Cabot Global Stocks Explorer 705

You might not think that flowers are a global business but American Airlines moved 417 tons of flowers from the Netherlands to America for Valentine’s Day.

The Cabot Global Stocks Explorer portfolio is led by our rocketing Virgin Galactic (SPCE), which has zoomed from 11 to 37 in a wink of the eye. Meanwhile, Sea Limited (SE) and Luckin Coffee (LK) were both up 10% this past week even as our emerging markets timer (EEM) moved to neutral.

Concerns over the impact of coronavirus are deepening as Apple announced revenue will be below expectations. In this issue, we’ll address these concerns, as well as why and how to hedge them, plus I’m putting a European 5G player on my watch list.

Cabot Global Stocks Explorer 705

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Is the Wuhan Virus a Real Black Swan?
It is important for an investor to stay in a positive frame of mind.

Why? Because the market normally goes up and getting in and out based on worrisome headlines will cause you to miss meaningful opportunities.

But the best way to avoid panic selling is to manage risk in the first place.

You can’t avoid the fact that there are a lot of unknowns about how bad things might get and what impact the coronavirus will have on company earnings.

Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, stated yesterday that the coronavirus outbreak may be “at the brink” of a global pandemic.

The Economist reports that provinces accounting for more than 90% of Chinese exports have kept factories either shut or running at low capacity since January 31, when the lunar new-year holiday was due to end. In addition, coal consumption is more than a third lower than average and property sales are down by more than 90%.

After the holidays, roughly 200 million people usually leave their hometowns to return to work. This year the returning trains have been nearly empty and city officials have warned that returnees might face 14-day quarantines.

Nine out of 10 companies surveyed by the American Chamber of Commerce in Shanghai have employees working from home and Starbucks has shut half its 4,500 cafés in China.

It should also be noted that global economy has changed since 2003, when SARS hit the Chinese economy particularly hard. China now accounts for 16% of global GDP, up from just 4% back then.

And China is now the world’s largest exporter and second-biggest importer, and its manufacturers have also become entwined with supply chains of staggering complexity.

Foxconn, which makes smartphones for both Apple and Huawei, has re-opened some of its factories but with minimal staffing. And these are just the brands you have heard of.

Now the Chinese authorities are taking action to inject liquidity and expanding lending by state-owned banks to calm markets but high debt loads are already a concern in China.

Bloomberg reports that Alibaba Chief Financial Officer Maggie Wu told investors that the company’s China retail and local consumer businesses would be hit hardest by the impact of the virus.

Alibaba CEO Daniel Zhang described the epidemic and resulting widespread quarantine as a Black Swan event. A Black Swan event cannot be definition predicted and once it arrives it’s difficult to quantify.

Bottom line: We’ll keep our three China positions and our aggressive play on Mexico but we’ll balance this out by adding a full position in a China ETF that moves opposite the FTSE China 50 index.

New Explorer Recommendation: ProShares Short FTSE China 50 (YXI)
As explained above, we are adding to the Explorer portfolio a full position to this exchange-traded fund that moves opposite (inverse) of the leading China index.

This hedges the potential China virus impact on our three China positions. BUY A FULL POSITION

I’m also putting Nokia (NYSE:NOK) on the watch list.

The Finnish telecom equipment and software maker, which just reported solid results for its fourth quarter, may restore its dividend later this year. I’m holding off on recommending Nokia since the company has supply chains and thousands of research and development employees in China.

NOK’s 5G win rate is increasing despite fierce competition from Ericsson and Huawei as it reported that it won 18 more 5G deals in Q4 2019. The company has also posted a dramatic increase in free cash flow in the past two quarters.

Moreover, its super-efficient system-on-a-chip 5G design was 10% of its 5G shipments in Q4. It expects to have that ratio reach 35% by the end of 2020 and 70% by 2021 year-end. In addition, given its strategic importance, I think the stock is undervalued since it trades for just 16 times its 2020 earnings expectations.

Model Portfolio

Portfolio Change
Rakuten (RKUNY) – MOVE FROM HOLD A HALF TO SELL

Updates
Alibaba (BABA) reported another stellar quarter.

Revenue for Alibaba’s core commerce business revenue increased 38% while Lazada (Southeast Asian e-commerce business) posted a 97% year-over-year increase.

Taobao (China’s consumer-to-consumer platform version of eBay) increased monthly active users by 100% year-over-year and Alibaba’s cloud segment increased revenue by 62% year-over-year.

Tmall Global, which imports products from international brands, saw growth of 45%.

On the other hand, the company’s view is that the outbreak of the coronavirus over the past three weeks has affected BABA in two ways:

1. Consumer sentiment on buying discretionary products has been dampened;
2. Delivery and its logistic network have been impacted due to the tight control measures by many cities, so many orders still are not fulfilled.

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 be a buyer at these levels. BUY A FULL POSITION

Cosan (CZZ) shares were up yesterday in the wake of its recent financial report for the fourth quarter of 2019, with gross profits up 38% and net revenue up 46%.

