Cabot Global Stocks Explorer 706

This week’s volatility has been a bit unnerving but below the drama some good things are happening. The majority of our stocks finished the week higher and Sea Limited (SE) hit an all-time high after reporting another great quarter, confirming our view that this
could be an enduring growth story. No surprise that our emerging market timer is mixed, in a very modest uptrend but still below 50- and 200-day moving averages

Today, we have a new recommendation for you as we follow Warren Buffett to a financial technology play in Brazil

Cabot Global Stocks Explorer 706

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In Extraordinary Week, Follow Warren Buffet to Brazil
This past week’s market volatility has really been something.

I know that many so-called gurus advise investors to turn off the news and take a nap but that is, of course, unrealistic.

Perhaps the key is to balance the day-to-day turbulence, which is almost always there, with the long-term trend of markets, which is up.

What is fascinating is the financial media’s seizing on a message for the day. This week was a great example.

First, concerns over the economic impact of the coronavirus sends market down.

Then, the suggestion that the Fed will ease rates sends markets up.

Then, concerns that the interest rate cut is either not enough to maintain growth, or is a sign of just how bad things are, sends markets tumbling down again.

And then yesterday, the comeback of former Vice President Joe Biden assures investors that far-left candidate Senator Bernie Sanders is unlikely to become president rockets markets up.

It is all quite amazing.

And in all this fog, Sea Limited (SE) again posted some stellar growth numbers, leading to an all-time high. Our Chinese stocks held like a rock through the turbulence, no doubt due to Beijing leaning on big holders not to sell stocks during the virus crisis.

While I’m a news and political junkie, I spent some time this week pulling together some research on fintech (financial technology) markets and stocks and found one that Warren Buffett’s group invested $340 million in. I had never heard of this company, which is headquartered in Brazi,l but its growth numbers are impressive.

New Explorer Recommendation & Fintech Overview
Many young people in the world today have never stepped foot inside a bank and may never do so.

Thanks to the ubiquity of smartphones, the internet and the growth of financial technology (fintech), these people have a whole new set of options for how to manage their finances and grow their portfolios. Fintech is driving the evolution of traditional financial services as companies and countries attempt to adapt to evolving consumer expectations regarding choice, costs, convenience and security.

There are three significant trends driving fintech forward.

• Digital Transformation
  Physical financial infrastructure requires significant investment in people, buildings, aging technology systems and even older paper-based processes. This dated foundation places incumbents at a disadvantage in terms of both cost structure and user convenience.In contrast, new companies have the advantage of a clean slate and can begin with a state-of-the-art technology platform from the get-go. This dynamic is playing out in virtually every arena of financial services, including banking, capital markets, real estate, insurance, payments, asset management and wealth management.
• Artificial Intelligence (AI)
  Artificial intelligence is simply the ability of machines to think like an intelligent human but perhaps 1,000 times faster and at a higher level.The ability to gain actionable insights from data using AI is driving the fintech market and creating frictionless and personalized consumer experiences that are predictive, personal and efficient.Emerging fintech companies are helping consumers gain access to small business loans and home mortgages, “intelligent” automated savings and investment plans based on a customer’s data profile.
• Blockchain
  You might think of blockchain as a secure, flexible ledger in the cloud, which offers tamper-proof, transparent tracking of transactions. This allows any process to be streamlined and settlement times to be shortened. Not only does this greatly reduce costs for financial service firms, but it also saves capital, which is increasingly important given the decline in fees and returns, plus the increase in regulatory costs.

With those trends in mind, below are some leading fintech stocks that I have on my watch list.

Goldman Sachs (GS)
Goldman Sachs, founded in 1869, is one of America’s largest and oldest banks. The financial institution has been able to replace many of its human traders with complex computer algorithms, some backed by machine learning and computer engineers. The investment bank generally can replace four traders with one computer engineer. More than one-third of Goldman’s personnel, or approximately 9,000 employees, are computer engineers and most trades are now automated, even in opaque currency markets, where human trading was once thought to be essential.

SS&C Technologies Holdings (SSNC)
SS&C Technologies provides software platforms to financial institutions, asset managers, and trusts that enable the manager to integrate their daily tasks, such as trading and portfolio management, with back-office functions, such as accounting and regulatory compliance. Most of these software platforms are subscription-based, requiring contract terms of one to five years.

Blackline (BL)
Blackline is a cloud-based software platform that allows businesses to automate burdensome and tedious accounting tasks, such as reconciling financial data, in real time. These tasks traditionally take lots of man-hours and are only done at the end of each month or even quarter. Blackline’s platform allows businesses with several product lines in different geographical markets to accumulate this data instantaneously, giving companies the confidence needed to make quicker strategic decisions all while sharply reducing accounting and back-office costs.

PayPal (PYPL)
PayPal was essentially the world’s first digital wallet. The service gained significant traction as eBay’s early buyers and sellers sought a safe and fast way to make transactions. PayPal has more than 260 million active user accounts, meaning those customers now use their accounts more than three times per month.

