Cabot Global Stocks Explorer 723

The potential vaccine and mixed election results pushed the market forward this past week, but the acceleration of the pandemic and near-term uncertainty in Washington pulled it back. It is a time to be a bit cautious. Emerging markets are showing some strength, as our timing indicator turns decidedly positive. Rotation into international stocks may be coming.

Alibaba (BABA) is a good example of the push and pulls. The Chinese e-commerce giant raked in a record-breaking $56 billion in sales in the first 30 minutes of China’s Singles’ Day on Wednesday, much higher than the $38 billion total in the entire 24-hour period last year. In comparison, Amazon booked $10.4 billion during its two-day Prime Day event last month. Yet, Alibaba’s stock was down sharply for the week. Find out why inside, where you can also learn about this week’s new SPAC recommendation.

Cabot Global Stocks Explorer 723

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Election, Vaccine, Pandemic, Chinese Regulators Roil Markets
Election results seem clear and will have a mixed impact on investor appetites. While still up in the air due to a pair of Georgia run-off elections, it seems likely that the GOP will control the U.S. Senate and thus be able to block any significant tax increases. But divided government also means that any further pandemic stimulus will be muted and not too much is expected to happen to address other pressing issues.

Markets were buoyed by vaccine news early in the week, but the pandemic is also surging in most states, hitting new highs nationally on almost a daily basis. Emerging markets and Dow industrial stocks gained ground relative to big tech but it is not clear whether this is a trend or just a couple days of rebalancing.

The Chinese consumer’s power is awesome. Alibaba (BABA) raked in a record-breaking $56 billion in sales in the first 30 minutes of China’s Singles’ Day on Wednesday, much higher than the $38 billion total in the entire 24-hour period last year. In comparison, Amazon booked $10.4 billion during its two-day Prime Day event last month.

Yet, Alibaba’s stock was down sharply for the week as Chinese regulators delayed the Ant IPO and China released an “Antitrust Guideline Proposal on Marketplace Models” to seek public opinion on a draft regulation that analysts think could lead to anti-monopoly measures focused on internet marketplace companies.

Today’s new recommendation is a long-promised Special Purpose Acquisition Company (SPAC), which is merging with America’s only rare earths mine and refiner located in Mountain Pass, California. We are swapping this into the Explorer portfolio for the Strategic Materials ETF (REMX). Both are in a nice uptrend.

New Explorer Recommendation
Fortress Value Acquisition Corporation (FVAC)
*This SPAC will trade as MP Materials (MP) when the merger is completed

America’s Only Domestic Source of Rare Earths
Rare earths and rare metals – oftentimes referred to as technology metals – are critical to economic growth and the advancement of technology.

They are also intertwined with national security, geopolitics, wealth and power. These strategic materials are sourced and refined almost entirely outside the United States from markets such as Russia, China, South Africa and Latin America. China, in particular, dominates the production of rare earths, which have critical commercial and defense applications.

Fortress Value Acquisition Corporation (FVAC) is a special purpose acquisition company (SPAC) that is merging into MP Partners to become MP Materials. The company owns and operates one of the world’s largest integrated rare earth mining and processing facilities in Mountain Pass, CA.

It is the only major rare earths resource in the Western Hemisphere. Its primary rare earth product, Neodymium and Praseodymium (NdPr), are key ingredients in permanent magnets which power the traction motors of electric vehicles (EVs), robotics, wind turbines, drones and many other high-growth, advanced-motion technologies.

Rare Earth Technology Applications

In particular, electric vehicle motors require sizable amounts of NdPr rare earths and as the chart below indicates, they will absorb a growing percentage of global expected production going forward.

Electric Vehicle Market Growth Projections Drive Demand

China Dominates Rare Earth Production
China dominates rare earth oxide production with about an 85% global market share. China’s Bayan Obo mine in Baotou, Inner Mongolia, is a major producer of the lighter rare earths, such as Neodymium. At the other end of China in the Jiangxi and Guangdong provinces, there are special clays, called ionic adsorption clays, that are sources of heavier rare earths like Dysprosium, which also have applications in permanent magnets.

The real value of these rare earths is their unique electrical and magnetic properties that allow for miniaturization and much lighter, stronger, resilient, and efficient components. Rare earths processing is difficult, involving first an extraction process to produce rare earth concentrate and then a separation process to extract each of the 17 rare earth oxides. This is why the above chart actually underestimates China’s dominance of rare earths, since even the production from California’s Mountain Pass rare earths mine is now sent to China for processing.

