Cabot Global Stocks Explorer 714

Markets, led by Nasdaq’s leading companies, had an impressive winning streak broken by concerns over an acceleration of coronavirus cases. Our Emerging Markets signal (EEM) stays positive as the virus is being handled well in Asia outside of China but is exploding in Latin America. The Explorer portfolio is well positioned with cash to deploy and stocks holding up well.

Today, we’ll look inside the indexes to see what’s working and also explore what more participation by individual investors in 2020 might mean for markets. Then we move north to Canada for a promising new recommendation that has all the characteristics of a winning gold stock.

Cabot Global Stocks Explorer 714

[premium_html_toc post_id="208735"]

Individual Investors on the Rise in 2020
To begin, I’d like to explain a bit more why I moved Alibaba (BABA) to a hold last week.

BABA has been part of the portfolio for well before I came on board as editor in early 2019. It has done well for investors but over time it has become a huge company with a market value over $600 billion and has underperformed a bit despite posting solid numbers. In many ways it is China Inc., and is a core holding of almost all China and emerging market funds. I considered moving BABA out of the portfolio to make room for new ideas but given that many of you are already holders and would appreciate updates on the stock, I’ve decided to keep it in the portfolio as a hold. We’ll consider it a long-term core holding – a “legacy” stock.

On Luckin Coffee (LK), the volatility and uncertainty continues as Nasdaq sent another de-listing notice to the company after it missed the deadline to file its annual financial report. An extraordinary general meeting is expected next month to decide whether to expel several directors, including its chairman. Still, LK was up 12% yesterday and closed at 3.1.

Nio (NIO), the speculative Chinese electric vehicle company that I profiled in a special report a while back, has doubled in the last month.

Shifting gears, some of you might have seen media accounts that describe how the COVID-19 shutdown has led to an uptick in the number of individual investors investing in stocks. As one yourself, you know the challenges and the opportunities this presents.

From a global perspective, America is an outlier in terms of how much ownership of U.S. stocks is in the hands of institutional investors, such as funds. According to OECD data, these funds own about 80% of the average public company, with only 11% held by individual investors. In countries like Hong Kong, Japan, South Korea and Taiwan, retail investors account for 25% to 50% of average ownership.

And in China, I’ve read that up to 80% of stock trading is done by individuals who apparently pay little attention to fundamentals.

It is interesting that worldwide, retail traders have considerably higher expectations for returns than professionals, according to a survey by Natixis Investment Managers. On average, finance professionals expect annual returns of around 5.5% above inflation, compared with the 11.7% annual return individuals expect.

Lately, returns have been strong everywhere. The tech-led Nasdaq had been on quite a roll until fear of a new virus surge led to a down day yesterday. Prior to that, it had risen 16 out the past 18 trading days, its best winning streak since 1999. Apple, Microsoft, Amazon, Google and Facebook now account for 40% of the Nasdaq index (2,700 stocks in the index) and 20% of the S&P 500 index.

That is incredible dominance.

New Explorer Recommendation
Canada’s Finest
Kirkland Lake Gold (KL)
As I’ve mentioned a few times, I have been searching for a good gold stock. I think I have finally hit pay dirt. Gold has been in an uptrend as uncertainty has risen and bond yields have dropped along with the Fed opening up the spigots. With the Fed throwing the kitchen sink at the market, the U.S. dollar will likely weaken; and since the dollar and gold usually move in opposite directions, a gold bull market could continue.

Canada’s Kirkland Lake Gold (KL) owns and operates four underground gold mines, including the Macassa, Holt, and Taylor mines located in northeastern Ontario, Canada; and the Fosterville Mine located in Victoria, Australia, as well as three milling facilities in Canada and Australia.

In a gold stock, I look for several characteristics, including a nice rising trend in a company’s production of gold plus superior profit margins and a strong balance sheet.

Kirkland ended the most recent quarter with $531 million in cash and cash equivalents and no debt. And this is after it recently doubled its dividend and used $330 million to repurchase shares. In addition, Kirkland has exceptionally low production costs and high efficiency. Even after factoring in the added costs related to its recent buyout of Detour Gold, Kirkland has delivered an operating margin of well over $900 cash per ounce of gold at current spot prices.

Having high levels of free cash flow and working capital is especially important for mining companies in this time of COVID-19. While Kirkland Lake has already halted all exploration activity, it is still in operation.

Kirkland’s latest quarter delivered 40% profit margins, 14.7% return on assets and 22.9% return on equity. Yet the stock price is pretty much where it was a year ago, while gold has gone from $1,300 to $1,771 an ounce. My guess is that institutional investors didn’t like the company’s decision to use equity to finance the Detour acquisition when interest rates are so low. In this case, the company’s conservatism backfired a bit.

It is always a good idea to have some gold in your portfolio. In these uncertain times, with concerns about inflation and a weaker dollar, and with gold prices in an uptrend, the case for an allocation to gold is even stronger.

Kirkland Lake Gold fits the bill. BUY A HALF POSITION

Model Portfolio

Portfolio Changes
Cloudflare (NET) moves from BUY A HALF to BUY A FULL POSITION
Fanuc (FANUY) moves from BUY A HALF to HOLD A HALF

Updates
Alibaba (BABA) shares ticked up this week as the company made a significant announcement regarding its Ant Financial subsidiary. Ant operates Alipay, which has 900 million users. Ant also owns a leading credit payment company. The announcement is that Ant Financial has received approval from Beijing to change its name to Ant Technology Group. My guess is that this step is to set the stage for Ant to be framed as more of a financial technology company and that it is being groomed for an IPO in Hong Kong or Shanghai. This would be a very attractive IPO.

