Cabot Global Stocks Explorer 708

After a strong rebound early in the week, markets sold off a bit over the past two days as investors battle uncertainty on the virus and economic impact fronts. We remain positive on our seven Cabot Global Stocks Explorer stocks and will put some of our 35% cash position to work today with a high quality Singapore bank many of you are familiar with. Our emerging market signal stays negative.

Also, I have a special alert regarding Luckin Coffee (LK), which is down very sharply this morning.

Cabot Global Stocks Explorer 708

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***Special Alert on Luckin Coffee (LK)
Luckin Coffee suspended its CFO Jian Liu and “several employees reporting to him” for misconduct related to “fabricated transactions.”

The stock opened on Thursday at 4.91 and has traded up to around 8.00.

The company said in a statement, “The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion.” In U.S. dollars, that amounts to about $310 million.

We will get more information in the coming days, but my recommendation is that holders of LK should not sell at these levels and very aggressive investor may wish to buy realizing that the situation is very uncertain. More on this later in the issue.

Invest Incrementally in High Quality Stocks
The coronavirus worries only began dominating the news in the U.S. about a month ago and the U.S. stock market peaked just six weeks ago.

I don’t know about you, but it sure feels like much longer than that to me. Part of this is the nonstop media coverage, which I’m trying to tune out.

It’s better to study the history of sharp pullbacks to get some sort of feel for the possible ways this will play out. One that rarely gets talked about is the Asian Financial Crisis in 1997. It was similar in a way – a debt-fueled currency contagion that started in Thailand and then spread throughout the region like a virus.

Below is a chart that shows how deep the pullback was in Asian markets and then how it came roaring back. I don’t believe we will see a pullback anything like this but you will see that this all took some time to play out.

It is foolhardy for anyone to try to call a bottom so it is best to move incrementally and cautiously.

The other issue I’m following closely is the U.S. Dollar, which has been strengthening during this crisis and has been strong since 2011, just when our decade-long bull market took off. A weakening of the dollar would be a signal to allocate more to emerging and international markets. All the debt we are taking on could have an impact on the dollar down the road.

With the cash we have in the portfolio, I’m moving forward with a dual strategy.

First, on market weakness, I’ll incrementally add stocks with the goal of doubling their value within a 12-month period.

Second, under the assumption that markets will remain volatile and in some sort of trading range, I’ll be looking for great trading opportunities with buys on pullbacks and sells on surges.

One suggestion is to keep handy a list of stocks you would like to buy at a lower price if markets pull back sharply from here.

Here are some of the stocks on my personal watch list with a buy price target that would be hard to resist. I encourage you to build your own list based on your personal circumstances so you can take action quickly having already thought things through.

Now let’s get to my new recommendation, which is a stock we had in the portfolio in 2019.

New Explorer Recommendation: DBS Bank (DBSDY)
The JP Morgan of Singapore
Like many countries, Singapore is struggling with the impact of the coronavirus.

But given that it is a city-state of 6 million people with a well-organized, effective government, it is well positioned to cope with all of this better than most.

It is also important to note that over the past decade, wealth is piling up faster in Singapore than anywhere in the world.

Assets under management in the city-state have jumped an amazing 1,120% since 2000 and are on track to overtake Switzerland, according to the research firm WealthInsight.

It boggles the mind that a country one-fifth the size of Rhode Island can eclipse London, New York, Shanghai, and Zurich.

A pure play on this emerging trend is the J.P. Morgan of Singapore: the Development Bank of Singapore (DBSDY) - better know as DBS.

DBS is one of the largest banks in Southeast Asia with a presence in 18 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index (STI).

The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore.

DBS has a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India.

It is the largest and strongest 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.

Wealth management is also a strategic priority and a growing part of its business.

Why buy DBS right now? The stock has come back from a 52-week high of 93 to trade just below 50, its lowest share price since 2016.

Yes, it has deferred (not cut) its dividend until it is able to have its annual meeting but this is already priced in. In short, this is an opportune time to tuck this quality bank into your portfolio.

Model Portfolio

Portfolio Change
Direxion S&P 500 Bear (SPDN) - MOVE FROM 15% POSITION TO 10% POSITION

Updates
Alibaba (BABA) shares pulled back marginally this week from 192 to 188. It seems to be stuck in a trading range but still holding its value relatively well.

BABA’s revenue for last quarter’s core commerce business 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%.

