The Explorer portfolio had another positive week, as the market is hostage to enacting another politically difficult stimulus package. Count me as skeptical. Stay-at-home stocks are leading the market while economic-recovery stocks struggle. Most overseas markets rose yesterday but Hong Kong’s Hang Seng Index was the one exception. That followed reports that the Trump administration is discussing potential curbs to digital payment platforms developed by Chinese tech companies Tencent Holdings and Ant Group on the grounds of national security.
The SPAC Revolution
A hot trend on Wall Street is a “Special Purpose Acquisition Company,” or in shorthand, a SPAC. Previously, it was referred to as a “blank check” company.
SPACs, which represent an expedited back-door strategy to bring a company public, are all the rage on Wall Street for a number of reasons and all indications are that they will be around for a while. They are generating big fees for banks, raising big capital for entrepreneurs, and in some cases, big returns for investors.
A SPAC is really not all that complicated but like most things, the devil is in the details. SPACs are formed and go public for the sole purpose of raising capital to merge with or acquire another company.
There are two key related factors that allow for a SPAC to raise significant capital by going public before it has identified a business to acquire, normally at $10 a share. The first is the credibility and track record of the company’s management team. The second is the stature of the banking firm handling the transaction for the SPAC.
“It’s SPAC 2.0,” said NYSE Vice Chairman John Tuttle. “They were around a while ago but didn’t have the same appeal. Now, they are larger and have some of the most well-known business leaders sponsoring them, which makes them more attractive to investors.” Here are some of the most talked-about SPACs this year.
• Tortoise Acquisition Corp (SHLL)
• Virgin Galactic (SPCE)
• DraftKings (DKNG)
• Nikola Corp. (NKLA)
The Cabot Explorer got into Virgin Galactic (SPCE) early at around $7 a share and I’m currently evaluating SPACs and will likely have a new SPAC recommendation in next week’s issue. Stay tuned.
Position Updates
Afterpay (APT.AX) shares bumped up to 84 this past, week building on momentum from announcing an expansion into Canada as well as partnership agreements in Spain and Italy. This company is revolutionizing the retail payment industry by effectively enabling interest-free loans at a growing number of retailers. Founded in Australia in 2017, Afterpay has seen heady growth, with revenue zooming from $23 million in 2017 to $218 million in 2019. The company has quickly captured almost 10 million active customers and has 55,000 retailers participating in its network. If you have not already done so, I suggest you purchase shares, which trade on the Australian Securities Exchange. BUY A HALF
Alibaba (BABA) shares are showing some strength as they approach 300 and the stock is now up 71% in the last year and 36% so far in 2020. Often compared to Amazon, Alibaba is projected to deliver a 20% return on equity for 2020, compared to 28% for Amazon. Just last week it announced that its fast-growing cloud arm should be profitable for the first time this year. Alibaba has huge upside in cloud infrastructure in China given that its global market share at the present time is a modest 6%, according to Statista. BABA remains a legacy hold. HOLD A HALF
Cloudflare (NET) shares are benefiting from the pandemic because it is accelerating the company’s plans to expand and protect their digital business arms. Cloudflare is showing impressive momentum as it leverages the company’s network of more than 25 million internet properties in 200 cities and over 100 countries to allow users to access global and regional trends in traffic patterns, view changes in traffic to popular websites over time, and monitor emerging security threats. Cloudflare’s management projects revenue growth of 40% in the third quarter and for the full year. I’m keeping NET at hold for now. HOLD A HALF
Kirkland Lake Gold (KL) shares were flat this week in line with gold prices. Kirkland Lake is a solid allocation to gold for your portfolio due to its outstanding fundamentals, such as strong cash flow, a strong balance sheet with 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 surged to new highs, jumping from 112 to 127, continuing their uptrend initiated in July, and trading well above the stock’s 50-day moving average. Its next earnings are expected on October 29, and I’m expecting signs that the company is getting close to profitability. 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 jumped again this week, from 157 to 167, and are now up 400% in the last year. UBS reiterated a buy rating and a target price of 200 this week. JPMorgan projects that Sea’s e-commerce revenue could grow more than 6x from 2019 through 2022, and gaming remains strong, with its top game, Free Fire, having downloads in excess of 100 million in the last quarter. No change in my hold rating but aggressive investors can add to their position incrementally. If you haven’t already done so, you should take some profits off the table to lock in gains. HOLD A HALF
Taiwan Semiconductor (TSM) shares were up almost 5% yesterday, reaching 87 despite some concerns about the company getting in the middle of the U.S.-China tech cold war. Taiwan Semiconductors has stopped taking new orders from or shipping new wafers to Huawei but will likely remain a step ahead of rivals such as Samsung by starting to produce 3-nanometer chips in low volumes next year. I’ll maintain my rating of buy a half position, but recommend you put a 20% trailing stop-loss in place. BUY A HALF
Van Eck Rare Earth/Strategic Metals ETF (REMX)’s share price got back up into the 40s as rare earths and strategic metals rallied over the last week. I view this ETF basket of rare earth and strategic metals stocks as an effective hedge on rising U.S.-China tensions as well as a play on overall growth in advanced technology.
BUY A HALF
Vipshop Holdings (VIPS) was flat in its first week in the portfolio.
It is the sixth largest e-commerce company in China and has a bit of a different strategy as an online discount retailer. You might think of the company as a Chinese online version of T.J. Maxx, Ross and Marshall’s all rolled into one. In the second quarter, the online retailer saw revenue increase to $3.4 billion as its total orders grew 15% from 147.8 million to 170.5 million. In addition, the number of its active customers jumped 17% to 38.8 million.
Management expects the company’s third-quarter revenue to be just over $3 billion. Its fourth quarter, which includes China’s big Singles Day splurge, could reach $4.8 billion. Trading in the mid-15s, it is far from its 52-week high share price of 24. On a price-to-sales and price-to-book-value basis, VIPS looks inexpensive compared to its larger rivals. Build a half position in advance of expected strong third and fourth quarters. This is an excellent entry point for this stock. BUY A HALF
Virgin Galactic (SPCE) shares were up a couple of points this week after a 25% surge last week. Not much news this week though SPCE is getting a lot of attention as one of the earliest in the recent wave of “Special Purpose Acquisition Companies” (SPACs), which I talked about earlier. This concept stock has captured the imagination of many including about eight Wall Street analysts, all of whom have the stock rated a buy. I remain positive on this stock and encourage you to build a position if you have not already done so. BUY
Visa (V) shares held firm this week at 202. This conservative fintech stock has no loans to worry about collecting so its profit margin consistently stays at or above 50%. Visa will be an excellent core holding supported by a dominant market position. With 55% of its net revenue coming from international markets, Visa has still put up double-digit top-line growth numbers in each of the past seven years. I recommend you buy shares if you have not already done so. BUY