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.

Analysts note that Brazilian sugar and ethanol companies are likely entering their best season in a long time, with favorable weather boosting new-crop prospects and an all-time low local currency increasing returns on exports.

For starters, Cosan has delivered earnings per share growth of 73% on average over the last four years, with a 22% return on equity. Earnings could more than double this year,

and this means the stock could be selling for just eight times forward earnings. If you have not yet done so, I recommend you put some Cosan in your portfolio. BUY A HALF

Luckin Coffee (LK) shares shrugged off virus concerns, gaining 10% this past week.

The company also announced that it ended 2019 with about 4,500 outlets, a number larger than Starbucks stores.

It’s been reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue. This and the emergence of short sellers have impacted the stock. I have been recommending that you take some Luckin profits off the table but see no reason not to keep this stock a buy. BUY A HALF

LexinFintech (LX) shares were flat this week giving you an opportunity to purchase shares if you have not yet done so.

Based in Shenzhen, LexinFintech is an online consumer finance platform for young adults in China.

The company owns and operates Fenqile, a popular online consumer finance platform that offers installment loans and also matches borrowers with other lenders.

The company owns and operates Fenqile, a popular online consumer finance platform that offers installment loans and also matches borrowers with other lenders.

Despite these stellar numbers, LX sells for 14 times trailing earnings and between 5-6 times prospective earnings. LexinFintech earned almost $2 a share in 2019 and this could potentially grow by 50% or more in 2020. BUY A HALF

Marvell Technology Group (MRVL) shares were again flat this week following a Cowen analyst reducing its rating for the semiconductor stock. We need to wait for earnings on March 4.

A 5G “internet of All Things” play, Marvell 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 demonstrated some relative strength this week, leaping from 85 to 93.

NVCR is a unique company in the biotech space marketing a device called Optune to treat cancer in a revolutionary way by mechanically disrupting cancer cell division using electrical fields.

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 a half position if you have not already done so. BUY A HALF

Ping An (PNGAY) shares been relatively quiet since this blue-chip company was added to the Explorer portfolio about a month ago. This is disappointing except against the backdrop of the Wuhan virus.

Ping An 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 29^th on the Fortune Global 500 list.

The latest numbers for Ping An are encouraging; recent 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.

Next earnings report is expected March 10. I recommend you begin a full position in Ping An. BUY A FULL

Rakuten (RKUNY) shares were up 6% this past week but as the Japanese economy appears to be sliding into a recession, I’m moving this to a sell.

I’m sure down the line we will be back to Rakuten - a well-diversified conglomerate with tentacles throughout Japan that 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. MOVE FROM HOLD A HALF TO SELL

Rio Tinto (RIO) shares are fighting a headwind of slower China growth, which means weaker copper prices.

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.

Rio offers good value, currently trading for about seven times earnings, and boasts a current dividend yield of 5.5%. I encourage longer-term investors to buy a full position in Rio if you have not yet done so. BUY A FULL

Sea Limited (SE) shares jumped 10% this week, reflecting the step-change in gaming revenues and profitability following the success of “Free Fire”, Sea’s first self-developed game. I see further upside potential to Sea’s share price based on better e-commerce numbers, the introduction of its “Battle Pass” game and expansion into India.

Garena, Sea’s gaming group, continues to do well in India and Latin America. Its lead independent game, “Free Fire” continues to maintain its position as the #1 or #2 grossing game on the Google Play Store in India.

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 and is expected to report its next earnings on March 3. BUY A HALF

Virgin Galactic (SPCE) shares continue to roll, up 24% yesterday alone, and have zoomed from 11 to 37 so far this year. I suggest that SPCE owners sell one-third of their shares to lock in some profits.

This week the company announced the relocation of the VSS Unity to Spaceport America to engage in the final stages of its flight test program.

This will begin with a number of initial captive carry and glide flights from the new operating base in New Mexico, allowing the spaceflight operations team to get familiar with the airspace and ground control. Then the team will carry out a number of rocket-powered test flights from Spaceport America to continue the evaluation of VSS Unity’s performance in preparation for the start of commercial spaceflight operations.

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.

Media attention to the private space race has centered on Jeff Bezos, who founded Blue Origin, in 2000, SpaceX, which was founded in 2002 with colonizing Mars as its ultimate mission, and of course Branson, who started Virgin Galactic in 2004.

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 potential, as the company is likely to remain in the media spotlight throughout 2020.

This stock has a lot of momentum behind it. BUY A HALF

Direxion Mexico 3X Bull ETF (MEXX) This leveraged ETF position was flat this week.

This aggressive play on Mexico moves 300% up and down relative to the underlying index, and is up 15% over the last three weeks. MEXX is only for more aggressive investors and I suggest a trailing 20% stop loss. BUY A HALF

The next Cabot Global Stocks Explorer issue will be published on March 5, 2020.

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