As US trade disputes spread to Latin America, Europe and a China deal may be pushed into 2020, markets struggled early in the week but rebounded yesterday.
Hong Kong retail sales were hammered in October but China’s manufacturing finally turned upward. Our emerging market signal is positive with EEM trading just above its 50-day moving average.
We will continue to diversify the portfolio and today rise above worldly concerns with a new recommendation that just may capture your imagination and make you money in 2020.
Cabot Global Stocks Explorer 699
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As Trade Disputes Spread, We Look to the New Frontier
Our Explorer portfolio is doing well, led by Luckin Coffee and Sea Limited, with majority of emerging market ideas outperforming the market.
After breaching 44 a few weeks ago EEM is now at 42.6 just above its 50-day moving average so we need to be a bit wary.
Markets rebounded yesterday after an unsettled couple of days as a package of US trade actions were announced beginning with tariffs on steel and aluminum from Argentina and Brazil.
The U.S. Trade Representative (USTR) also said it would review hiking tariffs on European products because of a dispute over aircraft subsidies.
In addition, USTR said it planned to slap punitive duties of up to 100% on $2.4B of French products such as champagne, handbags and cheese because a new French digital services tax (DST) would harm U.S. tech companies.
Meanwhile, Hong Kong retail sales declined 24% in October from a year ago as Chinese tourists are staying away due to pro-democracy protests now into their sixth month.
China’s exports to Asia and Europe are strong and manufacturing is trending upward after six months of decline and Huawei announced that its high-end smartphone contains no U.S. content at all.Against this mixed bag of news, our Explorer portfolio is doing well and today’s new recommendation should keep the momentum moving forward.
Featured Stock
New Explorer Recommendation: Virgin Galactic (SPCE)
The commercialization of space has captured the imagination of many, including those with a lot of cash to burn.
Elon Musk spent $100 million in 2006 to launch Space X.
Jeff Bezos is reportedly injecting $1 billion a year into Blue Origin.
Blue Origin hopes to go the moon for passenger trips by 2024 while Musk has Mars in his sights, with SpaceX planning its first cargo mission to the red planet in 2022. A crewed mission is to follow a couple of years later.
Since 2000, Goldman Sachs estimates that $13.3 billion has been invested in space startups. We certainly have come a long way from Sputnik 1, the first satellite launched by the Russians in 1957.
Incrementally lower costs, new technology, and increased commercial activity could make space the next trillion-dollar industry.
And one of the most intriguing segments of the space economy is space tourism.
Dennis Tito paid $20 million to become the first space tourist in 2001 while prepaid tickets for 90-minute suborbital flights in 2020 with Virgin Galactic went for a cool $250,000.
Virgin’s flamboyant and well-connected entrepreneur Sir Richard Branson has brought in heavy hitters like Chamath Palihapitiya, a billionaire tech investor and former Facebook executive.
More than 600 people from 60 countries have secured a spot on one of Branson’s first space flights by making a deposit representing half the total fare price. Virgin has an additional 2,500 people on the waiting list.
This 90-minute flight will escape the Earth’s atmosphere allowing passengers to experience weightlessness and see the planet’s rim from space.
Virgin Galactic operates the reusable SpaceShipTwo spaceflight system.
This consists of WhiteKnightTwo, a custom-built, carrier aircraft, and SpaceShipTwo, the world’s first passenger carrying spaceship to be built by a private company and operated in commercial service.
Virgin Galactic was founded and won the X Prize for its SpaceShip One in 2004. The company has been at the forefront of commercial space activity and produced the first private space vehicle to put humans into space.
In 2010, George Whiteside joined the team from NASA and he is currently CEO. In 2016, the company was awarded a commercial operator license by the FAA.
Credit Suisse recently concluded that that Virgin would have a “near-term monopoly” on the space tourism market once Spaceship Two begins operations in 2020.
Virgin Galactic (SPCE), which began trading on the NYSE on October 28 at 11.75, has pulled back about 35% since its public launch and is now basing between 7 and 7.5. The company’s third quarter earnings results, released November 12, revealed a net loss of nearly $51 million for the quarter and a loss of $138 million for the year to date.
My recommendation of Virgin Galactic at this time is based on the following:
- share price has come off 35% in the last few months leading to an attractive entry point
- the company has adequate cash reserves and a pipeline of customers with demonstrated willingness to pay
- Credit Suisse report underscores the company’s opportunity for a near monopoly on space tourism
- world-class executive team and deeply experienced pilots
- projected 70% Google-like profit margins are a key part of its strategy as it plans to incrementally lower prices as it scales upward
- potential to leapfrog to hypersonic point-to-point travel cutting travel time for LA-Tokyo from 11 hours to two hours
- first full flight in 2020, which will include Branson and six others, will create great drama as well as significant media and investor attention
The chief risk is of course the possibility of a failed or unsuccessful flight, which would, without question, hit the stock hard. For this reason I see Virgin as an aggressive idea and recommend a 20% trailing stop loss.
As I have done my research, I’m been impressed with the seriousness of this enterprise and the team of investors and management that has been pulled together to prepare for the 2020 launch of private flights. BUY A HALF POSITION
Model Portfolio
Updates
Alibaba (BABA) shares, after breaking 200 last week, have pulled back to 194 despite very good numbers and a successful IPO in Hong Kong.Baba should be performing better based on its recent positive earnings report (sales up 40%), and big annual Singles Day sales event ($38 billion of merchandise sold). For a company of its size, BABA is posting impressive numbers and is a core holding for those looking for exposure to the rising Chinese consumer class.For now the stock appears to be a hostage to the U.S.-China trade talks but I would still be a buyer under 200. BUY A FULL POSITION
DBS Bank (DBSDY), shares have held pretty firm as Singapore had one of its weakest weeks in the last two months.
