Cabot Explorer 739

Markets struggled for direction this week as data coming in is mixed and growth and inflation battle for a “goldilocks” middle ground. The controversy over DiDi’s recent IPO has Chinese-listed U.S. stocks in the crosshairs of both China’s regulators and American legislators. Looking ahead, these summer doldrums may just be a precursor to the market continuing its bull run and a bit of a pullback totally in line with the sharp upward swing we have experienced since March 2020. Today we have a pink sheet blue chip clean tech idea of the highest quality.

Cabot Explorer 739

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DiDi’s Defiance, Branson’s Boldness
The Uber of China, DiDi (DIDI) has been in the headlines and is caught up in a power play over data security and defying authorities in Beijing. All this highlights the fact that Chinese stocks listed in the U.S. should be considered speculative as they are caught between American and Chinese regulators.

Chinese companies seeking foreign capital are almost always incorporated offshore, so they have not needed Chinese regulatory approval in seeking a U.S. listing. This is likely to change.

DiDi’s IPO last week valued the company at more than $67 billion; the current value is $55 billion. Apparently, DiDi executives ignored warnings from Beijing to delay its IPO until issues regarding data security were clarified. Right after the IPO was launched, the Cyberspace Administration of China launched a cybersecurity review of the company, which it followed with an order to mobile app stores to remove DiDi’s China app. Then yesterday, some of DiDi’s subsidiaries were fined more than $77,000 each by China’s competition regulator.

This is quite a hammer blow to Didi and sends a strong message to other Chinese companies as China increases the level of scrutiny of Chinese companies listing in America. It’s too bad, because there’s a lot to like about Didi. The company reported a quarterly profit of about $800 million in the first three months of this year, most of that because of its market dominance and concentration in China. More than 90% of Didi’s first-quarter revenue came from ride hailing in China.

This controversy will hit Wall Street banks since DiDi was one of only three-dozen Chinese IPOs in the first half of 2021.

Meanwhile, Virgin Galactic (SPCE) boldly announced last week that it’ll try to fly founder Richard Branson on a fully crewed test flight on July 11. This is just ahead of privately held Blue Origin’s first flight with Jeff Bezos on board, scheduled for July 20.

The rivalry between the two companies is clear as Blue Origin CEO Bob Smith said Branson has a more modest goal. “We wish him a great and safe flight, but they’re not flying above the Kármán line and it’s a very different experience,” Smith said. The Kármán line is the unofficial altitude at which space begins, about 62 miles up.

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New Explorer Recommendation
Momentum and Value
Porsche (POAHY)
With electric vehicles (EVs) in investors’ spotlight, Volkswagen (VWAGY) has been much talked about as an excellent conservative play on this theme. As arguably the largest automaker in the world, VW sold more EVs last year than any other company in the world.

But another holding company and brand, Porsche Automobile Holding (POAHY), has a controlling interest in Volkswagen. And with typical Teutonic complexity, Porsche, in turn, is one of the many divisions of this auto giant, along with VW and Audi, and owns prestigious names including Bentley, Lamborghini and Bugatti. Porsche owns 31.4% of Volkswagen equity, but has 53.3% voting control of the company.

Surprisingly, Porsche is Volkswagen’s most significant profit center, followed by its Audi brand. Porsche also owns the prominent Taycan EV, priced from $79,900 to $187,600, as a sedan or an SUV. Porsche launched its Cayenne SUV way back in 2002 and in 2020 sold more than 90,000 Cayennes, by far its best seller with almost three times the sales of its most famous car, the 911. But most of Porsche’s profits come from its 911 sports car.

Porsche also announced last week a joint venture with Customcells to produce high-performance batteries that will significantly reduce charging times. The partnership will aim to develop car batteries with higher energy density than prototypes used in Porsche’s current electric cars.

Here is the opportunity. While competitor Ferrari’s (RACE) U.S.-listed shares trade at about 41 times forecasted 2021 earnings, Porsche trades at a mere seven times consensus forecasted earnings for 2021.

Last quarter’s earnings were up 905% over their previous pandemic comparison, with the stock nearly doubling since last September. Still, the stock trades at just 73% of book value and has only $37 million in debt. Porsche is a great example of what I call “pink sheet blue chips,” which trade over the counter. This stock has great trading volume and liquidity, so its OTC trading is not an issue. Let’s start with a half position.

