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Cabot Explorer 738

The S&P 500 has now gained 90% since its closing low in March 2020. This alone has made investors a bit cautious but all indications are that we are still in a bull market. Explorer recommendations did well this past week and today we go back to China for a new idea that many of you will know.

Cabot Explorer 738

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Back to Out-of-Favor China
The S&P 500 has now gained 90% since its closing low last March. Quite amazing. We now need to look forward and remain optimistic while a bit cautious. There are clearly signs of inflation, which could and should lead the Federal Reserve to lift interest rates from the near-zero levels. What could drive stocks forward? A strong economy should help, even if interest rates eventually rise.

Explorer recommendations did well this week and today we go back to China for a new idea that will be familiar to many of you. This company is a high-growth stock that has scaled up fast in China’s consumer market. This is China’s great edge – its massive population and “catch-up” growth.

From 1980 to 2020, roughly 600 million Chinese moved from the countryside to work in urban area factories. China’s total GDP in 1980 was under $90 billion in current dollars; now it’s almost $18 trillion.

Finance and technology is at the heart of this tug-of-war between China and the West. China has an enviable high-tech manufacturing and industrial base while advances in U.S. manufacturing now allow a ton of American steel to be produced with one-tenth the manpower required in the 1980s. Meanwhile, Panasonic has a plant in Japan that churns out two million plasma screens each month with only 25 workers. This is the future and a challenge for all countries—more output and the need for fewer, but highly skilled, workers.

Technology competition in space, 5G and 6G infrastructure, financial technology, robotics, drones, electric vehicles, advanced manufacturing, semiconductors and all the future-oriented industries will be critical to each country’s wealth, power and national security.

New Explorer Recommendation
Pinduoduo (PDD)
Private Chinese growth and tech stocks are out of favor right now for two reasons. First, Beijing is cracking down on the sector fearing that they have become too independent. Some of them, such as Alibaba (BABA), have grown so fast and have become so large that they have tremendous market power, which unsettles regulators. Finally, quite a few of them, while growing revenue and customers at a torrid pace, are still losing money and investors are losing patience.

The result is that a number of Chinese stocks are off their early 2021 highs by around 30%. Such is the case with our new recommendation: Pinduoduo. The chart does not look all that appealing but I see this as an attractive entry point for long-term investors.

Many of you will be familiar with this name and their business model.

Pinduoduo is the third-largest e-commerce player in China in terms of annual revenue, but in terms of total shoppers it’s actually now larger than JD.com (JD), with 628 million annual active buyers. Like Alibaba, Pinduoduo generates most of its revenue through listing fees and ads for third-party merchants.

Pinduoduo’s secret sauce in China’s discount marketplace is a platform that allows shoppers to team up for group discounts. This strategy relies on users sharing links across social networks in China. The company has also partnered with leading brands to challenge Alibaba and JD and enables online agriculture by helping more than 12 million farmers to directly ship their produce to customers.

The company continues to post impressive growth. Pinduoduo’s revenue surged 97% in 2020, then jumped another 239% year over year in the first quarter of 2021 to reach $3.3 billion. Analysts expect its revenue to grow 92% in full-year 2021. The company reports that it had 823 million active buyers on its platform as of March 2021, a 30% increase over the prior year.

Given Pinduoduo’s strong growth numbers, I suggest that investors comfortable with China risk begin with a half position.

BUY A HALF

PDD-062421

Model Portfolio

StockPrice BoughtDate BoughtPrice 6/24/21ProfitRating
Altimeter Growth Corp. (AGC)144/15/2112-16%Buy a Half
Cabot Corporation (CBT)615/13/2157-6%Buy a Half
Cloudflare, Inc. (NET)244/30/20104333%Hold a Half
Fisker (FSR)152/4/211928%Buy a Half
International Business Machines (IBM)1301/7/2114512%Buy a Half
Marvell Technology Group (MRVL)504/1/215510%Buy a Half
Palantir Technologies (PLTR)225/27/212618%Buy a Half
Pinduoduo (PDD)New122Buy a Half
Sea Limited (SE)152/8/192811790%Buy a Half
Taiwan Semiconductor (TSM)818/6/2011643%Buy a Half
Virgin Galactic (SPCE)7.3412/5/1941456%Hold a Half
XP Inc. (XP)436/10/21468%Buy a Half

Portfolio Changes
None.

