Cabot Global Stocks Explorer 727

2021 is off to a good start thanks to strong earnings and continued investor enthusiasm for big technology companies and a new administration. The backstop from governments and central banks, as well as the consensus among investors that a strong economic recovery is coming this year, has for now pushed volatility out of the market.

The Explorer portfolio had a good week and today we add another SPAC merging with an established, fast-growing financial payments firm based in the United Kingdom.

Cabot Global Stocks Explorer 727

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Investing in the Digital World
In 2020, the pandemic accelerated a clear trend that caught the imagination of investors: the emerging digital economy and the digital-based stocks that thrive in it. These companies benefit from several advantages: low capital requirements, the ability to scale up revenue quickly, and the high margins that can come with a low headcount.

One area of the digital world that the Explorer focused on in 2020 was financial technology, better known as “fintech.” At the core of this is financial payments ranging from digital currencies, digital payment platforms, and cryptocurrencies such as bitcoin.

There is a lot of confusion out there regarding just what qualifies as a currency. A currency has three functions: a unit of account, a medium of exchange and a store of value. The U.S. dollar fits the bill and of course is issued and backed by the balance sheet of America’s central bank – the Federal Reserve. Reacting in part to China’s initiative in launching a digital yuan, the Federal Reserve and the U.S. Treasury are working on launching a digital dollar, which again would be backed by the Federal Reserve.

Digital mobile payment platforms are closely associated with e-commerce and simply aid consumers in securely transferring money and making payments online. These are often done through online accounts normally referred to as “wallets.” Some of the leading U.S. payment platforms are PayPal, Venmo and ApplePay. The Chinese are the kings in this area with Alipay and WeChatPay accounting for $42 trillion of transactions in 2020. This is 150 times that of PayPal and Venmo combined.

Alipay, which is part of the Ant Group and an affiliate of Alibaba, serves over one billion users and 80 million merchants. Ant’s money market account has almost 600 million users. The staggering reach and influence of Ant is why the Mandarins in Beijing put the kibosh on Ant’s IPO in late 2020. It is a major pushback against Ant and its founder Jack Ma.

Next we come to the controversial area of cryptocurrencies, which are digital assets (usually referred to as coins or tokens) that serve as a unit of account and a medium of exchange using cryptography and blockchain (online ledger) to secure transaction ledgers. It is sometimes referred to as “software currency.” A key issue is how supply of these cryptocurrencies such as bitcoin is created. Basically, crypto-miners using huge amounts of electricity and computing power and employ sophisticated algorithms to solve codes to create new tokens.

The price of bitcoin is based on supply and demand and you can see that supply can be controlled to some degree. Notice that bitcoin is not technically a currency since it is not a store of value. In fact, buyers of bitcoin purchase it precisely because they expect it to increase in value.

Bitcoin and its brothers (Ethereum, etc.) are highly speculative but gaining more credibility as institutional investors are now making very small allocations to cryptocurrencies.

Today, I have a new recommendation that links three high profile growth trends: SPACs, e-commerce and internet gaming, and mobile payments. My read on SPACs is that they benefit the early promoters at the expense of post-IPO investors … but I think this SPAC may be an exception to this rule.

New Explorer Recommendation
Foley Trasimene Acquisition II (BFT) (Merging with Paysafe)
This company is a Special Purpose Acquisition Company (SPAC) formed in October 2020 by Bill Foley. A SPAC is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing private company.

They key to success with a SPAC in terms of raising capital and then successfully acquiring a private company at a reasonable price is the credibility and experience of the SPAC’s management. Bill Foley has been involved in more than 100 acquisitions and many spinoffs. His success stories include Fidelity & Guaranty Life, which he took over in 1984 and made into a Fortune 500 company, Black Knight, and Dun & Bradstreet.

On December 7, 2020, it was announced that Foley Trasimene had signed a definitive agreement and plan of merger with Paysafe Group, an integrated payments platform based in the United Kingdom. Upon closing of the transaction, the newly combined company will operate as Paysafe and plans to list on the New York Stock Exchange under the symbol PSFE.

This deal is expected to close during the first half of 2021.

Founded in 1996, Paysafe, based in London, is a payments platform that connects businesses and consumers across 70 payment types in over 40 currencies globally. Paysafe processed $98 billion of annualized transaction volume in 2019 and employs about 3,000 people. The company operates a payments platform that enables businesses and consumers to connect and transact through payment processing, digital wallets, and online cash solutions. The company’s core business right now is online gaming. Though this holds zero attraction to me personally, it is a booming business as evidenced by Sea Limited (SE) and other online gaming initiatives.

Another positive for Paysafe is that Blackstone (BX) is a substantial equity investor. Blackstone and CVC acquired Paysafe in 2017, taking the payments processor private. So far, this SPAC has not advanced as much as many others since going public at 10 in October, but yesterday it made a nice move. It’s relatively under the radar but given Paysafe’s business and the attention the SPAC will receive as it nears a merger with Paysafe, this could work out well. I would add that this is an aggressive idea so I would suggest you put in place a 20% trailing stop-loss. BUY A HALF

Model Portfolio

Portfolio Changes
None.

