Portfolio cash position: 25%
Expectations Rule
Markets steadied this week as the political situation became clearer and prospects for Covid-19 vaccines becoming available in the first half of 2021 seem more promising. The Explorer portfolio performed well this week, with a couple of ideas breaking out to new highs.
Still, as markets again approach and attempt to move new highs, I remain selective with new ideas and always suggest taking some profits on positions that have done particularly well. Remember that with great success come great expectations.
One company that fits that description is Sea Limited (SE), which just reported third-quarter financial results. This Singapore-based company’s revenue doubled to $1.2 billion for the quarter and it boosted annual forecasts for two key businesses. But the stock pulled back a bit as quarter-on-quarter growth in e-commerce gross merchandise value dropped to 16%, from 29% in the second quarter.
Nevertheless, the stock is still up more than 300% so far in 2020 and its shares have surged about 1,400% since the start of 2019, sending its market value to more than $80 billion. Revenue at its gaming group, Garena, increased 73% to $569 million while revenue from Shopee and other services climbed 113% to $489.5 million. Still unprofitable, Sea’s total sales and marketing expenses in the third quarter increased 87% to $471 million.
But if you look at the quarter on a year-over-year basis, the trend line is both explosive and impressive.
Gross orders and gross merchandise volume are also strong.
In Indonesia, where Shopee is the largest e-commerce platform, it registered over 310 million orders in the third quarter, or a daily average of around 3.4 million orders, an increase of more than 124% year-on-year. Separately, a new report from Google, Temasek Holdings, and Bain & Company showed that demand in Southeast Asia for online services, including e-commerce and digital payments, has skyrocketed. But Garena is their big profit center, thanks mostly to their Free Fire game, which is extremely popular in Latin America and Southeast Asia. More recently, it has entered the India market.
While I’ll maintain my hold rating on Sea, aggressive investors may wish to add shares here and you if have not taken any profits along the way of Sea’s tremendous run, I encourage you to sell some shares to book some profits ahead of 2021.
At some point, Sea’s growth will slow and management will need to be ahead of the curve in managing the market’s expectations. This may actually help the stock since this might be the inflection point for Sea to see growth balanced with profitability.
Position Updates
Afterpay (APT.AX) shares lost a little ground this week, falling from 99 to 97, a week after the company inked a partnership with Gap. Two weeks ago, the company reported that underlying sales increased 115% to $4.1 billion on a year-over-year basis. Active global customers increased 98% to 11.2 million and active merchants increased by 70%. If you have not already done so, I suggest you purchase shares on the Australian stock exchange. The stock also trades OTC in the U.S. under the ticker symbol ATFPF, but the liquidity is poor.BUY A HALF
Alibaba (BABA)
shares continued to pull back this past week, from 267 to 255, even after the company reported a massive $75 billion haul in gross sales from its one-week Singles’ Day shopping event. About $5 billion of this revenue was attributed to sales of American products and services. For some perspective, the sales number for the first Singles’ Day event in 2009 was $7.5 billion. The impact of Chinese regulators delaying the very much-anticipated IPO for Ant Group, in which Alibaba has a 30% equity stake, has to be the key issue here. BABA remains a legacy hold and a key core holding for investors looking for a quality stake in the emerging Chinese consumer. Long-term investors should consider adding some shares.HOLD A HALF
Cloudflare (NET)
shares have hit the pause button after the stock has more than doubled since early September. Cloudflare recently reported third-quarter results and revenue growth accelerated at a year-over-year clip of 54%. Large customers delivered a 75% conversion rate from free to paying customers and the company delivered a record-level addition of about 100 new large enterprise customers. I will keep NET a hold at these levels.HOLD A HALF
ElectraMeccanica (SOLO)
shares have been on a tear since being added to the Explorer portfolio. The stock has more than doubled in the last 10 days alone, jumping from 3.4 to 6.9. The company has been quietly laying the groundwork to bring to the U.S. west coast and then Europe and Asia a single-seat, three-wheel electric car (dubbed the Solo), and the company plans to open six new retail locations across the western U.S. within the next month. There are 4.6 million commuters in Los Angeles with an average 30-minute commute – an ideal market for the Solo. This is a speculative idea that will attract some serious media attention into 2021 and has a chance to scale up in America and beyond. SOLO remains a buy though I would be more aggressive on any pullbacks.BUY A HALF
