Cabot Global Stocks Explorer 718

With the exception of another nice gain by NovoCure (NVCR), this was a quiet week for the Cabot Explorer portfolio as the Nasdaq continues its march, up almost 35% so far in 2020. Our Emerging Markets timer (EEM) stays positive as some of these markets bounce back against the backdrop of very weak economies. Perhaps the worst is India with its latest quarterly GDP falling 24%. This issue’s new recommendation is a high quality stock in a growth sector with a wonderful high margin, low risk business model.

Cabot Global Stocks Explorer 718

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The Upheaval of Tech and Finance
2020 is shaping up as one for the economic history books.

The Nasdaq has had its best rally since 2000 and has risen by 18.7% since July 1.

If you add the market capitalization weightings of Amazon, Alphabet and Facebook to the information technology sector, the technology sector weighting balloons to roughly 38% of the broader S&P 500, dwarfing even its early 2000-peak weighting at the height of the bubble

It was also bit of a jolt to learn this week that Exxon Mobil (XOM) has left the Dow Jones Industrial average along with Pfizer (PFE) and Raytheon (RTN). Exxon joined the Dow in 1928 at Standard Oil.

When historians look back at this era I’m pretty sure the chapter will be entitles “The Age of Technology & Finance.”

Now its on to this week’s idea which naturally is at the heart of finance and technology.

New Explorer Recommendation
“It’s everywhere you want to be”
Visa (V)
This week, I was leaning towards recommending a fairly new fintech company that is growing like a weed but is far, far away from being profitable.

Then I thought back to the dotcom era when I was a co-founder and CFO for a start up financial payments company that was trying to launch a suite of payment products for online transactions. We had a good team: A former Morgan Stanley investment banker, the co-founder of Verifone, a former head of business development for MasterCard and, on our board, a former vice chairman of Citibank.

To make a long story short, we unfortunately lost out to PayPal to become the payments partner for eBay and then we ran into another giant problem.

We were selling our payments platform as an alternative to credit cards in terms of privacy, security and flexibility for transactions on the Internet.

And then Visa and MasterCard changed their policies and systems to address all three of these issues - knocking the wind out of our sails.

This is the power of mega companies and there are not many bigger than Visa (V), which today is the 8^th most valuable company in America in terms of market value. (Just ahead of Tesla!)

Visa was not sitting still two decades ago and it’s still on the move today pushing back and sometimes buying new innovative, disruptive fintech companies such as Plaid. In some ways, Visa could be seen as fintech venture fund. Other recent acquisitions include Earthport, Verifi, Payworks, and Bell ID. All this has enabled Visa to deepen and broaden its suite of products:

• Visa Direct is the prominent digital product that provides access to Visa’s transaction processing platform, VisaNet.
• Visa Checkout is a dedicated digital product that ensures secure online payments.
• Visa Token Service and Secure Remote are other digital products that secure personal account information by utilizing various encryption solutions.
• CyberSource is a merchant payment acceptance solution that provides an omnichannel (online, mobile, and in-person) payment acceptance service.

There are several other reasons that I like Visa.

One is that they do not lend any money or take any credit risk.

Think of them as the plumbing in between financial institutions and consumers.

The second reason is that their markets are almost infinitely scalable and with scale comes pricing power and profitability. Between 2008 and 2018, Visa expanded its share of credit card-based network purchase volume in the U.S. from 42% to 53%. Yet more than half (55%) of its net revenue generated in the most recent fiscal year came from international markets.

Despite being a massive company in a stable product category, Visa is still putting up double-digit top line growth numbers with revenue up 11.5% in fiscal 2019 to $23 billion. And in each of the past seven years, Visa’s operating margin has been above 60% (!), leaving plenty of cash flow to fund new products and services.

The pandemic has had an impact, of course, as its latest quarter showed net revenue of $4.8 billion declining by 17% year over year. But that’s a short-term effect, and even with the disruptions, the company posted a solid profit of $2.4 billion.

The chart for Visa also looks great with the stock in a nice uptrend. The valuation is rather high but V holds a lower price-to-earnings multiple than MasterCard.

The clincher for me is that Visa is a bridge between the online and offline, digital and cash. Globally, more than 80% of all transactions are still being conducted in cash. This means regions like Southeast Asia, Africa, and the Middle East can offer double-digit long-term growth potential.

This is just the sort of stock that young and upcoming Robinhood investors should tuck into their portfolios and forget about. Since the year began, the number of Robinhood members holding Visa in their accounts has more than doubled to approximately 98,400. Hooray! BUY A FULL POSITION

Model Portfolio

Portfolio Changes
None.

Updates
Alibaba (BABA) shares remain in good shape despite some wobbles with most growth stocks during the past couple of days. The highly anticipated Ant IPO is shining a spotlight on BABA and shareholders should benefit from the company’s 30% equity stake in Ant. This Ant IPO comes right on the back of Alibaba’s recent quarterly report with revenue climbing 34% to $21.8 billion, accelerating from the prior quarter.