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. For longer-term investors, I would be a buyer at these levels. BUY A FULL POSITION

British Petroleum (BP) shares held at 24-25 this week despite weak crude oil prices. Like all oil majors, BP is a mixed bag of assets and debt. It has both an impressive portfolio of assets and a current dividend yield of 10.3%. I don’t think the dividend is vulnerable but I do think the company’s share buyback program will be suspended.

In 2019, BP generated $28 billion in operating cash flow; $7 billion went to dividends and $2 billion to share repurchases.

Another positive for British Petroleum is that it is ahead of its rivals in diversifying into green energy and, for this reason, has become a darling of the clean energy crowd. This insulates it a bit from funds that are eliminating fossil fuel companies from their portfolios.

Adding a half position of BP to the Explorer portfolio is a smart, opportunistic play in a difficult market as U.S. officials are leaning on Saudi Arabia to cut production levels.

If you have not bought this stock, consider buying at these extreme lows. BUY A HALF

LexinFintech (LX) shares reversed last week’s gains, falling from 10.8 to 8.6 even though it is an excellent coronavirus play with no deliveries and is technology driven.

This trait was highlighted in LX’s earnings, reported yesterday for the full year of 2019. Lexin’s loan origination volume increased 90.6% year-on-year and revenue increased 39.6% year-on-year.

In the fourth quarter, LX loan volume was up 104% year-on-year with gross profit up 59.7% and net income of RMB518 million.

LX’s continued investment allowed for registered user numbers to increase 96.5% year-on-year, and new active users increased 244%.

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.

I believe LX offers us an excellent risk/reward opportunity and recommend you buy LX if you have not yet done so. BUY A HALF

Luckin Coffee (LK)
Luckin Coffee suspended its CFO Jian Liu and “several employees reporting to him” for misconduct related to “fabricated transactions.”

The stock, which closed on Wednesday at 26, opened on Thursday at 4.91 and has traded up to around 8.00.

The company said in a statement, “The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion.” In U.S. dollars, that amounts to about $310 million.

We will get more information in the coming days, but for now my recommendation is that holders of LK should not sell at these levels and very aggressive investors may wish to buy realizing that the situation is very uncertain. BUY A HALF (AGGRESSIVE INVESTORS ONLY)

Ping An (PNGAY) shares continued to hold firm this week though I certainly wish it moved upward more aggressively on days the market does well. Right now it’s the perfect stock for a turbulent stock market.

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.

Ping An is a dominant player in this space with over 200 million retail customers; it’s 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 eight times trailing and projected earnings.

Ping An is in the top 10 in the Global 500 2020 rankings, released by the leading brand valuation consultancy Brand Finance, climbing five places to number nine among global brands. Ping An ranked first among global insurance peers and second among global financial peers.

This stock has held up very well despite all the turbulence, and I recommend you buy a full position if you have not already done so. BUY A FULL

Sea Limited (SE) shares fell from 46 to 43 during the past week as the Singapore market showed some weakness.

Recently, the company released 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 Shopee Mall, the largest Southeast Asian e-commerce platform by orders, continues to see healthy growth in stores ahead of peers in ASEAN – online stores in Indonesia have grown by 30% in three months. Our analysis indicates widespread mall and store closures in ASEAN. Prolonged store closures could support adoption of e-commerce.

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.

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.

All indications point to Sea having the potential to be an enduring growth stock. BUY A HALF

Virgin Galactic (SPCE) shares pulled back this week from 17 to 13 after rising earlier this year to a high of 37, offering investors a great entry point.

The company announced that it plans to report its financial results for the first quarter 2020 following the close of the U.S. markets on May 5.

Last week, Morgan Stanley came out with a buy rating, valuing SPCE’s space tourism business at 14 a share and the hypersonic flight opportunity at 10 a share to arrive at a current composite target price of 24.

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. 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 contracts. 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 and 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.

The stock’s pullback over the last few weeks offers aggressive investors a chance to buy more shares. BUY A HALF

Direxion Daily S&P 500 Bear (SPDN)
The SPDN is an exchange-traded fund (ETF) that moves opposite (inverse) of the S&P 500 index. It serves as a portfolio shock absorber and was flat this week. MOVE FROM 15% POSITION TO 10% POSITION

Watch List
JP Morgan (JPM) shares closed at 85 yesterday and I would be a buyer in the 70-75 range.

The next Cabot Global Stocks Explorer issue will be published on April 16, 2020.

Cabot Wealth Network
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