Updates
Altimeter Growth Corp. (AGC) shares are holding firm as this SPAC awaits a merger with Singapore’s Grab Holdings, expected some time in the fourth quarter. Grab is the leading super-app platform in Southeast Asia with users comprising over 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

AGC-062421

Cabot Corporation (CBT) shares were off a couple of points on no news.

This specialty chemicals and materials company has technical, commercial and manufacturing talent among the best in the industry. Cabot recently reported its second quarter 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 11 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

CBT-062421

Cloudflare (NET) shares zoomed from 96 to 104 this past week as the company announced new integrations with Microsoft Azure Sentinel, Splunk, Datadog, and Sumo Logic to make it easier for businesses to connect and analyze key insights across their infrastructure.

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.

The company ended the first quarter with 119,206 paying customers, up 34% from a year ago. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF

NET-062421

Fisker Inc. (FSR) shares jumped 9% yesterday following news that the company was being added to the Russell 3000 index. The company recently announced its ambitious plan to produce what could be the world’s first “climate neutral” vehicle. Its shares have pinballed from a high of around 28 in February to a low of 10 about a month ago, back up to 19 as of this writing. This is well above the 10 per share value at which Fisker’s SPAC deal was struck less than a year ago.

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 this year; 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

FSR-062421

International Business Machines (IBM) shares were largely unchanged and prospects going forward are dependent on how its pivot to cloud-based services goes. IBM’s revenue grew just 1% for the quarter, but its cloud-based revenue was up 21%. The hybrid cloud computing market is a trillion-dollar opportunity. “Big Blue,” as it is called, is still trading just over 13 times forward earnings and 12 times free cash flow, with a 4.5% dividend yield. I encourage you to buy this stock as a long-term conservative play on key technology markets. BUY A HALF

IBM-062421

Marvell Technology Group (MRVL) shares advanced three points as the company recently 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. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks.

Its networking business recorded 26% year-over-year growth during the quarter and accounted for 60% of the total revenue. Excluding a recent acquisition (Inphi) contribution, Marvell’s networking revenue was up 21% on the back of growth in the 5G and cloud networking markets. Marvell’s Q2 outlook is $1.06 billion in revenue, which would be up 46% year over year. BUY A HALF

MRVL-062421

Palantir Technologies (PLTR) shares added a point to reach 26 this week.

Palantir is a software company specializing in big data analytics. According to IBM, 90% of the entire world’s data has been generated just in the past two years and Palantir offers those companies cutting-edge software to organize and understand it.

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, as Palantir’s customer base is concentrated with just 149 customers and the private sector currently represents just 44% of its business. I encourage you to buy shares if you have not already done so. BUY A HALF

PLTR-062421

Sea Limited (SE) shares continued their amazing run, reaching an all-time high of 280. Sea’s 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

SE-062421

Taiwan Semiconductor (TSM) shares have been treading water for the past month as the market sorts out the semiconductor shortage. The company’s strength and profits primarily come from high-end processors, where it has pricing power due to its dominant position. Recently, 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. I encourage you buy this dominant, strategic semiconductor stock if you have not already done so. BUY A HALF

TSM-062421

Virgin Galactic (SPCE) shares tacked on five points this week to break 40 as investor interest in commercial space continues to expand. The next step for Virgin is a second test flight and a third flight that will include founder Richard Branson. 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

SPCE-062421

XP Inc. (XP) picked up another point in its second week as an Explorer recommendation. XP is a leading technology-driven platform providing investment and financial services in Brazil.

XP reported a more than doubling of adjusted first-quarter profit as 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. This is an aggressive pick in a growth sector that is somewhat insulated from the political and economic turbulence in Brazil. I encourage you to begin a position if you have not already done so. BUY A HALF

XP-062421


The next Cabot Explorer issue will be published on July 8, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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