March 17, 2022

Happy St. Patrick’s Day! After the Fed for the first time since 2018 raised benchmark rates, stocks surged yesterday. The question remains whether the Fed can get a handle on inflation without tipping the economy into a recession. Rock-bottom Chinese stocks also got a lift yesterday as a Chinese regulatory agency indicated its support of U.S.-listed Chinese stocks. Emerging markets and fintech remain out of favor but we go there today for a Warren Buffett-backed, aggressive idea that is a play on both of these themes.

New Recommendation

Happy St. Patrick’s Day! After the Fed, for the first time since 2018, raised benchmark rates, stocks surged yesterday. The question remains whether the Fed can get a handle on inflation without tipping the economy into a recession. Rock-bottom Chinese stocks also got a lift yesterday as a Chinese regulatory agency indicated its support of U.S.-listed Chinese stocks. Emerging markets and fintech remain out of favor but we go there today for a Warren Buffett-backed, aggressive idea that is a play on both of these themes.

Is it Value or a Value Trap?
An age-old question for investors when markets pull back is whether a stock that is down sharply is a great value or a value trap – also known as “dead money.”

Nowhere is that more evident right now than with Chinese stocks, which are being buffeted by a perfect storm. The MSCI China Index has seen its valuation more than halve from a February 2021 peak. The gauge is trading at about 9 times its 12-month forward earnings estimates, versus a five-year average of 13. New concerns over the status of U.S.-listed Chinese stocks, geopolitical risks, and slower Chinese economic growth have to be weighed against quality stocks that are 50% to 80% off their highs.

Alibaba (BABA), DiDi Global (DIDI) Nio (NIO), XPeng (XPEV) and Pinduoduo (PDD) were just some of the companies in this group that jumped yesterday as sentiment shifted. It is always a matter of judgment and timing. I was going to highlight that speculators should look at this group of stocks but after yesterday’s surge you need to be much more selective.

Besides China stocks being inexpensive, China’s Financial Stability and Development Committee of the State Council pledged yesterday to keep the market stable and support overseas share listings. Keep in mind that in the event of a stock’s delisting, the stocks would trade over the counter or investors could exchange their U.S.-listed shares for the Hong Kong-listed ones.

Now we move to this week’s new recommendation.

New Explorer Recommendation
Follow Warren Buffet to Brazil - StoneCo Ltd. (STNE)
Many young people in the world today have never stepped foot inside a bank and may never do so.

Thanks to the ubiquity of smartphones, the internet and the growth of financial technology (fintech), these people have a whole new set of options for how to manage their finances and grow their portfolios. Fintech is driving the evolution of traditional financial services as companies and countries attempt to adapt to evolving consumer expectations regarding choice, costs, convenience and security.

There are also three significant trends driving fintech forward: the digital transformation of finance, artificial intelligence, and blockchain. However, after soaring in 2020 and doing well in 2021, the fintech sector has fallen out of favor in 2021 in part because many of the leading companies have high growth rates but little, if any, profits.

In particular, Brazil’s StoneCo (STNE) has plummeted from 67 to 9 over the last year and was up 14% yesterday. Stone will report quarterly financials today (Thursday) after the close. The company posted a 56% increase in revenue in its last reported quarter.

Based in Sao Paulo and founded in 2000, StoneCo is a digital payments company providing financial technology solutions for merchants to conduct electronic commerce across in-store, online, and mobile channels in Brazil.

It distributes its solutions principally through proprietary Stone Hubs, which offer hyper-local sales and services, and technology and solutions to digital merchants.

Warren Buffett’s Berkshire Hathaway invested $340 million in this Brazilian fintech company at its IPO in late 2018, which is a bit unusual for the value titan. No doubt the fact that Brazil is largely a cashless society and that 45 million Brazilians don’t have a bank account made this global gambit appealing. StoneCo has also been contending with high inflation and low growth in Brazil that has been battering the Brazilian economy and stock market since last summer, but it appears all of this is already reflected in its stock price.

Let’s jump in here.

BUY A HALF

Portfolio Changes and Updates

Model Portfolio

Portfolio Changes
None

Updates
Fisker (FSR) shares finished the week up after yesterday’s surge after the company appears on schedule to start deliveries of its Ocean SUV in November this year. Higher material costs such as nickel are a concern depending on the company’s contracts with its partners. However, this custom EV maker has a respected CEO and an asset-light strategy, giving it a chance to capture the custom mid-priced EV market. Next up, after the Ocean hits markets later this year, is the PEAR – a smaller vehicle than the Ocean with pricing starting at under $30,000. This remains an aggressive stock but I confirm a buy rating on Fisker. BUY A HALF

Ford (F) shares were relatively flat this week following the company’s announcement that it’s splitting the company into two with Ford Model e in charge of its EV business and Ford Blue handling its legacy combustion engine business. Ford outlined that it expects to produce two million EVs by 2026 and targets $50 billion in EV investment through 2026.

