Cabot Global Stocks Explorer 716

Tesla shares have more than tripled this year as the company delivered a net profit yesterday, marking its fourth consecutive profitable quarter for the first time in its history. Alibaba connected Ant Group announced a mega IPO in Shanghai and Hong Kong.

These two companies dominated the news as investors looked past the upsurge in the pandemic, rising tensions in U.S.-China relations and wrangling in Washington over another shot of stimulus to jump start the economy. Today we highlight a recommendation that was previously in the Explorer portfolio but has moved only modestly from March lows despite a very innovative approach to cancer treatment.

Cabot Global Stocks Explorer 716

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Gold, Tesla and Ant Power Ahead
Part of the gold and silver rally is connected to the softening of the dollar. The surge in precious metals, which, like other investments priced in dollars, becomes cheaper for overseas buyers when the dollar depreciates. The other driver is increasing uncertainty over U.S.-China relations and the spike in spending and debt in Washington. Our Kirkland Lake Gold (KL) is up 30% over the last month.

Other notable moves this week in the Explorer portfolio include Virgin Galactic (SPCE), up 25% with a new CEO, Cloudfare (NET) up 8%, and the continued strength of Sea Limited (SE) which is trading at 115.

Alibaba (BABA) is also doing well as its financial-technology giant Ant Group is breaking new ground as it prepares to go public on the stock exchanges in Hong Kong and Shanghai, and ignoring New York.

Ant owns the popular Chinese mobile payments network Alipay that has more than 900 million active users in China and handled nearly 54% of the country’s $29 trillion in mobile-payment transactions last year, according to market research firm Analysys. Sanford C. Bernstein estimates that Ant’s revenue was close to 20 billion in 2019, up sharply from around 16 billion the previous year. Alibaba founder Jack Ma launched Ant in 2014 and has a 50% stake in the firm so this will be a huge payday for him. BABA has a 30% stake in Ant.

Tesla shares have more than tripled this year and the company delivered a net profit, marking its fourth consecutive profitable quarter for the first time in its history with the potential of being included in the S&P 500 index. One note of caution, Tesla stock has been cut in half twice in the past two years. Tesla sold 50,313 electric vehicles (EVs) cars in the first six months of 2020, a 130% jump from a year earlier, according to Citi, and began shipping cars made in its Shanghai plant in January. Between 2014 and 2019, the number of electric vehicles in China jumped from approximately 90,000 to nearly 3.4 million.

In other EV news, Alibaba-backed rival, Xpeng Motors has raised nearly $500 million from investors including Sequoia Capital and Li Auto, another EV maker, filed earlier this month for an initial public offering on the Nasdaq. Last week, BMW, launched its made-in-China EV (iX3) model. But overall sales of EVs in China are a bit sluggish with sales of EVs and hybrids down 33% in June and government subsidies under pressure.

Some of you are asking about NIO, which was profiled in a special report issued last year. NIO is at 12 after a surge to 15 and pullback prompted by a downgrade from Goldman Sachs. It had been pulled ahead in the Tesla rocket, which has its stock tripling from March 2020 lows. I believe NIO and EVs, in general, are ahead of themselves and would not be a buyer of NIO at current prices.

Today’s new recommendation this week is in the spirit of the mission of the Cabot Explorer, to scour the world for the best companies on the edge of the new: from green energy and transportation, emerging and frontier markets, financial technology (fintech), medicine and science, space, and rare resource as well as digital payments and e-commerce.

New Explorer Recommendation
An Innovator in Cancer Treatment
Novocure Ltd. (Nasdaq: NVCR)
Some of you will recall Novocure, which was previously in the Explorer portfolio.

Now trading at 65, it was as high as 96 in February 2020 and its March low was 57 so you can see that, unlike the vast majority of stocks, it has not yet made a substantial move off its 2020 low. I’m recommending it ahead of its next quarterly earnings report expected July 30^th.

The biotech industry is known for its high upside potential as well as high risk and volatility. This is not a field for fainthearted investors, it is capital intensive, and a failed drug trial or a regulatory issue can pour cold water on a promising product.

But once a new product hits the market, the profits can be staggering.

Novocure is well-positioned in the cancer treatment niche and importantly; it does not produce drugs but rather has an innovative process to treat cancer without chemotherapy. Let me explain.

