Cabot Global Stocks Explorer 720

This was a good week for the Explorer portfolio as all our positions advanced, led by NovoCure (NVCR), Sea Limited (SE) and Virgin Galactic (SPCE), which jumped 25% this past week. We now head into the fourth quarter, which may bring some turbulence as the election approaches. We will take what the market gives us but will be on guard. Our emerging markets timer (EEM) is still positive.

Today, we have a new recommendation in emerging markets that we hope will benefit from the biggest shopping day in the world.

Cabot Global Stocks Explorer 720

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Into the Fourth Quarter with Guarded Optimism
We enter the fourth quarter of 2020 today with a long-term game plan, not a 2-minute drill. The Explorer portfolio had a good week, with all positions advancing, though some more than others. I’m comfortable with a cash position of 25%, though I will need to sell a couple of the weaker performers in our portfolio in the coming weeks to make room for new ideas in emerging markets. A number of you have recently asked about a couple of past ideas, so let’s get to those now.

Updates on Kraken Robotics (KRKNF), (PNG.V in Canada) and Luckin Coffee (LKNCY)

I have received several requests for updates on two speculative stocks. Kraken, which I mentioned as an interesting situation a couple of months ago, and Luckin Coffee, which was previously in the Explorer portfolio. I personally own both these stocks.

Kraken Robotics, based in Newfoundland and Labrador, is a marine technology company that designs, manufactures, and sells sensors, batteries, and underwater robotic systems for unmanned underwater vehicles used in military and commercial applications. The company recently finalized Danish and Polish Navy contracts worth about $36 million. The contracts are primarily for its “Katfish” system, an intelligent, towed underwater synthetic sonar system specifically designed for high-resolution imaging of the seabed.

The company still has an ample pipeline of additional contract opportunities that would serve to further bolster its backlog and it expects 136% revenue growth in 2021. Over the last month, Kraken Robotics stock is up 49%.

Regarding Luckin Coffee (LKNCY), China’s Ministry of Finance recently fined the coffee company nearly $9 million and the company has appointed a new, well-respected independent director to its board of directors. The stock moved from 2.77 to 3.07 over the last week. This company and stock will have to earn their way out of the doghouse, and this will take some time.

Now let’s get to our new recommendation, which is a Chinese online version of T.J. Maxx, Ross, Marshall’s and more all rolled into one.

New Explorer Recommendation
Vipshop Holdings (VIPS)
China will soon play host to the biggest shopping day of the year in the world, an event called Singles’ Day, which has occurred every year since 2003, on November 11. Last year, Singles’ Day sales were a record $38.4 billion, and the expectations are that they could hit $45 billion this year.

One of the companies that will surely benefit from China’s upcoming spending binge is Vipshop Holdings (VIPS). The company was founded in 2008 and is headquartered in Guangzhou, China.

Vipshop doesn’t get the attention of its largest competitors, such as Alibaba (BABA), but it is the sixth largest e-commerce company in China, according to eMarketer. Vipshop also has a bit of a different strategy as an online discount retailer. Through its website, it sells everything from apparel, cosmetics and jewelry to electronics, home appliances and all sorts of gadgets. It’s why I call it the Chinese online version of T.J. Maxx, Ross and Marshall’s all rolled into one.

In the second quarter, the online retailer saw revenue increase to $3.4 billion as its total orders grew 15% from 147.8 million to 170.5 million. In addition, the number of its active customers jumped 17% to 38.8 million. Another good sign is that repeat customers accounted for 90% of total active customers.

Despite these solid numbers, VIPS stock pulled back pretty sharply in part due to management lowering expectations for the balance of 2020. But management has a habit of doing just that, and while its third quarter revenue is expected to be just over $3 billion, its fourth quarter, which includes the aforementioned Singles’ Day splurge, could reach $4.8 billion.

The good news is the steep pullback has provided us with an opportunity to buy shares at a discount. Trading at just under 16 a share, it is far from its 52-week high of 24. In terms of price to sales and price to book value, VIPS looks inexpensive compared to its larger rivals. Its forward price-to-earnings ratio is just a bit over 12.

VIPS could be an excellent near-term trade, with a target price over the next 3-6 months in the 20-25 range. BUY A HALF POSITION

Model Portfolio

Portfolio Changes
None.

Updates

Afterpay (APT.AX) shares advanced this week from 75 to 80 as the company announced an expansion into Canada as well as partnership agreements in Europe. This company is revolutionizing the retail payment industry by effectively enabling interest-free loans at a growing number of retailers. Founded in Australia in 2017, Afterpay has seen heady growth, with revenue leaping from $23 million in 2017 to $218 million in 2019.