For international markets, Ford said it would introduce three new electric passenger vehicles and four new electric commercial vehicles in Europe by 2024, adding it plans to sell more than 600,000 EVs in the region by 2026. As part of its push, Ford deepened its existing partnership with Volkswagen under which the U.S. carmaker will produce a second electric vehicle for the European market based on its German rival’s platform. This will include investments of $2 billion at Ford’s Cologne site in Germany. BUY A FULL

Harley-Davidson (HOG) shares gained a point this week, finishing just under 40. One analyst has a projected upside for the stock over the next year of 30%. This leading motorcycle maker is banking on its LiveWire electric motorcycle to open new markets and recently reported a fourth-quarter profit that saw motorcycle revenue surge 54%. In its most recent quarter, Harley-Davidson’s revenue jumped 40% year over year to $1 billion, driven by a 39% rise in motorcycle shipments. Harley also announced it would be spinning off its LiveWire business into a stand-alone publicly traded company. BUY A HALF

Marvell Technology Group (MRVL) shares moved from 65 to 68 this week as the company led a Jim Cramer Mad Money segment, with CEO Matt Murphy stressing the strength of the company’s end markets. While Marvell shares were up 84% in 2021, this year is a different story since so many of its clients face supply chain issues, while Russia’s invasion of Ukraine, and concerns about the chip cycle peaking, all have weighed on semiconductor stocks in the last couple of months.

Recently the California-based company reported that fourth-quarter earnings jumped 72% on a 68% increase in sales as revenue increased in all five of its end markets. Marvell’s CEO projects that year-over-year growth will be more than 80%, and based on this last quarter some Wall Street analysts maintain price targets of over 100. HOLD A HALF

Novonix (NVNXF, NVX) shares were off slightly this week despite the company’s critical role as a strategic provider of domestic synthetic graphite that is both higher quality and lower priced than Chinese graphite and has an excellent partner in Phillips 66. We are already in an advantageous position since we are considerably above our entry price and have taken some profits. This is an aggressive idea but it remains undervalued and a buy. BUY A HALF

Oracle Corporation (ORCL) stock went from 75 to 79 this past week after the company reported third-quarter fiscal 2022 earnings of $1.13 per share. Oracle offers us cloud-computing high growth and wide margins coupled with an undervalued price relative to its peer group. This is a solid technology core holding for conservative investors that seems undervalued.

The company’s cloud services platform announced the launch of new capabilities and services that are focused on providing customers with more flexibility, enabling clients to manage their workloads more efficiently and securely at lower costs. BUY A HALF

QuantumScape (QS) shares were flat this week though this has been a bit of a volatile stock of late along with its fellow EV technology companies. While it will take some time, its technology is on track to develop a battery that will charge to 80% of capacity in 15 minutes.

Solid-state batteries could be one of the most promising technological breakthroughs of the EV revolution. QuantumScape is at the front of a sector and stands to benefit the most as more companies adopt solid-state battery technology. BUY A HALF

Sea Limited (SE) shares zoomed from 92 to 111 this week to a similar degree that China’s Tencent, which owns an 18% stake in Sea, surged during the last week. Nevertheless, its recent mixed fourth-quarter financials did not put to bed concerns that its red-hot growth is slowing down while expenses and losses remain stubbornly high. While revenue doubled from the year-ago period, losses increased.

In short, its e-commerce wing, Shopee, is still strong while profit-making gamer Garena has been at least temporarily banned in India. However, Singapore’s ministry of trade and industry announced that it hoped the issue of India’s ban of Sea’s gaming group would be resolved soon. HOLD A HALF

Veeco (VECO) shares were up marginally and this stock, with its strong balance sheet and steady growth, has been an excellent place to invest in a volatile market, though it has also been a bit uninspiring. Veeco makes the equipment and technology essential for the chip fabrication game, a business with technological and high capital barriers to entry which leads to high margins and return on equity. Veeco is a solid performer but I moved this stock to a hold last week until markets settle down. HOLD A HALF

The next Cabot Explorer issue will be published on March 31, 2022.

JUST PUBLISHED — New book from Chief Analyst Carl Delfeld