Guidewire (GWRE)
Guidewire provides property and casualty (P&C) insurers with software platforms that allow them to run their businesses effectively. Guidewire’s platforms enable insurance companies to accomplish seemingly all of their core services, from data analytics and digital engagement to underwriting and claims management. Guidewire serves more than 350 companies in 32 different countries, including Farmers Insurance and Nationwide.

Q2 Holdings (QTWO)
Q2 Holdings is a technology company that helps smaller banks and credit unions offer cloud-based platforms so their account holders can enjoy good experiences across all digital channels. These smaller banks often do not have the IT expertise or the necessary in-house resources to compete with the virtual offerings of bigger rivals.

Square (SQ)
Many might know Square as the credit card reader used by their local farmer’s market or favorite food truck. Indeed, that’s how the company started, offering payment processing services to smaller businesses that could not traditionally afford card acceptance services. But today, Square is a place where small businesses can go to meet nearly all their administrative needs.

These are all solid fintech ideas that I’ll keep an eye on going forward, but our recommendation today is focused on one of the fastest growing fintech markets in the world.

New #1 Fintech Recommendation: StoneCo Ltd. (STNE)
Follow Warren Buffett to Brazil

Warren Buffett’s Berkshire Hathaway (BRK-B) invested $340 million in this Brazilian fintech company at its IPO in late 2018, which is a bit unusual for the value titan. But the Oracle of Omaha’s rare gamble on StoneCo was quite telling.

No doubt the fact that Brazil is largely a cashless society and that 45 million Brazilians don’t have a bank account made this global gambit appealing.

Based in Sao Paulo and founded in 2000, StoneCo is a digital payments company providing financial technology solutions for merchants to conduct electronic commerce across in-store, online, and mobile channels in Brazil.

It distributes its solutions, principally through proprietary Stone Hubs, which offer hyper-local sales and services, and technology and solutions to digital merchants.

This week the company released fourth-quarter 2019 financials with revenue up 48% year-over-year and adjusted net income jumping 76%. Digging deeper, total payment volume improved 51% and StoneCo’s active client base surged 84%.

For the quarter, costs as a percentage of revenue were 39.6%, down about 3% compared to the prior-year quarter, as the company invested heavily to expand its operations.

This resulted in net margins that improved to 31%, up from 19% in the year-ago quarter, and the best profit margin in StoneCo’s history.

In the full-year 2019, StoneCo’s client base grew 84% year-over-year, with greater than 60% growth in 26 out of 27 Brazilian states. In addition to transactions, the company is expanding its software solution clients and in 2019 was able to increase the number of clients using software from 30,000 in the first quarter to over 135,000 by the end of the year. BUY A HALF

Model Portfolio

Portfolio Change
Move ProShares Short FTSE China 50 (YXI) from a Buy to a Sell

Updates
Alibaba (BABA) shares jumped this week from 205 to 212 despite continued concern about logistics being disrupted by the virus.

BABA’s revenue for last quarter’s core commerce business revenue increased 38% while Lazada (its Southeast Asian e-commerce business) posted a 97% year-over-year increase. Taobao 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%. This is all impressive for a company the size of Alibaba.

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 a point this week and recently posted a financial report for fourth-quarter 2019 that showed 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.

If you have not yet done so, I recommend you put some Cosan in your portfolio. BUY A HALF

LexinFintech (LX) shares stayed in the 11-12 range all week as it, like most fintech stocks, flies above the real economy since it has no deliveries and is technology driven.

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 lenders.

LX sells for between 5-6 times prospective earnings. LexinFintech earned almost $2 a share in 2019 and that number could potentially grow by 50% or more in 2020.

Of the seven fintech stocks I have on my watch list, I believe LX offers us the best risk/reward opportunity. BUY A HALF

Luckin Coffee (LK) shares were up 6% yesterday to breach 40 but are still a ways from the all-time high of 50 they hit in January.

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

In fact, it’s been reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue and this issue may impact LK as well. I have been recommending that some of you should take some Luckin profits off the table but see no reason not to keep this stock a Buy for more aggressive investors. BUY A HALF

NovoCure (NVCR) shares were up 6% yesterday but lost a little ground this week to settle 20 points below its high of 93 about a month ago. This is, of course, disappointing but I’m inclined to give this stock some more time given its compelling story.

It is also in sharp contrast to the financials released last week showing a 300% earnings surprise on a 42% jump in net revenue. Gross margins were 75% and the balance sheet is strong with $313 million in cash.

Based in Israel, Novocure sells a medical device that uses low-voltage electric fields to successfully treat the most aggressive forms of cancer. The technology has succeeded in every clinical trial. The Food and Drug Administration (FDA) has approved it and Medicare now covers it.

The core product is called Optune – its Tumor Treating Fields delivery system – and it was launched in 2011 for glioblastoma, the most common primary brain cancer and one of the most difficult cancer types to treat. Optune is sold in the U.S., Germany, Austria, Switzerland, Sweden, Israel and Japan.

