Portfolio cash position: 20%
Portfolio changes:
Alibaba (BABA) FROM HOLD TO SELL
Virgin Galactic (SPCE) FROM BUY TO HOLD
What to do with Alibaba?
As we head into a new year, I would like to thank all of you for your support and wish you all both good health and profits in 2021. But today, we have a piece of unfinished business that needs to be dealt with - Alibaba (BABA).
Alibaba has been a holding far longer than when I took over this advisory service two years ago and has recently been a legacy hold. It is one of the giants of China’s economic rise and a platform that touches just about every Chinese citizen. As such, in many quarters it is seen as a proxy for the Chinese consumer. In terms of revenue growth, the company continues to perform and as you can see from the chart below, is putting up numbers over the past two years that exceed the big tech darlings of America.
Unfortunately, the performance of it share price has been disappointing over the last year. It will end the year just about where it started. It was displaying some real strength from a March low of 181 to reach 310 in mid-October but since then, the news has all been bad.
The mandarins in Beijing put the much-anticipated IPO of the high-flying Ant Technology on hold. Worse, the directives seem to indicate that regulators are clipping its wings, curtailing its ambitions into high-growth financial services. In short, turn it into a bank. Then it appears that Alibaba is being investigated for anti-trust reasons, just like Amazon and Facebook. This overall uptick in government oversight is a cloud that will likely darken over time. Then, there is the legislation moving through Congress that could lead to Alibaba’s de-listing if it doesn’t meet SEC disclosure requirements.
The asset side of the Alibaba story is obvious. The Chinese consumer is just getting going, the company will remain dominant in e-commerce, and on top of that are Alibaba’s growth businesses such as cloud computing, and digital entertainment, all with attractive market growth rates. Also, after the recent sell off, Alibaba stock is trading with a forward price/earnings ratio under 20 while Amazon (AMZN) is close to 70, and even Tencent (TCEHY) is at 28.
It all comes down to expectations. I can easily see Alibaba (BABA) getting back well over 300 in 2021 provided we have a decent market. But our rule of thumb is that we want most ideas to have a chance of doubling under these circumstances so I’m removing the stock from the Explorer portfolio.
Position Updates
Afterpay (APT.AX) shares resumed their rise going from 97 to 115 during the past week as the company announced rapid growth in Canada. On average, Afterpay’s Shop Directory generates 19 million referrals per month globally to its merchant partners. Afterpay has been proven to help customer conversion rates increase by more than 20% and average order values increase by more than 25% compared to all other payment methods. If you have not already done so, I suggest you purchase shares incrementally on the Australian stock exchange, which offers by far the best liquidity. BUY A HALF
Alibaba (BABA) shares are underperforming and so we are moving this to a sell. Please see introduction for more information. MOVE FROM HOLD A HALF TO SELL
Cloudflare (NET) shares drifted lower over the last week from 83 to 78 but have had a huge run in 2020, up 350% with just a day remaining in the year. In other words, the company started 2020 with a valuation of just over $5 billion and it’s now worth over $25 billion. As companies continue to allow their employees to work from home, Cloudflare benefits. Identity and security needs continue to make this a viable and even preferred cloud play. Think of it as an Internet infrastructure play that helps deliver and secure the data and services traveling across the Internet. I will keep NET a hold at these levels and advise you to sell some shares to lock in some profits. HOLD A HALF
Companhia de Saneamento Basico do Estado de Sao Paulo: SABESP (SBS) shares have been flat over the last two weeks going from 8.8 to 8.6.
SABESP is a conservative water play in Brazil. This is a great monopoly opportunity that is majority owned by the state of Sao Paulo. The company provides water and sewage services to over 26 million people in 365 of the 645 municipalities in the State of Sao Paulo. I like SABESP because the company has plenty of room to grow in its monopoly territory of Sao Paulo with 18 million not yet connected to its services. In addition, the company is expanding to other regions in Brazil, and even in neighboring countries. It is trading at about 12 times projected earnings, quite a bit off its 52-week high. SBS is an excellent water play in a country with a stock market in a strong uptrend. BUY A HALF
ElectraMeccanica (SOLO) shares are up 179% in the fourth quarter but only marginally higher in the last two weeks. Three weeks ago, I advised to sell half of the shares you purchased and this seems to have been a wise move.