The biggest challenges going forward is that JD.com (JD) is taking aim at them at the top end of the market, and Pinduoduo (PDD) is encroaching in many of the fast-growth lower tier markets. Some analysts also worry that the U.S. government might block Alibaba’s semiconductor development and cloud computing efforts ahead of the election in November. BABA remains a hold. HOLD A HALF

Cloudflare (NET) was flat this week but remain in a sector that’s very much in favor. Cloudflare provides security and cyber services that help keep web pages and applications safe from attacks. NET helps support over 27 million websites, claims to block over 72 billion cyber threats per day and has a fast-growing customer base that spans the globe. Revenue rose roughly 48% year over year in both the first and second quarters with revenue significantly higher than the company’s guidance. I encourage you to buy NET on an incremental basis if you have not done so. BUY A FULL POSITION

Global X Cyber Security ETF (BUG) shares gained another point to reach almost 24 this week as this ETF is now up over 35% so far in 2020. I believe this sector will remain in favor given that demand for cyber security matches or exceeds online activity. HOLD A HALF

Kirkland Lake Gold (KL) shares continued its outperformance vs. the Gold Miners Index this week. In addition, over the past few weeks, earnings estimates have been hiked, with FY2021 numbers now at $4.18 per share, meaning the stock is trading at only 12 times earnings estimates. Based on the company’s aggressive buyback program, industry-leading margins and relative undervaluation, I continue to see the stock as a top gold producer. If you have not yet invested in Kirkland, I encourage you to buy a half position. BUY A HALF

Novocure (NVCR) shares have gone from 67 to 85 over the last two weeks and the company appears to be turning the corner on profitability.. The company has recently reported quarterly net revenues of $115.9 million, representing 34% growth versus the second quarter 2019 and 14% growth versus the first quarter 2020. Novocure has significant growth potential and is making plenty of fundamental headway (including a partnership with Merck, announced in July). I still rate NVCR a buy and encourage you to buy shares if you have not done so. BUY A FULL POSITION

Sea Limited (SE) shares briefly moved above 160 this week before settling back; shares are up 275% so far in 2020 and are now are up more than 10-fold from the price at the time of our recommendation last year.

Its momentum has been supported by its recent stellar second quarter with revenue up 93.4% and active users increasing of 61% year over year.

According to App Annie, Free Fire continued to be the top-grossing game in both Latin America and Southeast Asia. Shopee registered accelerating growth during the second quarter, gross orders increased by 150% year over year. I will keep this a hold. HOLD A HALF

Swire Pacific (SWRAY) shares didn’t much this week after performing better over the last few weeks as Asian economies rebound from the pandemic shutdown. I recommended this stock because it is a premium conglomerate trading substantially below its book (break up) value. I encourage you to buy a full position with a 6 to 12 month time frame. BUY A FULL POSITION

Taiwan Semiconductor (TSM) shares were choppy this week. TSM is the world’s largest semiconductor manufacturer, with 56% market share. Its most recent earnings surged 81% on 29% higher revenue, as its margins climbed. The U.S. State Department said on Monday it was establishing a new bilateral economic dialogue with Taiwan, an initiative it said was aimed at strengthening ties with Taipei and supporting it in the face of increasing pressure from Beijing. This is a well-managed, dominant company selling at a reasonable valuation. I recommend you start with a half position and put in place a 20% trailing stop loss in place. BUY A HALF POSITION

Van Eck Strategic Metals ETF (REMX) shares seem to be facing some resistance around 42 despite rising tensions between the U.S. and China that’s increasing the possibility of supply disruptions. For example, Japan, concerned about China and fragile supply chains, announced it is increasing its strategic stockpile of these vital materials from 30 days of use to 180 days of use. If you don’t own any, I encourage you to buy a half position as both a hedge on U.S.-China tensions and as a growth play in advanced technology. BUY A HALF

Virgin Galactic (SPCE) shares were flat this week at 17 as Cowen analysts initiated coverage of the stock with an outperform rating and 22 price target. Cowen sees commercial spaceflights boosting Virgin Galactic’s revenue to as much as $1 billion by 2030 though the company currently has no revenue as commercial service is set to begin in the first quarter of 2021.

Based on a Cowen survey, analysts see a total potential market of 2.4 million people, made up of those with a net worth of more than $5 million globally. It then estimates Virgin Galactic can potentially fly about 3,400 passengers per year to suborbital space by 2030.

In addition, it sees another business opportunity: space tourism flights to orbital space. This initiative ties into Virgin Galactic’s contract with NASA to provide an orbital astronaut training program and take on the role of broker to find customers and organize transportation. It is worth noting that Boeing’s venture capital arm HorizonX has a $20 million minority stake in Virgin Galactic. I remain bullish on this company and stock. BUY A FULL POSITION

The next Cabot Global Stocks Explorer issue will be published on September 17, 2020.

Cabot Wealth Network
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