Optune also uses low-intensity electrical fields to treat mesothelioma, a tumor of the tissue that lines the heart, lungs, stomach and other organs. However, studies are underway with other brain cancers as well as pancreatic, ovarian, liver and lung cancers, with key results due over the next few months.

Novocure customizes the technology to target each cancer type. Its devices work in patients undergoing other forms of treatment, including radiation, chemotherapy and immunotherapy. Importantly, there are no toxic side effects.

All of the above bodes well for this company and stock so I encourage you to buy on this weakness. BUY A HALF

Ping An (PNGAY) shares held pretty firm this week, which is what I would expect from this quality blue-chip company. What likely helped was an announcement that it is boosting R&D spending 20% to reach $1.4 billion in 2020.

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: 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.

The next earnings report is expected next Tuesday, March 10. I recommend you buy a full position if you have not done so. BUY A FULL

Rio Tinto (RIO) shares were up 8% despite fighting a headwind of slower China growth, which usually 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 fat dividend yield of 7.8%. I encourage longer-term oriented investors to buy a full position in Rio if you have not yet done so. BUY A FULL

Sea Limited (SE) shares surged this week following the release of its quarterly and full-year financials. Total adjusted revenue was $909 million, up 133.5% year-on-year from the fourth quarter of 2018.

Sea’s self-developed global hit game, “Free Fire”, was the most downloaded mobile game globally in 2019, according to App Annie, and recently hit a new record of 60 million peak daily active users. “Free Fire” was also the highest grossing mobile game in Latin America and in Southeast Asia in the fourth quarter and for the full year of 2019. “Free Fire” related content recorded approximately 30 billion view counts across YouTube globally in 2019, making it the fourth-most viewed video game on YouTube and the most viewed mobile-only video game in the year.

Adjusted revenue for digital gaming was $479.9 million, up 107% year-on-year.

Quarterly active users reached 354 million, an increase of 64% year-on-year.

Adjusted ecommerce revenue was $358.3 million, up 182%. Gross orders for the quarter totaled 440.5 million, an increase of 113% year-on-year.

The company also owns Shopee, the largest Southeast Asia e-commerce platform by orders. It registered over 188 million orders in the fourth quarter, or a daily average of over 2 million orders, an increase of 124.6% year-on-year.

More conservative investors may want to take some partial profits but all indications point to Sea having the potential to be an enduring growth stock. BUY A HALF

Virgin Galactic (SPCE) shares hit some turbulence this week but ended yesterday up 4%.

Still, after moving from 11 when we recommended it in January to as high as 37 three weeks ago, this pullback has been painful.

I suggested over the last several weeks that owners sell one-third of their shares to lock in some profits so we locked in some gains, which puts us in a position that all remaining shares represent profit. Its recently reported earnings and the expected loss needs to be balanced out against the company having no debt, $480 million in cash and ready access to capital markets.

SPCE still plans to make its first commercial space-tourism flight this year, and took a step toward resuming ticket sales for jaunts expected to cost upward of $250,000. The company said on an investor call Tuesday it was focused on working through testing and approval for its space launch system.

More than 600 potential customers have already paid a collective $80 million in deposits for the flight and the company has in its sales funnel 2 million prospects with liquid assets of $10 million or more.

Customers will be passengers aboard a six-passenger plane that will be carried aloft by a larger jet before being released and using its own rocket to reach the edge of space. Passengers on the 90-minute flights would experience three to four minutes of weightlessness. Expensive.

Furthermore, beyond space tourism, the company is taking dead aim at a global commercial aviation market worth $900 billion and could potentially land some defense contract. Those would include a proposed hypersonic jet that could in theory travel from London to New York in an hour.

Boeing last year invested $20 million in the company, in part to support the hypersonics effort and work on urban mobility initiatives.

CEO George Whitesides said the company was focused on the commercial launch and had completed 20 of the 29 approvals required to validate the commercial license it received from the Federal Aviation Administration in 2016. He also stated that Virgin Galactic’s use of a reusable plane made its “orders of magnitude” cheaper than the space capsules developed by Blue Origin.

This stock has had an incredible run this year and after selling just one-third of our position, our remaining shares are all potential profit. The stock’s pullback over the last few weeks offers more aggressive investors a chance to buy more shares. BUY A HALF

SELL ProShares Short FTSE China 50 (YXI)
BUY Direxion S&P 500 Bear (SPDN)

The SPDN is an exchange-traded fund (ETF) that moves opposite (inverse) of the S&P 500 index.

Based on the assumption that most of the virus fallout going forward will be outside of China rather than inside China, I’m replacing our China Short ETF with this S&P 500 Bear ETF. BUY A FULL

Watch List
Nokia (NOK) is an interesting 5G telecom opportunity that was up 2% yesterday. I’m looking into its Chinese exposure and potential upside. The company recently announced that it is bringing in a new CEO, which is a positive development.

The next Cabot Global Stocks Explorer issue will be published on March 19, 2020.

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