Keep in mind that this is largely a dividend and income play with dividends climbing by over 100% from 2014 to 2018.
DBS is the largest and highest quality bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore. Its tentacles reach out through 200 branches in 50 cities. DBS produces steady profit margins, revenue and earnings and is also increasing market share in consumer and corporate banking.
Despite all of these strengths, DBS is trading at only twelve times trailing earnings. Plus it comes with a 4.8% dividend yield. I encourage you to buy at these levels for a great core holding and play on Southeast Asia. BUY A HALF
Grupo Televisa (TV) shares were up yesterday but have been a bit of a laggard in the portfolio as Mexico remains out of favor. We’ll give it some more time but I’ll consider removing it from the portfolio if it slips below 10.
This stock could gain traction since TV is like having CBS, Comcast and 21st Century Fox tied together in one package. The company owns an appealing group of businesses, including a dominant set of Mexican TV stations; a controlling stake in the country’s largest satellite TV business; and a 36% interest in Univision, the big U.S. Hispanic broadcaster.
In addition, TV is also Mexico’s top provider of cable TV services and has a profitable programming contract with Univision that is one of its most prized assets.
All of this is very positive for TV and I continue to rate this a buy. BUY A HALF
Huya (HUYA) shares have been underperforming despite recently reporting a third quarter with revenue up 77% year-over-year and net income up 70%.
I think it’s best to move Huya to a sell but I will keep an eye on it and we can come back when it forms an uptrend. MOVE HOLD A HALF TO SELL
ICICI (IBN) is the top-performing bank in India and the stock was up nicely yesterday and increased 15% in the past month as it closes in on 15.
Its most recent quarter showed net interest income jumped 26% year over year and the net interest margin was a healthy 3.64%. The bank posted robust 22% loan growth in the retail segment with deposits rising 25% as credit quality improved.
IBN is a solid India play and there are still 191 million Indians without a bank account, which means a lot of potential new customers. This is a good entry point to take a stake in IBN if you have not yet done so. BUY A HALF
Luckin Coffee (LK) shares are up one day and down the next this week but have gone from 19 to 30 over the last three weeks.
Luckin SEC filings show that seven institutional investors collectively hold over 60% of shares. In the third quarter, the number of stores/outlets grew to 3,680 and revenue was up nearly 70% or 2.9 times the increase in store count.
Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half of Starbucks’. Most of its shops are set up for takeaway and delivery.
Luckin is an aggressive stock carving out a niche in China’s high growth coffee market. I like the trajectory of this young company and maintain a buy rating for aggressive investors. If you have owned LK for a while, feel free to take partial profits to lock in some gains. BUY A HALF
Marvell Technology Group (MRVL) shares were off a couple of points this week as the company reported third quarter numbers that were just short of expectations.
Marvell’s net profit of $0.17 was as expected but revenues of $662 million were a bit off and declined 22% year over year.
Marvell is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware to talk to each other. Most of Marvell’s customers are located in Asia and they accounted for 85% of Marvell’s net revenue in fiscal year 2019.
New markets are emerging in which Marvel has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics.
This is a quality company operating in high growth, strategically important markets. I recommend that you take advantage of this week’s dip to buy a half position if you have not already done so. BUY A HALF
NovoCure (NVCR) shares have pulled back to 89 after moving from 75 to 96 in the first three weeks of November.
NVCR is a unique company in the biotech space, marketing what is actually a device, Optune, to treat cancer in a revolutionary way by way of mechanically disrupting cancer cell division.
This process uses electrical fields to non-invasively disrupting cancer cell division and growth. This tactic has shown positive clinical results in some cancers and the firm’s target market could quadruple in three years and pick up momentum from there. Sales are expected to be up 30% in 2020 with positive earnings.
In its most recent quarter, gross margins were firm at 75% and the balance sheet is strong with $313 million in cash and $143 million in long-term debt. I encourage you to begin with a half position if you have not already done so. BUY A HALF
Rakuten (RKUNY) shares formed a modest uptrend this week and should benefit from higher than expected online sales. In addition, Rakuten should move as the company’s rollout of 5G services moves forward in early 2020.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank, and #1 credit card.
If you haven’t yet bought shares, this would be a good time to buy a half position since it is trading at just under 9 times trailing earnings. BUY A HALF
Rio Tinto (RIO), the most recent recommendation to the portfolio, held firm in a tough market. The company announced this week that it is spending $1.5 billion to expand its Kennecott copper mine in Utah. This mine produces 20% of America’s copper.
Founded in 1873 and headquartered in London, with half of its current operations in Australia, Rio Tinto is one of the world’s premier multinational mining, metals and commodity firms. Operating across 35 countries, Rio supplies the world with gold, diamonds, aluminum, copper, titanium, iron ore and other industrial metals.
As some key commodities such as copper seem to be beginning an uptrend, Rio offers good value; it’s currently trading for about seven times earnings and offers a current dividend yield of 5.8%. BUY A FULL POSITION
Sea Limited (SE) shares have moved from 30 to 37 and are already up over 300% so far in 2019. Sea’s third quarter numbers were impressive with revenue up 214% year-on-year and quarterly active users reached 321 million, up 82%.
Sea is an aggressive idea focused specifically on Southeast Asian markets representing 650 million consumers. Finally, its e-commerce platform Shopee is being deeply discounted despite gaining market in the fast-growing Southeast Asian market.
It makes sense to take a portion of these profits off the table and to have in place a trailing stop loss of 20% to lock in gains. New subscribers should purchase Sea up to $40. BUY A HALF
The next Cabot Global Stocks Explorer issue will be published on January 2, 2020.
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