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Explorer
The World’s Best Stocks

Cabot Explorer 737

Markets are a bit subdued with low summertime volatility, though some Explorer recommendations are doing very well in the power sectors of cyber and space. Today we take a look at Brazil, which is struggling with high unemployment, Covid-19 and political instability though we offer a new recommendation in a high-growth sector with a clear uptrend in share price.

Cabot Explorer 737

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Market Subdued, Brazil Struggles
The market has been subdued for the last few weeks as investors weigh how far stocks have come against the risks of rising inflation, supply-chain problems and the possibility of higher taxes. Such worries have contributed to a cautious outlook for stocks, which are trading around all-time highs.

The S&P 500 has been moving less than 1% daily in either direction for two straight weeks, the longest streak of low volatility since a period from October 2019 to January 2020, according to Dow Jones Market Data. Lower volatility has been tied to thinner trading volumes and summer vacations in the Hamptons.

While all this might be a bit boring to investors, it is clearly better than what is happening down in Brazil. Just a decade ago the country was in the midst of a commodity boom and looking forward to hosting the 2014 World Cup and the 2016 Olympics.

Now roughly 15% of workers are unemployed and Brazil’s economy is smaller than it was in 2011. Brazil’s death toll from Covid-19 is one of the worst in the world and Brazil’s political system is dysfunctional and corrupt. More than 30 parties in Congress make elections expensive and the country is constantly scrambling for near-term results rather than long-term market reform. President Jair Bolsonaro is up for re-election in 2022 – so more short-term stimulus can be expected.

Despite this turbulence in Brazil, wealth and investments are rising among a relatively upwardly mobile class demanding more choices and better prices for financial services.

New Explorer Recommendation
XP Inc. (XP)
XP is a leading technology-driven platform providing services in Brazil such as securities brokerage, private pension plans, investment banking, lending, foreign exchange markets and capital markets services and advisory and wealth management services for investors and institutional clients.

XP recently reported a more than doubling of adjusted first-quarter profit and announced plans to expand its banking services to small and large companies.

The company added about one million active customers in the first three months of 2021, a 47% jump, while assets under custody surged 96%. Adjusted net income rose 104% to the equivalent of $155.6 million. XP is benefiting from Brazilians seeking higher returns as the benchmark interest rate in the country fell to a record low.

“We had the best quarter in our history, and we will reinvest 100% of the result in our growth,” Chief Financial Officer Bruno Constantino said in a statement.

In February, XP announced the launch of a credit card for consumers, with digital banking accounts by mid-year. Last week, the company announced an agreement to acquire a minority stake in Giant Steps, the leader in systematic funds in Brazil. Giant Steps is the largest quantitative investment manager in Brazil, and the quantitative fund industry has been experiencing rapid growth in recent years.

Currently, 80% of the largest managers in the world focus on quantitative strategies, with these strategies representing more than 30% of total assets under management in the United States. In contrast, quantitative strategies represent less than 2% of the total assets under management in Brazil.

This is an aggressive pick in a growth sector that is somewhat insulated from the political and economic turbulence in Brazil. BUY A HALF

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Model Portfolio

StockPrice BoughtDate BoughtPrice 6/10/21ProfitRating
Altimeter Growth Corp. (AGC)144/15/2112-18%Buy a Half
Anglo American (NGLOY)Sold
Cabot Corporation (CBT)615/13/21634%Buy a Half
Cloudflare, Inc. (NET)244/30/2090276%Hold a Half
Fisker (FSR)152/4/211924%Buy a Half
International Business Machines (IBM)1301/7/2115116%Buy a Half
Marvell Technology Group (MRVL)504/1/21501%Buy a Half
Palantir Technologies (PLTR)225/27/21248%Buy a Half
Sea Limited (SE)152/8/192631670%Buy a Half
Taiwan Semiconductor (TSM)818/6/2011744%Buy a Half
Virgin Galactic (SPCE)7.3412/5/1935379%Hold a Half
XP Inc. (XP)New42Buy a Half

Portfolio Changes
None.

Updates
Altimeter Growth Corp. (AGC) shares were quiet this week. Singapore’s Grab Holdings postponed the expected completion of its merger with Altimeter to the fourth quarter as the ride-hailing and food-delivery giant works on a financial audit of the past three years. Grab is the latest company to be affected by intensifying scrutiny from U.S. financial regulators on deals involving special purpose acquisition vehicles.

Grab is the leading super-app platform in Southeast Asia with a user base that includes more than nine million drivers and merchants. Grab offers a wide range of on-demand services in the region, including mobility, food, package and grocery delivery services as well as mobile payments, and financial services in eight countries. I suggest you buy a half position here if you have not already done so. BUY A HALF

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Cabot Corporation (CBT) shares have been as quiet as the market. This specialty chemicals and materials edge is a combination of technical, commercial and manufacturing talent that’s among the best in the industry. One of the company’s key growth end markets is material used to make lithium-ion batteries. Cabot recently reported its second quarter results with earnings up a record 79% year over year.