The spread of cancer is through cellular division (mitosis) of cancer cells. Chemotherapy damages the genes inside the nucleus of cells. Novocure’s breakthrough research has proven that cellular proteins such as tubulin and septin are strongly affected by Tumor Treating Fields.

Tumor Treating Fields exerts forces on tubulin and septin, preventing them from moving to their correct locations and disrupting cancer cell division. As mentioned earlier, the company’s product, Optune, is not a drug; rather, it uses specially tuned electrical fields (Tumor Treating Fields) to disrupt the growth and division of cancer cells in tumors. In short, a disruptive electric charge can prevent the cells from dividing. As Novocure Executive Chairman William Doyle puts it, “Instead of one [cancer cell] becoming two... one becomes zero.”

Optune can now treat some types of brain cancer and mesothelioma, a tumor of the tissue that lines the heart, lungs, stomach and other organs. However, studies are underway with other cancers such as pancreatic, ovarian, liver and lung cancers, with key results due over the next few months.

Importantly, Novocure’s technology has succeeded in every clinical test and there are no toxic side effects. Optune treatment can also be effectively combined with drug treatment to amplify results. The FDA approved the Optune system in 2015, and Novocure received subsequent approvals for upgrades in 2016 and 2019 and is presently sold in the U.S., Germany, Austria, Switzerland, Sweden, Israel, China, and Japan. The company has more than 180 patents and patent-pending applications protecting its intellectual property.

While founded in 2000, Novocure is still a relatively small company with a strong balance sheet, more than $300 million of cash and almost 600 employees. Sales grew during the last quarter at a 39% annual clip and Novocure anticipates posting a modest net profit for 2020. Earlier this month, however, Novocure announced that over 100 physicians from more than 50 cancer treatment centers are now certified to prescribe Optune. As more come online, sales and profits will scale up so should the stock. BUY A FULL POSITION

Model Portfolio

Portfolio Changes
Trip.com (TCOM) move from HOLD A HALF to SELL

Updates
Alibaba (BABA) shares increased 10 points to break 250 on the back of the expected IPO of its Ant Group on the Hong Kong and Shanghai bourses. Ant owns the popular Chinese mobile payments network Alipay that has more than 900 million active users in China and handled nearly 54% of the country’s $29 trillion in mobile-payment transactions last year, according to market research firm Analysys. Baba has a goal to serve more than one billion consumers in China and see more than $1.4 trillion flow through its platform over the next five years. By 2036, Alibaba wants to provide services to two billion global customers and create 100 million jobs according to Chairman/CEO Daniel Zhang Yong in his first letter to shareholders. HOLD

Cloudflare (NET) shares rose 8% this week as the company announced opening an operation in Tokyo. You might not be aware that Cloudfare is decidedly global with a network that spans 200 cities in 100 countries. It began selling in Japan a decade ago and its Asian operations cover 33 cities. The company’s total customer count is approaching 3 million. JP Morgan recently published a $52 price target for NET citing Cloudflare’s easy-to-use single platform and freemium option, which allows customers to use the Cloudflare solution for free before deciding on premium options. I encourage you to buy NET if you have not done so. BUY A FULL POSITION

Global X Cyber Security ETF (BUG) had another good week, up 5%, as increased online activity requires more robust but affordable cyber-security services. The companies in the BUG basket address online security and cybercrime, which has reached an all-time high in the midst of Covid-19. I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive fast-growing industry. HOLD A HALF

DBS Bank (DBSDY) shares have been treading water over the last two weeks as Singapore’s economy sputters with the impact of Covid-19 though shares have gone from 50 to 62 since being added to the Explorer portfolio. My near-term target price is 70, which is reasonable given the bank’s quality. DBS is well-positioned to exploit growth in Southeast Asia with its 640 million youthful, dynamic and tech-savvy consumers. I encourage you to buy DBS shares that offer a solid dividend and are trading only marginally above its book value of 55. BUY A HALF

Gilead Sciences (GILD) had an up and down week as the company announced it will acquire a 49.9% equity interest in Tizona Therapeutics, a privately-held developer of cancer immunotherapies, for $300 million. In addition, Gilead will have an exclusive option to buy the rest of the company for up to $1.25 billion. Gilead announced last week comparative analysis results from its phase 3 clinical study of severely ill COVID-19 patients, which showed that patients who took remdesivir had faster recovery times.

