Cabot Explorer 733

Editor’s Note: For most of its run, Chief Analyst Carl Delfeld has referred to the Cabot Global Stocks Explorer advisory by its short-hand name, “The Explorer.” So we figured we’d join him! We have decided to shorten the name of this publication to simply, “Cabot Explorer.” The product won’t change at all. This merely puts more emphasis on the purpose of this advisory, which is to “explore” for new, often hard-to-find stocks and sectors ready to break out - regardless of market. Enjoy!

Markets seem to be paying more attention to valuations and looking to confirmation from earnings that the economy is moving to growth mode. Stocks are likely to churn a bit for a while after their great uptrend in the last year. We’ll discuss today why SPACs have cooled a bit even as they spread to Asia, and present a new idea to watch which offers huge growth potential but may be a bit pricey.

Cabot Explorer 733

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SPACs Cool
Markets seem to be pausing a bit, with some stocks losing momentum while a few show surprising strength. My sense is that the market is looking at numbers with a more skeptical eye these days.

Just as they’re beginning to take off in Asia, SPACs (Special Purpose Acquisition Companies) have definitely cooled a bit here, for several reasons. One is that the novelty has worn off a bit. Another is that the SEC is scrutinizing them from a tax point of view. A third is that investors are looking more closely at valuations, which is a good thing of course. It’s no surprise that investors who get in at the beginning of the formation of the SPAC have the highest likelihood of success.

While history favors pre-deal SPAC performance, buying shares of companies that emerge from SPAC combinations and holding them for one year results in an annualized loss of 15% on an equal-weighted basis, according to data from Jay Ritter, a University of Florida finance professor who tracked such deals from January 2010 through October 2020.

SPACs are also significantly underperforming traditional initial public offerings. This year’s SPAC listings are up about 1%, while regular listings have gained 35% on an offer-to-date basis, according to data compiled by Bloomberg.

Nevertheless, I am recommending a new stock today that I think will buck the recent SPAC underperformance. It’s the largest SPAC in Southeast Asia.

New Explorer Recommendation
Altimeter Growth Corp. (AGC)
Grab Holdings, Southeast Asia’s ride-hailing and food-delivery giant, is the first Southeast Asian tech unicorn to go public through a SPAC.

Altimeter Capital, which organized the initial public offering of Altimeter Growth in September 2020, is putting $750 million into the company, about a fifth of the new funds raised.

Other investors include the world’s largest asset manager Blackrock, a Morgan Stanley fund, Counterpoint Global, T. Rowe Price, Fidelity International, Fidelity Management and Research, Janus Henderson Investors, Emirati state-owned Mubadala Investment Company, Singapore’s Temasek Holdings and investment manager Nuveen.

In an unusual and positive move, Altimeter Capital Management, led by Brad Gerstner, has agreed to a three-year lock-up of their stock, signaling their confidence in Grab’s future value to other investors.

Gerstner is no stranger to Southeast Asia, having invested in Singapore-based gaming and e-commerce leader Sea Limited (SE). For now, AGC is the ticker symbol to invest in. However, once this Altimeter Growth-Grab Holdings SPAC deal closes some time in the coming months, the combined entity’s stock will trade under the ticker “GRAB.”

Grab’s roughly $40 billion valuation is pricey and represents a significant step up from where the company was valued in private markets at $16 billion last year. This is the only negative as far as I can discern.

Founded in 2012, Grab has grown from a college project first cooked up by its Malaysian co-founders Anthony Tan and Tan Hooi Ling while at Harvard Business School to a super app that offers services from ride-hailing to financial services in eight markets across Southeast Asia.

In 2018, Grab purchased Uber’s Southeast Asia operations with Uber maintaining a 27.5% stake in the company. In December 2020, a consortium founded by Grab and telecom provider Singtel won one of four digital banking licenses in Singapore.

Grab said in January that revenues rose 70% in 2020, with its ride-hailing business breaking even in each of its eight markets, including its largest, Indonesia, where it faces stiff competition from rival Gojek.

Grab has added nearly 600,000 new merchants to its platform over the past year and tripled net revenues at its food delivery business in the latest quarter. The company said it expected food delivery operations to break even by the end of this year.

Grab commanded 72% of regional ride-hailing gross merchandise value in 2020, half of the region’s food delivery revenue and 23% of total payment value (TPV) for digital wallet payments, according to market researcher Euromonitor.

Grab, the market leader in Southeast Asia for so-called super apps for consumer services, expects its addressable market to expand to more than $180 billion by 2025 from $52 billion in 2020.

“The U.S. and China have been big investment markets for 20 years and before Sea, Southeast Asia wasn’t really on many investors’ radar screens,” said Gerstner, who has been following Grab since its 2018 acquisition of the regional business of Uber Technologies Inc., another company he’s backed.

It should be noted that Grab lost about $800 million last year, on an EBITDA basis, on adjusted sales of $1.6 billion. It’s predicting earnings before interest, taxes, depreciation and amortization to become positive in 2023, reaching $500 million that year. The company is forecasting average annual sales growth of 42% for the next three years, with adjusted revenue hitting $4.5 billion in 2023.

According to a report from Bain in cooperation with Google and Temasek last year, online spending in the region will almost triple to more than $300 billion by 2025. Southeast Asia added 40 million new Internet users last year.

There are many positives here, with valuation a cause for concern. Aggressive investors can buy AGC now, but more conservative investors should wait to see if they can get the stock in the 11-12 range.

