This week’s leading issue is the China virus, which is impacting markets.
We will need to keep an eye on this breaking issue. Still, Virgin Galactic jumped another 14% yesterday and is up over 80% in the last month.
Our emerging market timer is clearly positive and today’s recommendation is an emerging country that is the overlooked big winner from the two recent trade deals. It is in a nice uptrend and has fuel to burn going forward, backed by several positive trends.
Cabot Global Stocks Explorer 703
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The Big Winner of the Two Trade Deals is … Mexico?
As the heavy hitters head to Davos to debate the future of capitalism, the world moves forward in all sorts of unexpected ways.
Coronavirus, the deadly virus that is emerging in China, is concerning, especially with the Chinese New Year holidays approaching. Below is a chart that shows how the disease is spreading and why the authorities have quarantined Wuhan - China’s seventh largest city.
The virus infected stocks too, especially Chinese stocks, earlier in the week and we will need to keep an eye on this breaking issue.
Still, Virgin Galactic (SPCE) jumped another 14% yesterday and is up over 80% in the last month. Sea Limited (SE) climbed 9% yesterday and NovoCure (NVCR) came alive this week as well, rising 15%.Another concern in China (and America?) is the high debt levels.
As of last September, Chinese banks were sitting on at least $900 billion of loans that are behind in payments or in default.
But capitalism often creates opportunities out of problems.
American companies such as Blackstone, Lone Star, Oaktree and Bain Capital are part of a group that is investing in Chinese nonperforming loans.
Investing in defaulted Chinese loans is usually a property play as investors buy loans at discounted prices, fix them up, and then resell into the market.
This just underlines that behind every stock and trend is a story.
For example, Luckin Coffee (LK) is doing remarkably well, but what was behind this recommendation was a clear trend. As country incomes have risen in countries such as Japan and Taiwan, coffee consumption has risen even faster. China is now hooked on coffee.
And this is helping Brazil, whose coffee exports to China have more than doubled in the last five years.
“The transformation that China is undergoing when it comes to coffee is spectacular,” Eduardo Heron Dos Santos, technical director of the national Coffee Exporters Council (Cecafe), told Xinhua.
This brings me to two recently completed trade deals—the new NAFTA deal with Mexico and Canada, and the China trade truce signed last week.
If I had to pick the big winner from both agreements, it would be Mexico.
And the market seems to agree with me.
Here is why - and an innovative and aggressive way to play this trend.
New Explorer Recommendation: Direxion Mexico 3X Bull ETF (MEXX)
While the Mexican economy has not been particularly strong, its stock market is in a nice uptrend and the two trade deals, together with cost advantages, work in Mexico’s favor for several reasons.
First, China’s rise as the world’s largest manufacturer over the last few decades has been a major headwind for Mexico. We know that thousands of American firms moved manufacturing operations to China. This trend hit Mexico doubly hard since Mexican firms moved operations to China too and American firms chose China over Mexico as a manufacturing destination.
But now, with Mexico’s wages lower than China’s, Mexico has become the low-cost manufacturing base of choice – especially for North American markets.
And while I realize we all want more U.S. manufacturing jobs, please keep in mind that Mexican exports to America already contain 40% U.S. content while Chinese exports to America have only 4% U.S. content.
In other words, a washing machine assembled in Mexico and exported to America has about 40% of its components made in America.
In sharp contrast, for products assembled in China and then exported to America, only 4% of the content is made in America—think an iPhone, for example. Almost all of its components are sourced in Asia.
So, U.S. imports of Mexican products are 10 times better for American workers when compared with Chinese imports.
Improved investment and trade in Mexico could reduce some immigration pressures by creating better jobs in Mexico and America while also expanding U.S. exports to Mexico and South America.
And with the new NAFTA deal passing Congress, a cloud of uncertainty has been lifted.
Analysts are calling it “near shoring,” “in shoring” or “reverse globalization.”
The U.S. is already the biggest foreign direct investor in Mexico, accounting for 45% of all foreign investment, according to the State Department.
How will all this shake out and what will American Congressmen (and U.S. labor groups) think of U.S. multinationals shifting some manufacturing from China to Mexico?
American firms still export three times as much to Mexico as they do to China. And Mexico, in turn, sends 80% of its exports back across U.S. borders. In comparison, Mexico’s exports to its giant neighbor to the south, Brazil, accounted for only 1% of its total exports.
Mexico has also launched more free-trade agreements that involve in excess of 40 countries – more than any other country and enough to cover more than 90% of the country’s foreign trade.
Another plus is Mexico’s very favorable demographics, where almost half of the country’s population is what we would term working age, and 27% of Mexicans are under the age of 14.
Most importantly, Mexican stocks are in a clear uptrend.
To gain direct and broad exposure to Mexico’s stock market, one could go with the Mexico iShares exchange-traded fund (ETF), which trades under the symbol (EWW).
But I recommend going with the bolder, more aggressive Direxion MSCI Mexico 3X Bull ETF (MEXX), which follows a basket of leading Mexican stocks but seeks to move three times (300%) the daily price change in the index – both up and down.
Because of that volatility, I suggest a 20% trailing stop-loss on this idea. BUY A HALF POSITION.
