Last week’s recommendation, Virgin Galactic (SPCE), took off like a rocket and this week we go underground to recommend a premier global company that provides the backbone for future-oriented technologies such as green energy and electric vehicles.
Looking at the big picture impacting global stocks, U.S.-China haggling continues but the NAFTA redo looks like a done deal as we head into the end-of-year rush. As a result, our Emerging Markets Timer (EEM) moved into a stronger bullish position, putting some distance between its 25- and 50-day averages as it moves back towards 44.
Cabot Global Stocks Explorer 700
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From the Stars to Below the Ground
Because we missed an issue on Thanksgiving, today is a “catch-up” issue.
The Cabot Global Stocks Explorer portfolio had another positive week led by last week’s recommendation, Virgin Galactic (SPCE), which is up 27% this week.
Part of the reason is that Morgan Stanley picked up coverage of the stock with a 2020 price target of 22 – even higher than my price target of 20.
In addition to our current recommendation, Marvell (MRVL), I will continue to look for promising 5G ideas as 5G smartphones are magnitudes faster than current 4G phones and are expected to account for one-fifth of all phones worldwide four years from now, compared to less than 1% today. A new industry report from Ericsson notes that there will be more than 10 million 5G subscriptions worldwide by the end of this year and within four years, that number will be 1.9 billion – or about 20% of all mobile subscriptions.
Looking at the big picture, U.S. and Chinese trade negotiators are laying the groundwork for another delay of tariffs set to kick in on $165 billion of Chinese goods on December 15, as they continue to haggle over how to get Beijing to commit to concrete purchases of U.S. farm products.
This week’s recommendation may not be high tech but it provides the backbone of many future industries such as green energy.
The Copper King in a Strong Uptrend
New Explorer Recommendation: Freeport-McMoRan (FCX)
Between 2000 and 2011, commodities were on fire, fueled by China’s strong demand and the willingness of Australia, Brazil, Canada and South Africa to invest in boosting production.
Now you rarely hear much about the commodity giants that used to dominate headlines in financial publications like the Financial Times.
And Blenheim Capital Management – once the world’s largest commodities fund – recently threw in the towel. At its peak in 2011, Blenheim managed $9 billion in assets. By the time it closed up shop, its assets had tumbled to $1.5 billion.
An ideal investment has three elements: First, it is cheap. Second, it is ignored or hated. Third, it has begun an uptrend.
That’s exactly how I would describe our recommendation today, Freeport-McMoRan (FCX).
Freeport-McMoRan, headquartered in Phoenix, Arizona, engages in the managing of mineral properties in North America, South America, and Indonesia. The company explores for copper, gold, molybdenum, silver, and other metals primarily in Indonesia as well as in Chile, Peru, New Mexico and Colorado. It is the world’s most significant copper producer.
Copper is in strong demand across the global economy, but here are three sectors in which copper plays a vital role.
Communications
Copper has been at the center of communications throughout history, from the telephone to satellites and wireless communication.
Infrastructure
Copper is the backbone of construction and emerging infrastructure as well as a critical material for wire, plumbing and hardware.
Technology
Copper is the oldest metal but still central to emerging technologies such as medical science research and green energy. One key driver is the growth of electric vehicles. While the typical conventional automobile contains about 50 pounds of copper, electric vehicles use more than double that amount.
So the demand for copper remains high. But Freeport-McMoRan is also making the right moves to improve efficiency and profitability.
The Grasberg mine located in Indonesia is the second-largest copper mine in the world and provides the majority of the gold output for the company. It is in transition from an open pit to an underground mine and is projected to increase copper production. According to a recent company presentation, Freeport-McMoRan projects an increase in copper production of 30% and a 70% increase in gold production by the end of 2021.
Turning to copper prices, Bloomberg shows a price of about $2.77 a pound while the average over the past 10 years has been $3.07 and the high of roughly $5 a pound. FCX’s forward projections estimate a copper price of $3.30 based on growing demand and historically low inventories.
The Chile Shock & China Factor
Chile is the global copper behemoth, accounting for 28% of the world’s production. To put this in perspective, Saudi Arabia accounts for just 12% of the world’s oil production. Chile (where FCX has minimal exposure) is currently enduring mass protests that commenced in mid-October to combat income inequality and the rising cost of living, resulting in a massive potential copper supply shock at a time when the market is already in a deficit and inventories are exceedingly low.