Management’s strategy for MP Materials is to complete and update its refining capabilities so that it can refine rare earth oxides in America and then scale up refining production of rare earth oxides to lower unit costs and boost margins. FVAC stock is in 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 POSITION

Model Portfolio

Portfolio Changes
VanEck Rare Earth/Strategic Metals ETF (REMX) - From Buy a Half to Sell
Portfolio cash position: 25%

Updates
Afterpay (APT.AX) shares came back a bit this week from 103 to 99, though the company announced that it has inked a partnership with Gap to bring its “buy now, pay later” platform to Old Navy, Gap, Banana Republic and Athleta. Now, in time for holiday shopping, consumers who shop these brands online will have the option to choose Afterpay at checkout to pay in four interest-free installments.

During its fiscal first quarter, the company’s active customers grew to 6.5 million in the U.S. market, averaging 15,000 new customers per day. Two weeks ago, the company reported that underlying sales increased 115% to $4.1 billion on a year-over-year basis. Active customers globally increased 98% to 11.2 million and active merchants increased by 70%. If you have not already done so, I suggest you purchase Afterpay shares on the Australian stock exchange. The stock also trades OTC in the U.S. at ATFPF, but the liquidity is poor. BUY A HALF

Alibaba (BABA) shares took quite a hit this week, falling from 285 to 265 in the wake of Chinese regulators delaying the very much anticipated IPO for Ant Group, in which Alibaba has a 30% equity stake. Financial regulators seem particularly concerned about Ant’s consumer credit platforms. Shares were also negatively impacted by noise out of Beijing that it is taking aim at disrupting monopolies in China.

On the positive side of the ledger, Alibaba delivered $75 billion of gross sales during its Singles’ Day shopping event after raking in a record-breaking $56 billion in sales in just the first 30 minutes. This is much higher than last year’s total of $38 billion in the entire 24-hour period and dwarfs the record $10.4 billion spent during Amazon’s two-day Prime Day event last month. BABA remains a legacy hold and is an essential core holding for investors looking for a quality stake in the Chinese consumer. Long-term investors might consider adding some shares although my guess is that the Ant IPO will be delayed into 2021. HOLD A HALF

Cloudflare (NET) shares made another nice move this week, going from 57 to 65. Cloudflare reported that third-quarter revenue growth accelerated to 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-setting addition of about 100 new large-enterprise customers. Cloudflare is disrupting a large and growing market of $32 billion. It offers ease of use, product development, efficient architecture and its free, low-touch go-to-market strategy highlights its competitive edge and growth potential. I will keep NET a hold at these levels. HOLD A HALF

ElectraMeccanica (SOLO) shares are up 36% in their first two weeks in the Explorer portfolio. This company reported an operating loss of 8.8 million Canadian dollars in its most recent quarter, and a cash position of 101 million Canadian dollars. 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 “Solo”). Last week, the company announced that it would 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 speculative idea that will attract some serious media attention into 2021 and has a chance to scale up in America and beyond. BUY A HALF

Logiq (LGIQ) shares went from 8.7 to 8.4 over the last week as it looks forward to the release its next earnings, on November 16. 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 take advantage of this week’s pullback to buy shares if you have not already done so. BUY A HALF

NovoCure (NVCR) shares were flat this past week but 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. Recently, NovoCure reported encouraging quarterly results. Here are some highlights:

• Net revenue increased 44% year over year to $132.7 million.
• Sales rose 51% in the U.S., 57% in Japan and 205% in China.
• Net income increased 381% to $9.3 million.
• The company now has 3,361 active patients on therapy.

NovoCure has momentum and has the opportunity to scale up as it gets the word out and gains wider acceptance in the oncology community. 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 pulled back early this week from 185 to 156 before rebounding sharply to 169. The pullback was probably a mix of profit taking, one analyst downgrade, and the announcement of a potential vaccine by Pfizer, which seemed to hit digital stocks.

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. Sea’s gaming division, Garena, is its big profit center, thanks mostly to their Free Fire game, which is extremely popular in Latin America and Southeast Asia. More recently, Garena has entered the India market. 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 moved sideways this past week as the big news was the launch of new Mac laptops using its homegrown M-1 chips. The initial rave reviews are bad news for rival Intel. China also 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

VanEck Rare Earth/Strategic Metals ETF (REMX)’s share price has developed a nice uptrend in the last two weeks, going from 40 to 46.6, but I suggest we book these profits as we add a new rare earths recommendation to the Explorer portfolio today. MOVE FROM BUY A HALF TO SELL

Virgin Galactic (SPCE) shares jumped from 18 to just under 22 despite the general consensus that revenue will be more modest in 2021 than the earlier projection of $31 million. Instead, Virgin Galactic Holdings’ seven analysts are now forecasting revenues of $24 million in 2021. As the only pure play space tourism stock in 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 should be buying at these levels ahead of 2021 developments. BUY A FULL

Vipshop Holdings (VIPS) shares were flat this week despite a stupendous start to Singles’ Day in China. This stock is up 34% over the last five weeks as we await third-quarter earnings, expected tomorrow, November 13.

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. BUY A HALF

The next Cabot Global Stocks Explorer issue will be published on December 10, 2020.

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