BUY A HALF POSITION

Model Portfolio

Portfolio Changes
Atlas Corp. (ATCO): Moves from Hold to Sell
QuantumScape (QS): Moves from Buy to Sell

Updates
Anglo American (NGLOY) shares were up this week but have generally been unimpressive, sitting right where they were a month ago. This play on infrastructure basic materials is also the largest producer of platinum, with about 40% of world output, and explores for diamonds, copper, platinum group metals, coal, iron, nickel, and manganese ores. I recommend you buy a half position if you have not already done so. BUY A HALF

Atlas Corp. (ATCO) shares have somehow misfired as a trading play on dislocations in container shipping caused by the pandemic. Atlas charters a fleet of 118 containerships and the pandemic has led to distorted trade flows and a worldwide container shortage crisis. We will move this to a sell to make room for new ideas. MOVE FROM HOLD to SELL

Cloudflare (NET) shares gained a few points this week after the company announced a partnership with chipmaker Nvidia (NVDA) that will enable customers to build artificial intelligence-based apps that run on its security network. Cloudflare’s ability to speed up web applications and provide security on its global network will be enhanced by its partnership with Nvidia.

Given that we have taken some profits off the table, I’m going to keep this a hold and will watch the stock to see if it develops some momentum. Cyber is still a strong power trend and Cloudflare has built a global cloud platform that delivers a broad range of network services making them more secure, and eliminating the cost and complexity. Aggressive investors can purchase additional shares on dips. HOLD A HALF

Fisker Inc. (FSR) shares lost two points this week, in line with SPAC-related stocks’ overall performance as described in the introduction. The company will have little or no sales revenue in 2021 and its first product will be the Ocean, a mid-priced SUV. If you have not yet purchased shares, I encourage you to do so at these levels. BUY A HALF

International Business Machines (IBM) shares were flat this week as IBM announced worldwide availability of its financial service-ready cloud platform to help decrease financial institutions’ risk. The cloud-computing platform is in collaboration with Bank of America, which first used the service in 2019.

IBM, with revenue in 2020 of $73.6 billion, has begun the process of exiting its managed infrastructure services business, and expects to execute the spinoff later this year. IBM will continue to build supercomputers and operate IT systems but the key emerging growth driver for the company has become the hybrid cloud. The company has a market cap of $118 billion and currently offers a dividend yield of 5%. BUY A HALF

Marvell Technology Group (MRVL) shares gave back recent gains in the last week. A relatively new recommendation, Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capabable networks. The company’s processors and products are cutting-edge and already generate $3 billion in annual sales.

Marvell’s markets include drones, data integration and consumer and industrial robotics. These are all huge markets, giving Marvell an opportunity to post double-digit growth in both sales and net profits in 2021. Despite these high-growth markets, the stock is trading at a reasonable 22 times earnings. I suggest we take advantage of the pullback in tech stocks to begin with a half position. BUY A HALF

Paysafe (PSFE) shares were flat this week as the stock recently began trading independently of its SPAC. 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. This company is operating in some promising growth opportunities so if you have not already done so, I recommend you purchase shares now. BUY A HALF

QuantumScape (QS) shares fell from 47 to 40 this week despite the company recently announcing that it has successfully met the technical milestone that was a condition to close for Volkswagen’s $100 million investment in the company. QuantumScape’s solid-state battery can achieve greater range, superior reliability and a longer life than its lithium-ion cousins. In addition, they’re also capable of charging to 80% in as little as 15 minutes, half the time the fastest Tesla Supercharger takes to charge. If you are a long-term investor, you may want to hold on to this one but we have already fallen below our normal 25% loss limit so I’m moving this to a sell. MOVE FROM BUY TO SELL

Sea Limited (SE) shares have rebounded sharply over the past three weeks and are now up 26% so far in 2021 after a great 2020. Sea’s gaming group continues to grow its user base and the company now has 610 million quarterly active users, a number that is growing at an annual rate of 120%. Morgan Stanley came out this week with a target price of 305.

E-commerce is Sea’s second growth engine with gross merchandise value of $12 billion last quarter from a record billion orders. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in one of the world’s fastest growth markets of Southeast Asia. BUY A HALF

Taiwan Semiconductor (TSM) shares held at 120 this week, which I believe is an excellent entry price if you have not purchased shares yet. Taiwan Semiconductor, usually referred to as TSMC, is dominant in the premium microchip sector and the company announced it will spend $100 billion in capital expenditures including $28 billion in 2021, a 47% year-over-year increase. I’m convinced that Taiwan Semiconductor is a great core holding as the most strategically important company in the world. BUY A HALF

Virgin Galactic (SPCE) shares pulled back a few points as management announced that the next quarterly earnings would be posted on May 4. The company looks to resume test flights in June at its headquarters in New Mexico but it will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing.

We need to monitor the situation carefully because while Virgin’s test-flight program in New Mexico remains on hold, its Texas rival, the private company SpaceX, is test-flying Starships at a rapid clip. SpaceX is further from commercialization than Virgin but it eventually will have a spaceships capable of flying 100 tourists at a time on dayslong excursions through space compared to Virgin’s six-seaters able to provide just a few minutes of weightless flight at a time. SpaceX may go public sometime in 2021.

We have taken profits several times in SPCE, and the share price is almost four times our entry point, so I’m keeping this stock a hold for now. HOLD A HALF

The next Cabot Explorer issue will be published on April 29, 2021.

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