Afterpay has quickly captured almost 10 million active customers and 55,000 retailers participating in its network. If you have not already done so, I suggest you purchase shares, which trade on the Australian stock exchange. BUY A HALF

Alibaba (BABA) shares made a nice move this week from 270 to 294, helped by the announcement that its fast-growing cloud arm will be profitable for the first time this year. In addition, no doubt investors are buying BABA stock for an indirect play on the upcoming mega-IPO of Ant Technology, on both the Shanghai and Hong Kong exchanges. Alibaba has huge upside in cloud infrastructure in China given that its global market share at the present time is a modest 6%, according to Statista.

Historically, Alibaba’s core commerce business, which generated 87% of its revenue last quarter, has been its only profitable unit. The company is posting some nice numbers and analysts expect its revenue and earnings to rise 37% and 24%, respectively, in 2020. BABA remains a legacy hold. HOLD A HALF

Cloudflare (NET) shares have over the past two weeks increased from 35 to 41, and the company announced today the launch of Cloudflare Radar, a free public tool that lets anyone view global traffic and security trends across the internet as they happen. Cloudflare Radar leverages the company’s network of more than 25 million internet properties that span more than 200 cities in over 100 countries to allow users to access global and regional trends in traffic patterns, view changes in traffic to popular websites over time, and monitor emerging security threats.

Cloudflare’s management projects revenue growth of 40% in the third quarter and for the full year, with international business accounting for more than 50% of its revenue. I’m keeping NET a hold for now but if you haven’t yet bought NET, I’m fine with you building a half position now. HOLD A HALF

Kirkland Lake Gold (KL) shares inched up this past week and we will stick with this position since Kirkland Lake has outstanding fundamentals, such as strong cash flow, a strong balance sheet with lots of cash, little debt and industry-leading margins. I suggest you take a position in Kirkland and buy more at current prices if you want a larger allocation to gold. BUY A HALF

NovoCure (NVCR) shares resumed their march, going from 103 to 111. Over the last month, shares have jumped 34%. The company’s next earnings are expected on October 29, and I’m expecting signs that it’s getting close to profitability. NovoCure is still a relatively small company with significant growth potential. I still rate the stock a buy and encourage you to buy shares if you have not done so. BUY A FULL

Sea Limited (SE) shares continue to climb, moving from 145 to 154 over the past week. Sea is quite a ways from profitability but growth across its core markets is getting better and better. JPMorgan projects that Sea’s e-commerce revenue could grow more than 6X from 2019 through 2022, and gaming remains strong, with its top game Free Fire having downloads in excess of 100 million in the last quarter. Free Fire is also the top game in India now, with more games in the development pipeline. I will keep this a hold for now but aggressive investors can add to their position incrementally. If you are a long-time holder, you should take some profits off the table to lock in some gains. HOLD A HALF

Taiwan Semiconductor (TSM) shares gained ground this week, going from 77 to 81 as Taiwan President Tsai Ing-wen promised to help the island’s key semiconductor industry overcome difficulties and consolidate its leading position, offering support to a sector increasingly caught up in China-U.S. trade and tech war tensions. The company has stopped taking new orders from or shipping new wafers to Huawei, but will likely remain a step ahead of rivals such as Samsung by starting to produce 3-nanometer chips in low volumes next year. I’ll keep my rating at buy a half position, but recommend you put a 20% trailing stop-loss in place. BUY A HALF

VanEck Rare Earth/Strategic Metals ETF’s (REMX) share price was flat this week and the stock has clearly lost momentum over the last month. Nonetheless, I encourage you to take advantage of its pullback to buy a half position if you have not already done so. This ETF is a basket of rare earth and strategic metals stocks that serve as an effective hedge on rising U.S.-China tensions as well as a play on overall growth in advanced technology. BUY A HALF

Virgin Galactic (SPCE) shares gained 25% this week despite a bit of a pullback yesterday. The reason for the move can probably be attributed to two new Wall Street analysts picking up coverage and issuing buy recommendations. The average analyst price target is 26, with the highest at 35. I take these numbers with a grain of salt as the pandemic has put off plans for its first space tourism launch with Sir David Branson from later this year into the first quarter of 2021. Still, this concept stock has captured the imagination of many and has significant upside potential. Based on a Cowen survey, the company has a potential market of 2.4 million people, with a net worth of more than $5 million globally. I remain positive on this growth concept stock and suggest you build a full position. BUY A FULL

Visa (V) shares climbed to almost 200 this week, which is roughly where I recommended this stock about a month ago. Though this is disappointing,

Visa will be an excellent core holding supported by a dominant market position. With 55% of its net revenue coming from international markets, Visa is still putting up double-digit top-line growth numbers 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. I recommend you buy shares if you have not already done so. BUY A FULL

The next Cabot Global Stocks Explorer issue will be published on October 15, 2020.

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