I’m keeping its rating a hold for now but if you haven’t yet bought NET, I’m fine with doing so now. HOLD A HALF
Global X Cybersecurity ETF (BUG) shares grounded out another small gain as this basket of stocks tap into the investment theme of cybersecurity – one of the fastest-growing segments of IT spending. However, due to recent lack of relative strength and a desire to raise the Explorer’s cash position, I’m moving this to sell, though I believe this is a fine long-term core ETF holding. MOVE FROM HOLD A HALF TO SELL
Kirkland Lake Gold (KL) shares came back this week in line with gold prices, which tumbled from $1,959 an ounce to $1,866 an ounce. I would stay the course with Kirkland Lake, a Canadian 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, lots of cash, little debt and industry-leading margins. I suggest you take a position in Kirkland and buy more at current prices if you want a larger allocation to gold. BUY A HALF
NovoCure (NVCR) shares, after surging 35% in two weeks, took a breather this week but did well considering the weakness in tech stocks. The company’s next quarter will be important to reassure investors that its recent growth is accelerating and that the company is making progress on the profit front. NovoCure is 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 were higher this week – a good sign in a tough market. Sea’s e-commerce arm Shopee has increased commission fees in Taiwan, Vietnam and Indonesia while JP Morgan projects that Sea’s e-commerce revenue could grow more than 6X from 2019 through 2022.
Gaming remains strong with its top game Free Fire having downloads in excess of 100 million in the latest quarter. Free Fire is also the top game in India now, with more games in the development pipeline. In addition, the company launched a fresh-food delivery app in Indonesia today, showing its ability to break into new markets, and challenging the local leader, Grab.
I will keep this a hold but any significant pullback will likely move my rating to a buy. HOLD A HALF
Taiwan Semiconductor (TSM) shares weakened in line with the tech sector as the company has become caught up in the China-U.S. tension and has stopped taking new orders from or shipping new wafers to Huawei. Taiwan Semiconductors accounts for 56% of global chip production and plans to stay a step 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 confirm a buy rating for a half position and suggest you put a 20% trailing stop-loss in place. BUY A HALF
VanEck Rare Earth/Strategic Metals ETF (REMX) shares have slipped below 40 so if you have not already done so, I encourage you to buy a half position as a hedge on rising U.S.-China tensions and as a play on overall growth in advanced technology. BUY A HALF
Virgin Galactic (SPCE) shares drifted a point lower this week on no news.
The stock seems to be in a bit of a dead space right now since the pandemic has put off plans for its first space tourism launch with Sir David Branson, pushing it back from later this year to the first quarter of 2021. UBS and Cowen analysts have both picked up the stock in the last several weeks and are recommending SPCE. Based on a Cowen survey, analysts see a total potential market for Virgin Galactic 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. I remain positive on this growth concept stock and suggest you build a full position. BUY
Visa (V) shares are just the type of stock you should own in this market. They have not done much for us so far but I’m convinced they will be an excellent core holding going forward. Visa’s market position is dominant with its share of credit card-based network purchase volume in the U.S. already at 53%. In addition, more than half (55%) of its net revenue generated in the most recent fiscal year came from international markets. Visa is still putting up double-digit top-line growth numbers and in each of the past seven years, its operating margin has been above 60%, leaving plenty of cash flow to fund new products and services. Take advantage of recent weakness by filling out a full position. BUY
