Cabot Global Stocks Explorer 712

U.S. and international markets staged a rally this week alongside momentous events in Asia as China imposes its will on Hong Kong through the passage of national security law. America indicates it will withdraw trade preferences for Hong Kong, viewing it as indistinguishable from China. China cracks down on Hong Kong as legislation advances in the U.S. to potentially delist international and Chinese companies that do not meet U.S. disclosure standards. Meanwhile, we have a new recommendation this week that has been in the news regarding Covid-19 and how we should all look at the economics of discovering new drugs.

Cabot Global Stocks Explorer 712

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Markets Rally as China Cracks Down on Hong Kong
Cabot Global Stocks Explorer positions did well this week, led again by a surging Sea Limited (SE) and after rebound of interest in Virgin Galactic (SPCE) pushed its shares up 16%. Trip.com (TCOM) was up 7.3% yesterday in anticipation of earnings, which are expected after the close today.

Luckin Coffee (LK), which we moved to a sell last week at 2.6, continued to weaken to 1.4 before commencing a rally on very heavy volume to get back to 2.5 at yesterday’s close. The volume indicates that institutional interest in the stock is there but the drama and uncertainty remains high and no new information is known about Luckin’s financial situation. This is an interesting development for speculators that I will keep an eye on.

China’s legislature approved a resolution to impose national-security laws on Hong Kong, overriding the territory’s partial autonomy in a bid to crush anti-Beijing protests that have challenged Chinese leader Xi Jinping. While the details remain unclear, the law will likely lead to Hong Kong being a simmering center of revolt and this summer could see violence on a scale that dwarfs last year’s protests. Hong Kong stocks are of course under pressure, but there’s certainly no mass selling.

Many investors in U.S.-listed Chinese stocks are rattled by a new Senate bill that could delist companies that are controlled by foreign governments or don’t open their books to American auditors. The bill still needs to be approved by the House but it is gaining bipartisan support. This measure has dampened interest in Chinese stocks but in reality it will take time to see what steps are taken.

U.S. authorities have long complained of a lack of access to the audit work papers of listed Chinese companies. Under the legislation now moving its way through Congress, foreign companies would have to leave U.S. stock markets if they fail to comply with the nation’s regulatory audits for three consecutive years. There are 223 Chinese companies with a combined market value of $1 trillion that may be impacted by this legislation, according to Goldman Sachs. American investors own about a third of these shares.

New Explorer Recommendation
Big Pharma in Action: Gilead Sciences (GILD)
Pharmaceutical and biotech companies are often criticized as rapacious but the truth is that the business is very much feast or famine.

All these companies are launched and financed by private investor capital looking for a return commensurate with the risks – which are daunting. Their goal is to discover, develop and distribute new medications.

This requires quite a bit of upfront investment in paying top talent and extensive research and development with the understanding that before finding one commercially viable drug, there will be dozens of ideas that don’t pan out or pass the Food & Drug Administration (FDA) gauntlet.

Offsetting these tremendous risks and losses for unavoidable failures are two factors.

The first is the ability to gain government protection of intellectual property through patents. The second is the ability to temporarily charge prices above the marginal cost of production.

Keep in mind that about 70% of drugs never make it to market and new drugs typically gain approval only after many years of development. Charging more than the cost of production allows these firms the chance to recoup these costs.

Gilead’s remdesivir, which has received emergency approval by the FDA to treat severely ill Covid-19 patients, is a good example of this process in action.

Research on remdesivir as a treatment for childhood respiratory diseases began in 2010. Though the drug ultimately failed in that purpose, Gilead continued to research its potential. Several years later the company discovered that the drug might work against Ebola, but that didn’t work out either.

Despite this setback, Gilead continued burning cash through its research efforts. Its scientists uncovered evidence that remdesivir might work against two coronaviruses, those behind SARS and MERS, but both passed before any trials with humans could be conducted.

So when the novel coronavirus was identified a few months ago, Gilead immediately began working with the FDA to speed up human trials of remdesivir as the FDA approved access to the drug for more than 2,000 gravely ill patients.

The above is a great and rather typical story in the vital business of discovering new drugs for the marketplace – all funded by patient capital provided by private investors.

This leads to today’s new recommendation, a global name familiar to most investors: Gilead Sciences (GILD).

Between February and April, Gilead Sciences stock surged as excitement built over the company’s antiviral drug remdesivir, after a study found it reduced Covid-19 patients’ recovery time.

Then Gilead recently announced it would donate its entire current remdesivir supply to the federal government. This act of humanity has hurt the stock but Gilead is still the only company with an approved Covid-19 therapy and first-mover advantage.

Remdesivir is currently in clinical trials in both the U.S. and at the end of June or early July the company expects initial results. That will likely renew interest in the stock.

Gilead expects to start generating new sales in July. Pricing has yet to be disclosed, but analysts believe global revenue could hit $1.1B this year assuming about $5,000 per treatment.