The U.S. government has purchased Gilead’s entire stockpile of 500,000 vials of remdesivir for $195 million in new revenue. Gilead plans to produce up to two million treatment courses, that’s $4.7 billion in potential revenue by the end of 2020, compared with a research and manufacturing cost of about $1 billion to develop the drug. If you haven’t yet purchased GILD shares, I encourage you to buy a half position. BUY A HALF

Kirkland Lake Gold (KL) shares were up 10% again this week and up 30% over the last month as gold and silver prices stay elevated with a softening of the U.S. dollar and concerns about U.S. government finances and potential inflation, not to mention rising tensions in Asia. Kirkland also reported a very positive second quarter with gold production up 54%. The company’s balance sheet is among the strongest in the industry as it benefits from a large net cash position and zero debt. The miner says it ended the quarter with $537 million in cash and no debt. If you have not yet invested in Kirkland, I encourage you to buy a half position. BUY A HALF

Sea Limited (SE) shares got back to 115 this week and continue to benefit from stellar growth numbers such as sales up 9x in 5 years. In addition to gaming and e-commerce growth drivers, its digital payments segment is gaining momentum with more than $1 billion in total transactions from over 10 million SeaMoney mobile wallet users in the first quarter of 2020. Southeast Asia has 416 million Internet users and fourth quarter 2019 e-commerce growth was 37% or more than three times the rate of increase in the United States. Again, I encourage owners of Sea to take some profits if they have not already done so and only the most aggressive investors to buy at these levels. HOLD A HALF

Swire Pacific (SWRAY) is a new addition to the Explorer portfolio and a deep-value play. Swire has expansive assets from property to retail and transportation not only in Hong Kong but also throughout the region. This Hong Kong blue-chip is trading way off its 52-week high and substantially below its book (break up) value and I encourage you to buy a full position. With roots back to 1816, Swire is active in a wide range of commercial activities throughout Asia including aviation, property and retailing. Swire owns and manages significant commercial property, the premier airline Cathay Pacific, eighteen Coca-Cola plants and distribution rights in Hong Kong and parts of China and Southeast Asia, plus extensive retail businesses in fashion, food and auto. BUY A FULL POSITION

Trip.com (TCOM) shares grinded out a small gain this week but given the slower than expected recovery in travel markets in China and the risk of an uptick in Covid-19, I think it is best to exit this stock with a modest profit. MOVE FROM HOLD A HALF TO SELL

Van Eck Strategic Metals ETF (REMX) shares breached 40 this week though the big news in the rare earths world was the merging of Fortress Value (FVAC) with the private MP Partners, which owns and manages the Mountain Pass rare earths mine formerly run by Molycorp. The combination of this special purpose acquisition company (SPAC) with this rare-earth maker attracted attention and the stock was up 35% in its first three days.

This ETF basket has positions in twenty strategic metal and rare earths companies with about half of them based and listed in China. These materials are vital to a wide range of advanced technology and defense applications and China has a quasi-monopoly position on many of them. I encourage you to buy a half position as both a hedge on U.S.-China tensions and growth in advanced technology if you have not already done so. BUY A HALF

Virgin Galactic (SPCE) shares surged 25% this past week as the company announced Michael Colglazier as the new CEO. His previous role was as president of Disney Parks International. Outgoing CEO George Whitesides will fill the newly created role of chief space officer. In that role, he will oversee the company’s high-speed mobility and orbital spaceflight programs. This is a fascinating concept stock with a high-quality management team in a potentially high growth market. In addition to space tourism, Morgan Stanley believes the hypersonic point-to-point market could be worth $400 billion by 2040. For example, a flight from New York to Shanghai that takes 12 hours now might be shorted to as little as 40 minutes. The U.S. space agency has been working on a high-mach flight with its Supersonic X-59 test plane built by Lockheed. I’m fine adding small amounts to your positions at current prices and would be more aggressive on any pullbacks. BUY A FULL POSITION

The next Cabot Global Stocks Explorer issue will be published on August 6, 2020.

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