BABA has been part of the portfolio for well before I came on board as editor in early 2019. It has done well for investors but over time it has become a huge company with a market value over $600 billion and has underperformed a bit despite posting solid numbers. In many ways it is China Inc., and is a core holding of almost all China and emerging market funds. I considered moving BABA out of the portfolio to make room for new ideas but considering that many of you are holders and would appreciate updates, I’ve decided to keep it in the portfolio as a hold. We’ll consider it a long-term core holding – a “legacy” stock. HOLD

Cloudflare (NET) shares pulled back with the market yesterday but daily trading volume has been increasing since the middle of February. This confirms that more and more investors have been attracted to the story and the stock. Cloudflare’s CEO stated in an interview this week that over the last three months, global internet traffic is up more than 50% but that there has been an even larger increase in cyber attacks.

This aggressive web infrastructure and website-security company is likely to surprise on the upside and some analysts expect its revenue to double by 2022. I’m upgrading NET to buy a full position. MOVE FROM BUY A HALF TO BUY A FULL POSITION

Global X Cybersecurity ETF (BUG) shares were largely unchanged this week.

The companies in the BUG basket address online security as cybercrime, which has reached an all-time high, with the cost of damages from these activities expected to cost $6 trillion annually by 2021. Cloudflare is one of the 29 companies in BUG and we made these recommendations at the same time to provide subscribers with two different strategies to play this cutting-edge growth trend. Though it’s rated a hold, I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive industry. HOLD A HALF

DBS Bank (DBSDY) shares cooled off a bit this week and at 59 are just above a book or break-up value of 53. This high-quality bank is the largest and best 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 this price. As a bonus, DBS comes with a current dividend yield of 12.2%. BUY A HALF

Fanuc (FANUY) shares were flat again this week and its lack of momentum leads me to move the stock to a hold. A maker of industrial robots based in Japan, Fanuc should be performing better given its balance sheet, with zero debt and a cash position of $7 billion. Profit margins are impressive and it offers a decent dividend as well. This “maker of robots that make robots” should be performing better. MOVE FROM BUY A HALF TO HOLD

Gilead Sciences (GILD) shares were up this week as the Institute for Clinical and Economic Review (ICER) recommended that Gilead’s antiviral drug remdesivir could be priced up to $5,080 per course based on benefits shown in COVID-19 patients. Remdesivir reduced hospital stays by 31%, compared to a placebo, in a clinical trial released in late April. Gilead also announced earlier this week that it expects to be able to supply enough remdesivir by year end to treat more than 2 million COVID-19 patients.

In other news, GILD also announced that it plans to acquire a 49.9% equity stake in San Francisco-based private biotech Pionyr Immunotherapeutics, which is engaged in developing first-in-class cancer immunotherapies.

If you haven’t yet purchased shares, I encourage you to buy a half position. BUY A HALF

Sea Limited (SE) shares reached 115 this week before selling off to 103.

Sea Limited is the leading internet company in Southeast Asia and Taiwan. These economies are going digital at an exponential rate, and Sea is strategically positioned to take advantage of this growth in part due to its partnership with China’s Tencent.

The company operates in two segments: an e-commerce platform (Shopee) and an online and gaming entertainment division (Garena). Both are growing fast. According to Bain & Company, the digital economy in Southeast Asia has tripled in the past five years to $100 billion and is expected to triple again by 2025 to $300 billion. Sea is up 170% so far this year and I have been advising subscribers to take some profits while rating the stock a hold. HOLD A HALF

Trip.com (TCOM) is a dominant Chinese travel service provider. TCOM shares have been doing better recently but this week the stock was flat. Yesterday the company announced a range of initiatives to reinvigorate travel, as part of its online “Travel On” launch event, which attracted an audience of over 1 million viewers worldwide.

Trip.com also announced a flex booking guarantee and is partnering with Google to launch a joint Travel Trends Report, finding that interest in short-haul travel is quickly developing, and that in addition to safety, flexibility was the foremost consideration in planning future travel. The company also launched its international “Travel On Sale”, giving customers access to exclusive discounts of up to 60% at over 30,000 hotels in 180 countries. This is an aggressive idea at a time of considerable uncertainty in the travel industry but I expect a strong rebound of the sector and in this undervalued stock. BUY A HALF

VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) was recently added to the portfolio because there is a fair amount of geopolitical risk in the world and, in particular, in the Indo-Pacific region. I believe there is a fairly high probability that the fragile supply chains for these strategic materials could be interrupted, causing prices and REMX to move sharply upward. In some respects, this ETF is a hedge on China risk since this is where many of these materials are sourced. BUY A HALF

Virgin Galactic (SPCE) shares surged 14% earlier this week on the announcement that it had signed an agreement Space Act agreement with NASA for private orbital spaceflights to the International Space Station (ISS). Under terms of the agreement, Virgin Galactic will develop a private orbital astronaut readiness program, including identifying people interested in buying private missions to the ISS.

“We are excited to partner with NASA on this private orbital spaceflight program, which will not only allow us to use our spaceflight platform, but also offer our space training infrastructure to NASA and other agencies,” said Chief Executive George Whitesides.

Virgin 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. At this point, Virgin Galactic is a speculative concept stock but it represents a compelling growth story and has a professional management team so I have it rated a strong buy for aggressive investors. BUY A FULL POSITION

The next Cabot Global Stocks Explorer issue will be published on July 9, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.