Virgin Galactic (SPCE): Move from Hold to Buy
Luckin Coffee (LK): Move from Hold to Sell
Explorer in Brief
Our positions for the most part performed well this week. Most recent idea Trip.com (TCOM) was up 14% in its first week in the portfolio, Sea Limited (SE) surged 20% after reporting high revenue and user growth, Alibaba (BABA) made a nice move, and problematic Luckin Coffee (LK) resumed trading Wednesday morning. See the portfolio update section below for more details.
China Stocks in the Spotlight
Despite a Chinese economy that has grown three times faster than America’s every year over the past three decades, it has been a bit of a challenge to consistently make money in Chinese stocks.
Part of this is that the market has been more volatile and out of favor for rather long periods of time. It has been more of a trading market than a buy-and-hold market.
And over the past two years, the on and off again trade tension has been difficult to navigate.
You should also know that Chinese companies often don’t adhere to American auditing standards. Beijing has never agreed on sharing audit papers with U.S. regulators even for companies that trade on U.S. markets. Such papers are treated as state secrets in China, presumably because officials worry such documents might sometimes reveal dealings between private Chinese companies and the government.
In response to rising tensions between the U.S. and China, the Senate yesterday unanimously passed legislation (Holding Foreign Companies Accountable Act) that could bar many Chinese companies from publicly listing their shares on U.S. exchanges if they do not use American accounting standards.
The bill would require foreign companies to use U.S. accounting standards and allow the Public Company Accounting Oversight Board to audit certain accounting documents and, if they do not, to certify that the company is not owned by the government. The legislation approved by the Senate would be phased in and would only require the SEC to prohibit trading in any shares where the company’s auditor hasn’t faced an inspection for three consecutive years.
Chinese companies have raised over $66 billion through U.S. initial public offerings since 1997, according to data from S&P Global Market Intelligence. There were 25 IPOs of Chinese companies in 2019, about 18% of all deals that year, according to research by University of Florida professor Jay Ritter.
In general, we have done well with Chinese stocks though, Luckin Coffee (LK) is a cautionary tale. Usually, having big players such as Temasek, Goldman Sachs, Capital Group funds and Blackrock in on an IPO and then staying on as institutional investors is a strong vote of confidence and a source of comfort for retail investors. Not this time.
Until this accounting/political issue is cleared up, I will be reluctant to recommend any new China ideas unless something unusual turns up.
Also, for all recommendations, please make a point to sell some shares when a stock makes a very sharp move upward, as was the case with LK. How much to sell to lock in profits is a judgment call but I usually advise selling 1/3 to 1/2 of a position after it doubles. I have made an effort lately to make this advice more clear and visible in the portfolio update section.
Finally, consider China proxy ideas such as Singapore-based Sea Limited (SE) and DBS Bank (DBSDY). Sea’s gaming and e-commerce platforms tap into high-growth markets throughout China and Asia and just reported another quarter with gross revenue up 58%.
DBS is consistently ranked as the highest quality bank in Asia. To give you some idea of its reach, 24,000 online equity-trading accounts have been opened since Singapore tightened its lockdown on April 7. Digital banking is also a profitable trend since DBS’s digital customers making up more than 50% of its retail and small business base in Singapore and Hong Kong, up 25% in the last two years.
There are plenty of other international opportunities that are trading at attractive valuations with strong fundamentals and we will have a new idea for you next week.
Position Updates
Cloudflare (NET) shares again began the week strong, hitting 30 before coming back with the market to 27 and change. Looks like there may be some resistance at 30.
Recently, NET reported strong first-quarter numbers.
Sales in the U.S. region climbed 44% year over year and represent 40% of total revenue and 62% year-over-year surge in its international business. Total revenue was $91.3 million, increasing 48% year over year and its gross margin was 77%. The company’s loss from operations due to higher development spending was $36.1 million, compared to $17.1 million in the first quarter of 2019.
The company’s net loss per share was $0.11 as it reported a cash and equivalent position of $588 million. In addition, during the first quarter, the company added 250,000 new customers representing a year-over-year jump of 40%.
This aggressive cybersecurity recommendation went public last year. The company is growing fast and appears to be gaining market share and some analysts expect its revenue to double by 2022.
If you have not yet invested in NET, I suggest you do so and consider pairing it with the below more conservative cybersecurity play, an ETF called BUG. BUY A HALF
Global X Cybersecurity ETF (BUG), a basket of cybersecurity stocks of companies developing and managing security protocols to prevent cyber attacks, jumped 7% this week – not bad for a diversified ETF.
This ETF has 29 holdings and the top 10 stocks represent roughly 60% of the total market value of the basket. Seventy-four percent of the companies are incorporated in America followed by 13% in Israel and 8% in Japan.
This ETF can be seen as a more conservative play on cybersecurity or can be paired with our more aggressive Cloudfare (NET) recommendation for the best of both worlds. BUY A HALF
DBS Bank (DBSDY) shares increased 5% this past week as the company reported that 24,000 online equity-trading accounts have been opened since Singapore tightened its lockdown on April 7. Digital banking is also a profitable trend—DBS’s digital customers make up more than 50% of its retail and small business base in Singapore and Hong Kong, up 25% in the last two years.