Gilead should not just be viewed through the lens of remdesivir, and as you might expect it’s moving forward on many fronts. On Tuesday, it announced it was signing a 10-year agreement with Arcus Biosciences (RCUS) to co-develop and co-commercialize the next-generation cancer therapeutics in Arcus’ pipeline. The agreement also gives Gilead an equity position in the small-cap, clinical-stage biotech company. Arcus is developing both small-molecule and monoclonal antibody drugs that target mechanisms that tumors use to evade the immune system, as well as pathways important for cancer growth and metastasis.

Gilead’s stock is likely to regain its momentum as remdesivir approvals advance and the breadth of its product offerings is appreciated and turned into profits. Gilead is donating the first 1.5 million doses to governments worldwide, which it said was enough for at least 140,000 patients through the end of May. More than half of that was targeted for U.S. patients.

An independent organization that measures the cost-effectiveness of drugs said Gilead could be justified in charging up to $4,500 for a 10-day course of treatment for a single coronavirus patient.

This is a compelling and rather conservative story for the biotech sector and I encourage you to add a half position in Gilead Sciences (GILD) to your portfolio. I’ll have more aggressive ideas in this sector in the weeks ahead. BUY A HALF

Model Portfolio

Portfolio Changes
None

Updates
Cloudflare (NET) shares rebounded off support this past week. This aggressive cybersecurity recommendation went public last year. The company is growing fast and appears to be gaining market share and some analysts expect its revenue to double by 2022. If you have not yet invested in NET, I suggest you do so and consider pairing it with the below more conservative cybersecurity play, the ETF BUG…BUY A HALF

DBS Bank (DBSDY) shares fell from 57 to 54 this week and are trading way off their highs of 78 in January and just a bit above the 2020 low of 47 in March.

Digital banking is a profitable trend since DBS’s digital customers make up more than 50% of its retail and small business base in Singapore and Hong Kong, up 25% in the last two years. DBS is one of the largest banks in Southeast Asia with a presence in 18 high-growth markets across Greater China, Southeast Asia, and South Asia/India.

I encourage you to aggressively buy DBS at these depressed levels. BUY A HALF

Fanuc (FANUY) shares grinded out another small gain this week as the stock closes in on its 2020 high of 19 and Japanese shares continue to outperform the S&P 500.

Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the “brains” of industrial robots used to manufacture all sorts of high-value products, including other robots.

Fanuc offers investors a balance sheet with zero debt and a sizable $7 billion in cash. Profit margins are impressive and Fanuc also bought back more than 70 million shares last month. In short, Fanuc is a high-quality play on a growth trend. I encourage you to buy this conservative robot play if you have not already done so. BUY A HALF

Global X Cybersecurity ETF (BUG), a basket of cybersecurity stocks of companies developing and managing security protocols to prevent cyber attacks, was pretty flat after jumping 7% last week. This ETF has 29 holdings and the top 10 stocks represent roughly 60% of the total market value of the basket. Seventy-four percent of the companies are incorporated in America followed by 13% in Israel and 8% in Japan. This ETF can be seen as a more conservative play on cybersecurity and can be paired with the above more aggressive Cloudfare (NET) recommendation for the best of both worlds. BUY A HALF

Sea Limited (SE) shares continue to show great strength and momentum, jumping from 71 to 79 in the last week, and are now up more than 90% so far in 2020.

We are in a strong position, having sold half our position a month ago at 55 for a gain of 310%. Sea is now a hold but we will be buyers if the stock pulls back. If you have not already sold half your shares, I strongly suggest you do so now. HOLD A HALF

Trip.com (TCOM) shares were weak last week but rebounded 7.3% yesterday as the company is expected to report earnings at the close of the market today.

The company is a travel service provider that specializes in ticketing, reservations, and tours as well as aggregating hotel and transport information. Trip began 2020 with a strong tailwind as its fourth-quarter 2019 net income soared from $161.7 million to $1 billion. The company has enormous reach and scale in China as well as overseas providing reservation services for more than 1.4 million hotel and hostel properties, and more than 1.2 million vacation rental properties around the world.

This is an aggressive idea with considerable uncertainty, but I believe there is enough evidence of a rebound in domestic travel to warrant a half position to take advantage of what was a 40% reduction in price of this leading player in China’s travel sector. BUY A HALF

Virgin Galactic (SPCE) shares were up 7.3% yesterday and 16% over the past week after being upgraded from a hold to a buy last week.

I recommended selling half your shares a few weeks back for a 146% gain so we’re now in a strong position to ride this momentum forward.

Galactic plans to send groups of paying customers on brief flights to the edge of space. Perhaps even more important to its future than space tourism is its plan to launch point-to-point hypersonic flights. SPCE still plans to make its first commercial space-tourism flight this year, and took a step forward with two test flights from its New Mexico spaceport in the first quarter.

If you have not stepped up yet to buy more shares in this compelling story, I encourage you to do so. BUY A HALF

Watch List
Alibaba (BABA) shares retraced this week, going from 220 to 200. Given the headwinds of potential delisting, rising U.S.-China tensions and the fact that this company has gotten so big that sizable upside potential is limited, I’m thinking of removing this stock from the watch list.

The next Cabot Global Stocks Explorer issue will be published on June 11, 2020.

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