Cabot Global Stocks Explorer 721

Markets hit pause this week as third-quarter earnings begin rolling in, doubt reigns over chance of another stimulus bill, and uncertainty over the outcome of the presidential election just three weeks out is palpable. Overseas, the Stoxx Europe 600 fell 2.2% as local governments and local authorities hurried to impose lockdown restrictions to halt the spread of Covid-19 cases. This week’s new recommendation is a fintech stock offering an intriguing mix of Southeast Asian, American and European growth. Interestingly, it has a partnership with Sea Limited (SE) and perhaps can best be described as a young “Shopify of mobile”.

Cabot Global Stocks Explorer 721

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As U.S. Markets Pause, We Move to Southeast Asian Growth
The Explorer portfolio held steady this week, though Cloudflare (NET) broke out with a 42% gain and our newest recommendation, Vipshop (VIPS), was up 12%. A few other stocks moved nicely higher and some of you who still hold former portfolio recommendation Nio (NIO) probably noticed its surge this week on the back of a strong recommendation by JPMorgan. Meanwhile, Luckin Coffee (LKNCY), in recovery mode, has more than doubled in the last month to breach 5.

Reuters reported yesterday that the U.S. State Department has filed an application to put Ant Group on the trade blacklist as the fintech giant 30% owned by Alibaba is currently seeking a record $35 billion in dual IPOs in Shanghai and Hong Kong. This would be quite an escalation in the U.S.-China rivalry and could impact Alibaba (BABA) stock.

Almost exactly a year ago, Amazon (AMZN) launched its local website in Singapore, its first in Southeast Asia, competing with two Explorer holdings; Sea Limited (SE) and Alibaba’s Lazada, a Southeast Asian e-commerce marketplace it acquired in 2016. Amazon is pricing its Prime subscription in Singapore at $2/month, aiming to grab market share.

This leads to our new recommendation, an intriguing blend of Southeast Asian, American, and European fintech growth. Interestingly, it has a partnership with Sea Limited…

New Explorer Recommendation
Logiq (LGIQ)
(appeared as Weyland Tech until September 25, 2020)

Logiq is a New York-based leading global provider of e-commerce, mobile-commerce, and fintech business enablement solutions for three big markets: Southeast Asia, Europe and the United States.

Its AppLogiQ platform helps small-and-medium sized businesses easily create and deploy a native mobile app for their business without technical knowledge or background. AppLogiQ enables these businesses to reach out to more potential customers, increase sales, manage logistics, and promote their products and services in an easy, affordable, and highly efficient way. So far, AppLogiQ is offered in 14 languages across 10 countries and three continents.

In addition, the company’s subsidiary, DataLogiQ, provides a data-driven, end-to-end e-commerce marketing solution for enterprises and major U.S. brands. PayLogiQ also offers mobile payment products.

Here are the four reasons for this recommendation.

1. Growth Potential in Highly Scalable Markets

As you probably know, I’m very high on the growth and investment potential of markets in Southeast Asia. The 10 nations of Southeast Asia have a combined population roughly double that of America. Indonesia, with the fourth largest population (260 million) in the world, is the largest of these countries. Jakarta, with a population of about 30 million, is the second largest city in the world.

The people of Southeast Asia are tech savvy, well educated, young and riding high economic growth rates to expand incomes and consumer spending. Logiq is focused on this region and Indonesia in particular but also expanding in America and Europe. The opportunity to scale up its products and revenue across these markets is significant as penetration of smartphones and mobile shopping are both on upward trajectories.

2. Attractive Valuation Relative to Peers
Logiq’s stock is trading about two times 2020 projected revenue while Shopify (SHOP) is at 30 times and Sea (SE) is trading at almost 60 times revenue. Even allowing for different stages of development and risk factors, this sort of gap will likely close. This valuation also makes the company an attractive acquisition target in this high growth strategic space.