DBS is one of the largest banks in Southeast Asia with a presence in 18 high-growth markets across Greater China, Southeast Asia, and South Asia/India.
I encourage you to buy DBS at these levels and believe this stock has considerable upside potential since it is still trading below its 2020 high by a wide margin and is widely considered on of the highest quality banks in Asia. BUY A HALF
Fanuc (FANUY) shares gained 6% this week as the Japanese market was up along with U.S. markets.
Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots that used in manufacturing all sorts of high value products including other robots.
I have been following Fanuc’s stock for more than a decade and it has always demanded a premium to the market in terms of its price to earnings and book value. With the pullback in the market, now is a great entry point as the stock is trading just below 17, well up from its low of 11 two months ago but still trailing its 52-week high of 19.
Fanuc offers investors a balance sheet with zero debt and a sizable $7 billion in cash. Profit margins are impressive and Fanuc has also bought back more than 70 million shares last month. In short, Fanuc is a high-quality play on a growth trend. I encourage you to buy this conservative robot play if you have not already done so. BUY A HALF
Luckin Coffee (LK) stock began trading again yesterday, fell quickly and then traded very consistently between 2.8 and 3.0 all day. Volume was incredibly high at almost 140 million shares. It is difficult to ascertain what is happening behind the scenes but we do know that Goldman had a sizable block of shares and can assume it wants the shares to go up. We can also assume that the Chinese want to save face with this coffee company.
Last week, the Luckin board fired its CEO and COO and the company received a notice to delist from the Nasdaq earlier this week, which it has announced it is appealing. Another headwind is that the U.S. Senate passed yesterday legislation that calls for Chinese companies to meet the same disclosure standards as U.S. companies, or delist.
Luckin also points out that the company’s stores throughout China remain open but given all the uncertainty I suggest that most subscribers should sell any remaining shares. For those of you that choose to be all in to the end, I will continue to carefully watch and report on this unfolding situation. MOVE FROM HOLD TO SELL
Sea Limited (SE) shares, after the company reported first-quarter numbers, surged 20% this week and are now up 76% so far in 2020.
SE reported strong revenue and user numbers. Revenue in the first quarter jumped 58% to $913.9 million and gross merchandise volume (GMV) in the e-commerce segment soared 74% to $6.2 billion, and adjusted revenue in the digital entertainment business increased 30% to $512.4 million. Quarterly active users grew to 402.1 million, of which 35.7 million were quarterly paying users. Sea’s Free Fire game reached a new record of over 80 million peak daily active users.
Despite these impressive numbers, the company’s adjusted net loss was $0.52 per share, which was worse than the $0.32 per share in adjusted net losses that the market was expecting. This week, JP Morgan raised its price target for SE to 70 so it has already blown by this number.
We are in a strong position, having sold half our position a month ago at 55 for a gain of 310%. Sea is now at 72 and I have it rated a hold but we will be buyers if the stock pulls back. If you have not already sold half your shares, I strongly suggest you do so now. SELL HALF YOUR POSITION - HOLD THE BALANCE
Trip.com (TCOM) shares increased 14% in their first week in the Explorer portfolio as China’s economy begins to reopen and domestic travel may be gaining some traction.
The company is a travel service provider that specializes in ticketing, reservations, and tours as well as aggregating hotel and transport information. Trip began 2020 with a strong tailwind as its fourth-quarter 2019 net income soared from $161.7 million to $1 billion. The company has enormous reach and scale in China as well as overseas, providing reservation services for more than 1.4 million hotels and hostel properties, and more than 1.2 million vacation rental properties around the world.
This is an aggressive idea with considerable uncertainty but I believe there is enough evidence of a rebound in domestic travel to warrant a half position to take advantage of what was a 40% reduction in price of this leading player in China’s travel sector. BUY A HALF
Virgin Galactic (SPCE) shares have, as expected, pulled back to the 15 level after digesting news that Richard Branson’s Virgin Group plans to sell up to 12% of its ownership in Virgin Galactic to raise cash for some of his other ventures that are under pressure due to the impact of Covid-19.
This sort of response is why I recommended selling half your shares a couple of weeks back, for a 146% gain.
Galactic plans to send groups of paying customers on brief flights to the edge of space. Perhaps even more important to its future than space tourism is its plan to launch point-to-point hypersonic flights.
Virgin Galactic reported a cash position of about $420 million suggesting the company has enough money to finish its test flights before commercial operations begin. SPCE still plans to make its first commercial space-tourism flight this year, and took a step forward with two test flights from its New Mexico spaceport in the first quarter. Challenges remain but I’m moving this stock from a hold to a buy to take advantage of the share price pullback to seek more profits from this remarkable story. MOVE FROM HOLD A HALF TO BUY A HALF
WATCH LIST
Alibaba (BABA) shares made a very nice move this week from 194 to 213 and reached 221 at one point on Wednesday until the U.S. Senate legislation on potentially delisting China stocks passed, taking some wind out of its sails.
