Portfolio cash position: 20%
Portfolio Change: Sell Vipshop (VIPS)
Macro Rules Markets
The Explorer portfolio had another good week despite a sharp pullback by ElectraMeccanica (SOLO). We still have a big profit there, so I advise you to sell half your position and let the rest ride. As you review your stock portfolios going into 2021, I encourage you to take partial profits from your big winners.
On to news affecting our investing world, the House of Representatives passed a bill this week that would lead to the delisting of Chinese stocks from U.S. exchanges if they don’t comply with U.S. audit oversight rules within a three-year window. I comment on this in the below update of Alibaba (BABA).
One of the changes over the years I have noticed is that macro news about the economy tends to impact company earnings, and thus move stock prices, at an increasingly high rate. In a way, Washington has become just as important as Wall Street to stock market performance. So all the market pundits are now on hold as we await what the new administration will do, when the vaccine will be widely available, and just when a big stimulus bill will make it out of Washington alive.
This “macro first” attitude is summed up nicely by a quote from Derek Halpenny, head of research at MUFG Bank: “Why would you be a seller of stocks when you know that policy support, both fiscal and monetary, is there and probably will be there going forward?
This brings me to two very different budget and spending strategies from Mexico and Brazil, and their respective impact on stock markets. Mexico’s leftist President Andrés Manuel López Obrador has, despite the pandemic, doubled down on budget discipline. Mexico’s stimulus is just 0.6% of gross domestic product (GDP), according to the International Monetary Fund. At the other extreme, Brazil’s stimulus amounts to a whopping 8.3% of GDP. The result is Mexico is expected to end the year with a budget gap of just 4% of GDP while Brazil’s will be almost 17% of GDP, according to Fitch Ratings.
The payoff for Mexicans will hopefully come next year but Brazilians are, you guessed it, moving money to its stock market as interest rates in Brazil have fallen sharply, from double digits to a historic low of 2%. There are now three times as many investors in the Brazilian market as there were two years ago. And they are all piling in to the small number of big Brazilian companies. What I’m searching for is the best Brazilian trading play and a longer-term Mexican stock for 2021.
We’ll have a new idea on one those fronts next week.
Position Updates
Afterpay (APT.AX) shares breached 100 as the company announced that it hit a new monthly sales milestone in November 2020 by delivering over $2.1 billion of monthly underlying sales, more than doubling the $1 billion of underlying sales in November 2019 (up 112%). The total number of customers that have signed up to Afterpay in the U.S. now exceeds 13 million. The U.K. continued to drive strong underlying sales growth (up 315%) through November with the number of merchants on the platform increasing by 800% compared to November 2019. If you have not already done so, I suggest you purchase shares on the Australian stock exchange, which offers by far the best liquidity. BUY A HALF
Alibaba (BABA) shares drifted lower this week, from 276 to 261, as the House of Representatives on Wednesday unanimously passed a bill that would lead to the delisting of stocks such as Alibaba from U.S. exchanges if they don’t comply with U.S. audit oversight rules within a three-year window. Let’s see how Alibaba responds this week. I think it is probably premature to sell BABA but some investors may wish to switch to Alibaba’s Hong Kong listing (9988) to avoid this issue altogether. Part of the weakness in the stock of late is no doubt due to the delay in the IPO for Ant Group, which some believe will not happen until the middle of 2021. For now, BABA remains a legacy hold and a key core holding for investors looking for a quality stake in the emerging Chinese consumer. HOLD A HALF
Cloudflare (NET) shares have more than doubled since early September and have appreciated by around 300% year to date. KeyBanc Capital Markets initiated coverage of Cloudflare, with a price target of 87, highlighting that its platform could over time address a market size of $69 billion. Cloudflare recently reported third-quarter earnings, 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, after an explosive run-up, have come back to earth in the last 10 days or so, from over 12 to about 7. Electric vehicle stocks have pretty much pulled back as a group. Even so, we have a big profit, so if you have not sold any shares, sell about half your position and book some profits. 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. If you have not yet bought shares of SOLO, you can still do so now, but I would do it incrementally. SELL A HALF, HOLD A HALF
LogiQ (LGIQ) shares moved from 7.8 to 8.4 during the last week and the stock has more than doubled over the last six months. This 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
MP Materials (MP) shares were up marginally this week and have risen 24% in the last month. MP Materials is the only major rare earths resource in the Western Hemisphere. Its primary rare earth products are key ingredients in permanent magnets that power the traction motors of electric vehicles, robotics, wind turbines, drones and many other high-growth, advanced motion technologies. 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
NeoGenomics (NEO) shares moved from 45 to 47 in their first week in the Explorer portfolio. NeoGenomics operates a network of cancer-focused testing laboratories in the United States, as well as laboratories in Switzerland and Singapore. The company is the world’s leading oncology testing company for doctors, pathologists and hospitals, serving more than half a million patients each year. NeoGenomics’ strength is that it is entirely focused on cancer testing rather than trying to diversify into related business segments. As Chief Strategy Officer Bill Bonello says, “If there is an oncology test to be done, we do it.”
The stock has been in a strong uptrend and revenue should accelerate in 2021 as pent-up demand drives catch-up testing. This is an aggressive play with a leading company in a critical, high-growth market. BUY A HALF
NovoCure (NVCR) shares made a very nice move from 121 to 130 and the stock has more than doubled in 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 of its innovative therapy, Tumor Treating Fields. Despite its nice move, I still rate it a buy for long-term investors that have not yet purchased shares. BUY A FULL
Sea Limited (SE) resumed its charge this week, advancing from 175 to 185.
Though the stock is up more than 320% so far in 2020, aggressive investors can add to their position at these levels, but I will keep Sea as a hold and encourage holders to take some profits if they have not already done so.
Sea is Southeast Asia’s biggest internet platform, with 40 million daily active users. The stock has benefited from strong tailwinds during the COVID-19 pandemic, rising 4x in the last six months. Sea’s business operations are in the e-commerce, gaming, and payments space, which have seen strong user adoption over the last few years. Given the macroeconomic factors (such as the rise of the middle class and increased smartphone penetration) and demographic shifts (young population) in Southeast Asia, SE will continue to see strong growth over the next few years. HOLD A HALF
Taiwan Semiconductor (TSM) shares rose sharply to 104 and then settled at 100. This company is a dominant global semiconductor chip fabricator with tremendous economies of scale in a capital-intensive industry. 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 were flat this week even as the company recently reported that orders in the third quarter increased 35% year over year, total net revenue increased 18.2%, and net income surged 42%. I suggest we sell this stock to book some nice profits (57% in two months!) as the company announced it is moving to the very competitive arena of offline retailing. It is also probably the weakest performer in the portfolio. MOVE FROM BUY A HALF TO SELL
Virgin Galactic (SPCE) shares have zoomed from 18 to 28 over the last month. The stock benefitted from the renewed attention to the commercial space sector 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, this remains your best way to gain 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 can buy at these levels ahead of 2021 developments. BUY A FULL