BUY A HALF

Model Portfolio

Portfolio Changes
Pinduoduo (PDD) to Hold a Half
XP Inc. (XP) to Sell

Updates
Altimeter Growth Corp. (AGC) shares pulled back marginally this week as this SPAC awaits a merger with Singapore’s Grab Holdings, expected sometime in the fourth quarter. Grab is Southeast Asia’s leading super-app platform with over nine million users. 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

Cabot Corporation (CBT) shares added a couple of points this week but the stock hasn’t done much for us lately. Still, we need to have a little patience as we await third-quarter earnings results (due out August 9) for this specialty chemicals and materials company. While the company’s shares have surged around 25% over the past six months, the last couple of months have been quiet as we await earnings. Cabot projects earnings of around $5 a share meaning that the stock is trading at just under 12 times forward earnings with a return on equity of 19%. The stock is an effective hedge on inflation and a play on the economic recovery with exposure to the lithium-ion battery sector. BUY A HALF

Cloudflare (NET) shares were flat this week on no news. This 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 almost 120,000 paying customers, up 34%. I’m going to keep this a hold though more aggressive investors can add to their position. HOLD A HALF

Fisker Inc. (FSR) shares drifted lower this week, from 18.9 to 16.9, but I think we should stick with this niche EV player for three reasons.

Last week, it announced the official opening of several Fisker-dedicated operational areas at Magna’s world-class manufacturing facility in Graz, Austria and will also be working with Taiwan’s Foxconn.

Second, its Ocean SUV’s solar roof, designed to increase range and efficiency by supplementing the normal charge, and other green energy perks are very much in vogue.

Third, the Ocean’s under-$40,000 retail price point makes it more affordable for a younger demographic interested in environmental causes, along with potentially wider appeal in emerging market countries.

We have to accept that the company will have little or no sales revenue in 2021 as the company’s first product (the Ocean) will not be launched until 2022. This is an aggressive stock but I believe the EV market has room for a limited number of custom EV players. BUY A HALF

International Business Machines (IBM) shares pulled back from 146 to 140 this week after IBM President and Red Hat CEO Jim Whitehurst announced that he will be stepping down, though he will remain a “senior advisor” to CEO Arvind Krishna and the rest of the executive team. No clear explanation for the unexpected exit was provided.

“Big Blue,” as it is called, is still trading just under 13 times forward earnings and 12 times free cash flows, with a 4.7% dividend yield. I encourage you to hold this stock as a long-term conservative play on key technology markets. BUY A HALF

Marvell Technology Group (MRVL) shares had a quiet week as Wall Street waits for its next earnings report. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks. Marvell’s Q2 outlook is $1.06 billion in revenue, up 46% year over year. BUY A HALF

Palantir Technologies (PLTR) shares were hit hard this week, falling from 26.8 to 22.8, but I believe the story is intact. Its software is used by government agencies in a wide range of applications. In the recent first-quarter report, management disclosed that U.S. government revenue had grown 83% year over year. Palantir has signed various sizable government contracts in the past six months. And the company sees plenty of room to expand into the commercial sector. I encourage you to buy shares if you have not already done so. BUY A HALF

Pinduoduo (PDD) shares tumbled from 128 to 110 this week as the stock was caught in the controversy regarding DiDi and the crackdown by both Chinese and American regulators. I’m moving this to a hold pending some clarification on this issue and hoping for a possible bounce-back in the coming week.

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 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. We need to watch this stock carefully to see if it can recover some ground this week as Chinese stocks are coming under increased scrutiny. MOVE FROM BUY A HALF TO HOLD A HALF

Sea Limited (SE) shares have, over the last six months, exploded from 196 to 282, but this week pulled back to 268. 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. Long-term holders may wish to add some shares at this level. BUY A HALF

Taiwan Semiconductor (TSM) shares were quiet this week, still well short of the 2021 high of 138. 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

Virgin Galactic (SPCE) shares were choppy but ended the week largely unchanged as the company announced that Sir Richard Branson’s first flight will be on July 11. He will be one of six people on board the VSS Unity spacecraft; the others will be three Virgin Galactic employees and two pilots.

Branson would beat rival Jeff Bezos into space by nine days since Bezos will fly from West Texas on July 20 aboard a rocket made by Blue Origin, his space-travel company. Last week, Virgin Orbit delivered satellites from three countries into space, its second successful rocket launch from a plane. The space sector is becoming increasingly crowded so I’m keeping this stock a hold for now but depending on when you purchased SPCE, feel free to take partial profits, though some analysts bumped their price target up to 50 this week (it currently trades at 44). Keep in mind that this is an aggressive stock. HOLD A HALF

XP Inc. (XP) gave up another three points this week so I’m moving this to a sell as emerging market stocks are underperforming and we have to make room for new ideas. MOVE FROM BUY A HALF TO SELL

The next Cabot Explorer issue will be published on July 22, 2021.
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