For fiscal 2021, Cabot projects earnings of around $5 a share meaning that the stock is trading at just over 12 times forward earnings. The stock is an effective hedge on inflation and a play on economic recovery with exposure to the lithium-ion battery sector. BUY A HALF

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Cloudflare (NET) shares zoomed from 80 to 90 this week against the backdrop of a national focus on cybersecurity. The company provides a broad range of network services to businesses in more than 200 cities and over 100 countries. It offers network security, performance and reliability to a growing portion of global web traffic. Cloudflare ended the first quarter with 119,206 paying customers, up 34%. But 945 of those customers now pay over $100,000 each year, a 70% increase from the same period last year. I’m going to keep this a hold, though more aggressive investors can add to their position. HOLD A HALF

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Fisker Inc. (FSR) shares were up 30% this week as the company announced its ambitious plan to produce what could be the world’s first “climate neutral” vehicle. A key element to the Fisker story is that it won’t manufacture its own vehicles. Rather, it will use large contractors, such as Magna and Foxconn, to build its vehicles. We have to accept that the company will have little or no sales revenue in 2021; the company’s first product will be the custom Ocean, a mid-priced SUV to be launched in 2022. This is an aggressive stock. BUY A HALF

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International Business Machines (IBM) shares breached 150 as the company announced that all its workers would be reporting to their offices in early September. IBM is trading just over 13 times forward earnings and 12 times free cash flow, bundled with a 4.4% dividend yield. I encourage you to hold this stock as a long-term conservative play on key technology markets. BUY A HALF

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Marvell Technology Group (MRVL) shares moved up three points as the company reported net revenue of $832 million, up 20% year-on-year and above expected earnings on the back of demand for its infrastructure semiconductor solutions like networking and storage products.

Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capabable networks. These connected devices will talk to each other – in a process called machine-to-machine communication – and act on the information they get from one another.

Marvell’s key growth markets include drones, data integration and consumer and industrial robotics. The company expects to post double-digit growth in both sales and net profit in 2021. Despite these high-growth markets, the stock is trading at a reasonable 20 times earnings. BUY A HALF

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Palantir Technologies (PLTR) shares were up modestly in their first week as an Explorer recommendation. Revenue growth for the company remains strong, and its bread-and-butter governmental business continues to rack up contract wins such as last week’s deal signing worth $111 million with the United States Special Operations Command (USSOCOM).

Palantir is a software company specializing in big data analytics. Peter Thiel and a few others from the PayPal mafia founded Palantir in the early 2000s. Its software is used by government agencies in a wide range of applications and the company sees plenty of room to expand into the commercial sector. On May 11, the company posted its first quarterly profit as revenue reached $341.2 million. PLTR stock is roughly 35% off its January peak and the stock has been in a clear uptrend. BUY A HALF

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Sea Limited (SE) shares were up 10 points this past week as Shopee, its thriving e-commerce arm, announced it will launch in Colombia and Chile, where it plans to offer online sales via its website and local apps. Shopee grew even faster than the gaming group Garena in the last quarter. Revenue rose 250% to $922 million on the back of a 153% rise in orders.

Sea Money, Sea’s fintech division, saw adoption accelerate throughout the quarter. Mobile wallet payments volume more than tripled year over year to $3.4 billion, while quarterly paying users grew 145% to 26 million. We have taken profits several times over the past two years with this impressive growth stock. It benefits greatly as a fintech leader in the fast-growth markets of Southeast Asia. BUY A HALF

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Taiwan Semiconductor (TSM) shares were flat on no news this week. Last week, the company announced it has started construction at a site in Arizona where it plans to spend $12 billion to build a computer chip plant that’s on track to start production of chips using the company’s 5-nanometer production technology starting in 2024. Taiwan Semiconductor controls more than half of the global market for microchips. I would take advantage of the relative weakness to be a buyer of this dominant, strategic semiconductor stock. BUY A HALF

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Virgin Galactic (SPCE) shares continued to advance this week after surging almost 40% last week. Over the past month, the stock has nearly doubled after it successfully landed a powered test flight of its SpaceShipTwo spaceplane. Next up is a second test flight, and a third flight will include founder Richard Branson, with sales of seats to private astronauts reopening around the same time. A fourth flight, the last of the test flight program, will be with the Italian Air Force to demonstrate Virgin Galactic’s capabilities for microgravity research and professional astronaut training.

The space sector is becoming increasingly crowded so I’m keeping this stock a hold for now but depending on when you purchased the stock, feel free to take partial profits after this 2X move in one month. HOLD A HALF

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The next Cabot Explorer issue will be published on June 24, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.

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Chief Investment Strategist: Timothy Lutts
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