The stock has been treading water recently. This is understandable given a run that is way ahead of sales, which are just getting going on the West coast. There are some short sellers out there and electric vehicle stocks have pretty much pulled back as a group. This is 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, let’s hold off for now. HOLD HALF OF A HALF
LogIQ (LGIQ) shares have been volatile over the last two weeks but closed yesterday at 10.5, down from 12.75 on December 17th. I recommended at that time to lock in some profits as we head into 2021. This fintech and payments stock is still up more than 40% for us. LogIQ 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 just over three times 2020-projected revenue. This is an aggressive idea and I suggest that investors that can deal with some volatility buy shares only incrementally at these levels. BUY A HALF
MP Materials (MP) shares pulled back over the last week from 39 to 33 after surging 30% the previous week. 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 EVs, robotics, wind turbines, drones and many other technologies. This is a speculative idea so feel free to take some profits. I’m keeping this stock a hold until it comes back a bit more. HOLD A HALF
NeoGenomics (NEO) shares are up 20% since being recommended five weeks ago. NeoGenomics operates a network of cancer-focused testing laboratories in the United States, Switzerland, and Singapore. It is the world’s leading oncology testing company for doctors, pathologists, and hospitals, serving more than a half a million patients each year. Revenue should accelerate in 2021 as the pandemic recedes and pent up demand drives catch-up in-person testing. This is an aggressive play with a focused company in a critical, high growth market. You can still buy shares here if you have not yet bought any shares. BUY A HALF
Novocure (NVCR) shares continued to demonstrate relative strength over the last two weeks going from 157 to 175. This company and stock is getting more attention given its remarkable cancer treatment device called Optune that uses electric fields at specific frequencies to interrupt cell division. Despite its nice move, I still rate it a buy for long-term investors that have not yet purchased shares. BUY
Sea Limited (SE) shares have lost some momentum over the past month as it recently completed a secondary stock offering that raised at least $2.57 billion. The company now has a market value of 100 billion and a share price of 197 - a far cry from the 15 per share price at which we began our position in February 2019. The only recent news is that the company announced it has been granted a license to operate a full-service digital bank by the Monetary Authority of Singapore. This is a big deal and I would again recommend that investors take some profits here, but this story will likely continue into 2021. Sea is Southeast Asia’s biggest gaming, e-commerce, and payments company, with more 40 million daily active users in a region populated by 655 million consumers. HOLD A HALF
Taiwan Semiconductor (TSM) shares have added 5 points to reach 109 as its struggling U.S. competitor Intel is coming under pressure to address its falling further behind in the semiconductor fabrication rate. Taiwan Semiconductor dominates global chip making and benefits from secular trends of advanced computing and 5G going into next year and beyond. The chip-making business is both capital and brain intensive with half the company’s workforce having postgraduate degrees. 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
Virgin Galactic (SPCE) shares have been in a holding pattern over the last few weeks since the company aborted a planned test flight of its spacecraft, delaying a key step needed for Richard Branson’s space tourism company to start commercial service. In addition to technical issues, according to data from the New Mexico Department of Health, new COVID-19 infections spiked in the days leading up to Christmas and this is also impacting work on all these issues.
Virgin Galactic CEO Michael Colglazier recently outlined how, from just a single operational VSS Unity spaceplane today, flying out of Spaceport America in New Mexico, Virgin Galactic plans to build entire fleets of spaceplanes and to fly them out of multiple spaceports around the world, bringing in annual revenue of $1 billion. This is welcome ambition but it will require eight craft each flying 50 flights per year as well as a higher price per ticket relative to the $250,000 set for the first 600 passengers.
As the only pure play space tourism stock in the public markets, this remains your best way to play for exposure to this megatrend. Feel free to take some profits if you bought near the recommendation level, but given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I’m going to move this stock to a hold. MOVE FROM BUY TO HOLD