There is also evidence of increasing copper consumption and investment in China with copper imports on the rise after a period of weakness.
To sum up, FCX and copper are demonstrating rising relative strength, Chile supply may be disrupted, inventories are at historically low levels, demand projections are solid and China seems to be picking up the pace of purchases. In addition, Freeport is ahead of schedule in terms of increasing output and gaining efficiencies, which should boost margins.
All of that is good news for Freeport-McMoRan, and by extension FCX stock. BUY A HALF POSITION
Model Portfolio
Updates
Alibaba (BABA) shares moved from 198 to 205 this week getting back on track following the company’s 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 as BABA is perhaps the best conservative China consumer play out there. BUY A FULL POSITION
DBS Bank (DBSDY) shares moved modestly forward this week with the market but keep in mind that this is largely a dividend and income play with the dividend more than doubling 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. 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 12 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 5% yesterday and 8% for the week, giving me some confidence that it can be a core holding for Mexico in the portfolio.
This stock could gain traction since TV is like having CBS, Comcast and 21st Century Fox tied together in one package. The company owns 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.
All of this is very positive for TV and I continue to rate this stock a buy. BUY A HALF
ICICI Bank (IBN) shares are up more than 40% in the last three months and in a gradual uptrend in the last month.
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 took a breather this week, dipping just below 30 after topping out at 32 last month.
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 up 4.7% yesterday, propelled by 5G momentum from Samsung, which uses Marvell’s 5G chips.
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.
New markets are emerging in which Marvell has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics. Marvell has been shifting to 5G technology for years and has an important first-mover advantage over competitors.
That means the firm is a leader in the following high-growth markets:
- A virtual reality market projected to reach $65 billion by 2021
- A wearable tech market projected to reach $27.2 billion by 2021
- A drone market forecast to hit $49 billion
- Data integration projected to be a $23 billion market
- Two different robotics markets – targeted at $10 billion for consumers and $227 billion for industrial needs
- Public cloud services estimated at $205 billion
That’s more than $600 billion in potential customers for Marvell’s products!
In a conference call, President and CEO Matt Murphy noted, “We expect a strong increase in 5G-related revenue, driven by continued Korea deployment and the start of 5G adoption in Japan and other countries, such as the U.S., as they start to install 5G base stations in higher volumes.”
A new industry report from Ericsson notes that there will be more than 10 million 5G subscriptions worldwide by the end of this year and within four years, that number will be 1.9 billion - or about 20% of all mobile subscriptions.
This is a quality company operating in high-growth, strategically important markets. I recommend that you buy a half position if you have not already done so. BUY A HALF
NovoCure (NVCR) shares lost considerable ground this week on no news after making a nice move 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 mechanically disrupting cancer cell division.
This process uses electrical fields to non-invasively disrupting cancer cell division and growth, a tactic that has shown positive clinical results in some cancers. The firm’s target market could quadruple in three years and pick up momentum from there. More immediately, 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 were flat this week as we wait for the company’s rollout of 5G services in early 2020.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and with 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) shares were up 4% this week as 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, 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, currently trading for about seven times earnings and offers a current dividend yield of 5.8%. BUY A FULL POSITION
Sea Limited (SE) shares moved little this week after making a nice run from 30 to 37 over the previous few weeks. Sea’s third-quarter numbers were impressive, with revenue up 214% year-on-year and quarterly active users reaching 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 share 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
Virgin Galactic (SPCE) shares are already up 27% since being added to the portfolio last Thursday.
Boeing’s venture capital arm HorizonX took a $20 million minority stake in Virgin to help Sir Richard Branson’s company develop a vehicle to travel Earth at hypersonic speeds.
The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue.
Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021.
The cost of a Virgin flight on SpaceShipTwo, which can hold seven passengers and two pilots, is $250,000. I agree with a just-released Morgan Stanley report that equates the space tourism company to a biotech in terms of risk/reward and that the big payoff down the road will be hypersonic point-to-point travel.
While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at nearly five times the speed of sound could make the same journey in just two hours. BUY A HALF
The next Cabot Global Stocks Explorer issue will be published on December 26, 2019.
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