Updates
Afterpay (APT.AX/AFTPF) shares jumped this week from 109 to 141. The average basket size for Afterpay users increased 30% and traffic to Afterpay’s brand partners was also strong, as the company saw a 145% year-over-year increase in referrals in the latest reported quarter. This momentum stock is growing fast but its valuation is quite rich. I suggest we take partial profits here as I’m moving this stock from a buy to a hold. HOLD A HALF

Cloudflare (NET) shares jumped from 78 to 84 this past week on no news. The company announced that it would report its next quarterly earnings on February 11. 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 again 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 were up incrementally this past week, though overall this stock has been a bit disappointing. SABESP is a conservative water play with plenty of room to grow in its monopoly territory of Sao Paulo with 18 million people 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 just 8 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. We will give it a bit more time in hopes that it will gain some traction. BUY A HALF

ElectraMeccanica (SOLO) shares pulled back a bit this week after a great fourth quarter in 2020. A month or so ago, I advised to sell half of the shares you purchased, and this seems to have been a wise move. SOLO recently announced that the company is expanding its retail footprint to three new West Coast locations in the United States, slated for a March opening. These additions will bump up the company’s total retail location count to 13 across 10 major markets. This is speculative idea that will attract some serious media attention in 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 A QUARTER

International Business Machines (IBM) shares were flat in their second week in the portfolio as the company is expected to report earnings today. The U.S. Patent Office announced that IBM in 2020 ranked first in the area of quantum computers. The company considers hybrid cloud as a $1 trillion opportunity and this, together with analytics and cybersecurity, could result in sales reaching $77 billion in 2021 and earnings growing by more than 50%. IBM stock is trading at just over 10 times projected earnings, which is less than half the average for the S&P 500 index. This is a solid, conservative growth play to begin 2021 and on top of all this, IBM offers a 5.1% current dividend yield. BUY A HALF

LogiQ (LGIQ) shares, after jumping 22% last week, retraced a bit from 9 to 8.4. 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 an aggressive idea that is trading at just two times trailing earnings. I would be a buyer here but only incrementally. BUY A HALF

MP Materials (MP) shares moved from 31 to 35 this week as one of its key rare earth products, neodymium, was up 87% in 2020. 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 given its surge in the last quarter. HOLD A HALF

NeoGenomics (NEO) share were again flat this week as the pandemic is evidently impacting in-person testing. NeoGenomics is a leading operator of a network of cancer-focused testing laboratories in the United States, Switzerland, and Singapore. As the world’s leading oncology testing company, revenue should accelerate in 2021 as the pandemic recedes and pent-up demand drives catch-up in-person testing. This is an aggressive play in a critical, high-growth market. You can still buy shares here if you have not yet done so. BUY A HALF

NovoCure (NVCR) shares made a roundtrip over the past two weeks, closing yesterday at 172. Last week, the company released preliminary numbers for calendar 2020 with $494 million in net revenues, representing 41% annual revenue growth. NovoCure launched three new clinical trials, expanding its development pipeline to include eight ongoing global studies. Yet this is still a relatively small company and its Tumor Treating Fields delivery system – for glioblastoma, the most common primary brain cancer—is gaining traction. In addition, studies are underway with other brain cancers as well as pancreatic, ovarian, liver and lung cancers. I rate this stock a buy for long-term investors who have not yet purchased shares. BUY A FULL

Sea Limited (SE) shares were up from 214 to 233 as the company announced it is acquiring an Indonesian bank and recently won a bid for a digital banking license in Singapore. Sea is Southeast Asia’s biggest gaming, e-commerce and payments firm with more 40 million daily active users in a region populated by 655 million tech-savvy consumers. Sea’s strategy so far is relying on its gaming group Garena to generate sufficient cash to fund surging growth in its e-commerce and digital financial services segment. Unprofitable thus far, the company’s e-commerce segment will likely see significant growth as it consolidates its dominant position in Southeast Asia and leverages this to expand to growth markets such as India and Latin America. Another growth driver with huge potential is SeaMoney, a digital payments platform that ties together its gaming and commerce segments. HOLD A HALF

Taiwan Semiconductor (TSM) shares increased from 124 to 131 as the company announced it will raise capital expenditures to $28 billion in 2021, a 47% year-over-year increase. The company also reported that record quarterly revenue improved 31% compared with the same period a year earlier. Taiwan Semiconductor dominates global chip making with a market share over 50%. It also 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% with operating margins in excess of 40% in its most recent quarter. I maintain a buy rating on the stock. BUY A HALF

Virgin Galactic (SPCE) shares leapt from 27 to 32 this week as Ark Invest announced it was launching a space ETF. This was welcome news as investors await Virgin Galactic going operational some time in the first half of 2021. The company plans to build entire fleets of spaceplanes and to fly them out of multiple spaceports around the world with the goal of bringing in annual revenue of $1 billion. Given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I recently moved this stock to a hold. HOLD A FULL

The next Cabot Global Stocks Explorer issue will be published on February 4, 2021.

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