Model Portfolio
Updates
Alibaba (BABA) was flat this week amidst the virus scare, but has been in an uptrend since last August, moving from 159 to 225.
The next earnings release is particularly important because it will show results for the most important quarter of the year. Due to the seasonality of shopping, Alibaba generates approximately 30% of its yearly profits in the fourth quarter.
For a company of its size, BABA is a remarkable growth stock and is a great core holding for those looking for exposure to the rising Chinese consumer class. I would still be a buyer at these levels. BUY A FULL POSITION.
Cosan (CZZ) shares were up a point this week but have been a bit of a disappointment since being added to the portfolio about a month ago.
Cosan, based in Brazil, offers a diversified portfolio of fuel distribution, sugar production, ethanol and electricity, rail transportation, warehousing, as well as natural gas distribution.
Its most recent quarter indicated that momentum is accelerating, with net profits up 790% year over year. The stock is trading at just 12 times trailing earnings and perhaps 10 times on a forward basis. BUY A HALF.
Freeport-McMoRan (FCX) is a play on recovering sentiment in iron and copper. Over the last 25 years, FCX has moved with copper prices 88% of the time.
The company primarily 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.
However, I have decided that one play on higher copper and commodity prices is enough. Since Rio Tinto is trading at more attractive valuations, implying higher upside potential, I’m moving FCX to a sell. MOVE FROM BUY TO SELL.
Luckin Coffee (LK) shares moved from 46 to 51 on Friday and then profit taking and the impact of issuing new shares knocked it back to where it started.
Still, LK has jumped eight points in two weeks and has more than doubled in the last six months.
The company also recently announced Luckin Coffee Express, a vending machine for brewed coffee and snacks. The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks stores, with a composite valuation of $54 for the stock.
More conservative investors should take some profits off the table but most aggressive investors should keep all their shares. BUY A HALF.
Marvell Technology Group (MRVL) shares have not done much over the last month but we’ll give it some time as we await earnings.
Our 5G play, Marvell recently sold its Wi-Fi business to NXP Semiconductors and is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware.
New markets are emerging in which Marvell 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 and the company is boosting its stock buyback program.
I recommend that you buy a half position if you have not already done so. BUY A HALF.
NovoCure (NVCR) shares were up 15% this past week to reach 97.
NVCR is a unique company in the biotech space, marketing a device, Optune, that treats cancer in a revolutionary way by mechanically disrupting cancer cell division.
This process uses electrical fields to non-invasively disrupt cancer cell division and growth. 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. I encourage you to begin with half position if you have not already done so. BUY A HALF.
Ping An (PNGAY), the most recent addition to the portfolio, had a nice move last Friday but gave it back due to Chinese stock weakness in wake of the Coronavirus scare.
The company provides financial products and services for insurance, banking, and asset management but is best known for its life, health and property insurance business.
It is also evolving into more of a financial technology (fintech) play and its co-CEO, a former McKinsey consultant, is heading up the effort to transform the company into more of a blend of financial services and technology.
Ping An is a dominant player in this space with over 200 million retail customers and ranked 29th on the Fortune Global 500 list.
The numbers for Ping An are encouraging; last quarterly earnings were up 49.7%, the company delivers a 24% return on equity and the stock is only trading at 14 times trailing earnings and nine time projected earnings.
I recommend you buy a full position in Ping An. BUY A FULL.
Rakuten (RKUNY) shares have been lackluster since they delayed the rollout of 5G services into 2020. Next earnings are due out February 13, but I think we are all losing patience with this idea despite its high quality and attractive valuation.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and it 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.
The stock is cheap, trading at just under nine times trailing earnings, but, pending an uptrend, I’m keeping it at hold. HOLD A HALF.
Rio Tinto (RIO) is now our sole play on higher copper and commodity prices, and both are in an uptrend.
London-based Rio is one of the world’s premier multinational mining and commodity firms. Operating across 35 countries, it supplies the world with gold, diamonds, 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 5.0%.
I encourage you to buy a full position in Rio if you have not yet done so. BUY A FULL.
Sea Limited (SE) shares were up 9% yesterday to break 45 as esports continue to capture investors’ imagination, especially in Asia.
Sea has tripled in the last year and is an aggressive idea focused specifically on Southeast Asian markets representing 650 million consumers.
The company is primarily known for gaming and its e-commerce platform Shopee is being deeply discounted despite gaining market in the fast-growing Southeast Asian market.
More conservative investors may want to take some partial profits in Sea while aggressive investors should keep all shares. This company has the potential to be an enduring growth stock but you may wish to put in place a trailing stop-loss of 20% to protect profits. BUY A HALF.
Virgin Galactic (SPCE) shares continue to roll, up 14% yesterday, and surging 80% over the last month.
The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue.
Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021.
The big payoff is down the road, with hypersonic point-to-point travel. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at five times the speed of sound could make the same journey in just two hours.
This is an aggressive idea that has made a strong move since being added to the Explorer portfolio, but I believe there is more upside as the company is likely to remain in the media spotlight throughout 2020.
SPCE stock has a lot of momentum behind it and management is very media savvy. BUY A HALF.
The next Cabot Global Stocks Explorer issue will be published on February 6, 2020.
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