*Fortress Value Acquisition Corporation (FVAC) is now trading as MP Materials (MP)
MP Materials (MP)
shares moved from 13.7 to 15 in their first week in the Explorer portfolio. The company owns and operates one of the world’s largest integrated rare earth mining and processing facilities in Mountain Pass, California. It is the only major rare earths resource in the Western Hemisphere. Its primary rare earth product is Neodymium and Praseodymium (NdPr)—key ingredients in permanent magnets which power the traction motors of EVs, robotics, wind turbines, drones and many other high-growth, advanced motion technologies. The stock is on an uptrend as the merger is progressing and also due to rare earths becoming more and more of a strategic priority and national security issue as it becomes clearer that the U.S.-China rivalry will continue no matter which party runs Washington.This is a speculative idea with a strong management team and represents a play on climate change tech and, in particular, clean energy such as wind power and electric vehicles.BUY A HALF
LogiQ (LGIQ)
shares were up 13.8% yesterday after a sharp pullback earlier in the week following an earnings report that showed revenue declining 22%, which was partially offset by increased revenue from DataLogiq consumer data management platforms. Revenue for the nine months ended September 30 increased 27% to $31.3 million. The company is a New York-based leading global provider of e-commerce, mobile commerce, and fintech business enablement solutions for three big markets: Southeast Asia, Europe and the United States. LogiQ’s stock is trading at less than three times 2020-projected revenue. This is an aggressive idea and I suggest you buy shares if you have not already done so.BUY A HALF
NovoCure (NVCR)
shares were flat this past week as NovoCure reported revenue growth of 44% in the third quarter, with the number of active patients increasing 22% year over year. Shares have more than doubled over the last six months. NovoCure is a global oncology company working to extend survival in some of the most aggressive forms of cancer through the development and commercialization of its innovative therapy, Tumor Treating Fields. I encourage you to take advantage of the stock’s recent dip to buy shares if you have not already done so.BUY A FULL
Sea Limited (SE)
shares have been up and down since topping out at 186 two weeks ago; they opened Thursday trading at 167. Please see the introduction for an extensive update and recommended action on Sea. Aggressive investors can add to their position at these levels but I will keep Sea as a hold.HOLD A HALF
Taiwan Semiconductor (TSM)
shares made a nice move from 91 to 97 on significant volume—always a good sign. This company is a dominant global semiconductor chip fabricator with tremendous economies of scale in a capital-intensive industry. Since the beginning of 2004, Taiwan Semiconductor shares have returned almost 1,000% while Samsung’s have gained more than 400%, and Intel less than 100%.China recently announced major investments in its semiconductor industry though the country is several generations behind Taiwan Semiconductor, which dominates global chip fabrication with a market share of 56%. The company delivered an impressive return on equity of 31% in its most recent quarter. I maintain a buy rating on the stock. BUY A HALF
Vipshop Holdings (VIPS) shares moved from 22.3 to 23.4 this past week on top of positive third-quarter earnings. Total orders in the third quarter increased 35% year over year, total net revenue increased 18.2%, and net income surged 42.1%. You might think of the company as a Chinese online version of T.J. Maxx, Ross and Marshall’s all rolled into one. I suggest you buy this stock if you have not already done so in anticipation of learning the results of Singles’ Day shopping’s impact on its upcoming fourth-quarter financial results. BUY A HALF
Virgin Galactic (SPCE) shares rose from 21 to 22.6 despite the company’s announcement that it is delaying its first powered test flight scheduled from November 19-23 due to spiking coronavirus cases in New Mexico. But attention on the commercial space sector jumped this week with Elon Musk’s SpaceX launching its first operational crewed mission to the International Space Station. As the only pure play space tourism stock in the public markets, SPCE remains your best way to play for exposure to this megatrend. If the next two missions run smoothly, Virgin Galactic plans to send founder Richard Branson up in the first quarter of 2021. Aggressive investors should be buying at these levels ahead of 2021 developments. BUY A FULL