3. Top-Line Revenue Growth with Margins Expected to Expand
The below chart highlights the company’s rapid revenue growth. Margins are expected to expand for two reasons. First, the company has moved to 100% digital markets, and second, much of the research and development work for the development of AppLogiQ is complete.

4. New CEO and Share Ownership
Of particular interest is the recent promotion to CEO of Tom Furukawa. His extensive e-commerce background includes high-level positions at Yahoo and Rubicon. Furukawa has a track record of success for being an industry leader in the big data space and his appointment to CEO shows the direction the company is moving in. With extensive experience and knowledge of the Southeast Asian markets, former CEO and now chairman Brent Suen will focus on negotiations for mergers & acquisitions and a possible exit strategy for the company

I also like two things about the share ownership of Logiq. First, institutional investors hold only 2% of shares and as this story gets out the opportunity for discovery in the investment community is quite high. Second, insiders own 22% of shares, which means they are very incentivized to meet targets and execute the company’s strategy.

This is an aggressive idea with significant upside potential. BUY A HALF POSITION

Model Portfolio

Portfolio Changes
None.

Updates
Afterpay (APT.AX) shares jumped 10 points, from 86 to 96, building on momentum from announcing an expansion into Canada and Europe as well as the announcement this week that its in-store solution is now available to all U.S. customers at some of the best retail stores nationwide. These include Forever 21, Finish Line, JD Sports, Levi’s, Skechers, Fresh, APL, Solstice Sunglasses, as well as select DSW stores. Shoppers can use Afterpay to buy items in select retail stores using their Afterpay card, a virtual, contactless card stored in their digital wallet. Just like using Afterpay online, customers can pay for their in-store purchases in four installment payments, without the need to take out a traditional loan or pay upfront fees or interest.

If you have not already done so, I suggest you purchase APT.AX shares, which trade on the Australian stock exchange. BUY A HALF

Alibaba (BABA) shares moved from 295 to break 300 but the big news this week is that, according to Reuters, the U.S. State Department has filed an application to put Ant Group on the U.S. trade blacklist. Alibaba has a 30% equity stake in this fintech giant, which is currently seeking a record $35 billion in dual IPOs in Shanghai and Hong Kong. Once listed, Ant, which was formed in 2004, could have a similar value to JPMorgan Chase, the world’s biggest bank, which traces its roots to 1799.

Alibaba recently announced that its fast-growing cloud arm should be profitable for the first time this year. The company has a huge upside in cloud infrastructure in China given that its global market share at the present time is a modest 6%, according to Statista. BABA remains a legacy hold. HOLD A HALF

Cloudflare (NET) shares exploded 42% this past week as the stock is benefiting from the pandemic because it is accelerating companies’ plans to expand and protect their networks. On Monday, the company announced the launch of its new cloud-based platform Cloudflare One. The network-as-a-service platform promises to secure and connect companies and remote working teams anywhere and on any device. The company also said that it has integrated the Cloudflare One platform with all major providers of identity management and device-security solutions—Microsoft Active Directory, Google Workspace, Okta, etc.

This stock is showing impressive momentum as it leverages the company’s network of more than 25 million internet properties in 200 cities and over 100 countries. Cloudflare’s management projects revenue growth of 40% in the third quarter and for the full year. I’m keeping NET a hold for now. HOLD A HALF

Kirkland Lake Gold (KL) shares were up three points as the company released gold production figures for the third quarter of 2020.

Consolidated gold production rose 37% year over year and consolidated gold sales rose 29.5%. The company’s average realized price of gold was $1,907 per ounce in the third quarter compared with $1,482 in the prior-year quarter. Kirkland Lake is a solid allocation to gold for your portfolio due to its outstanding fundamentals, including 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 if you have not already done so. BUY A HALF

NovoCure (NVCR) shares continued to outperform the market, up 10 points again this past week. Its next earnings are expected on October 29 and I’m expecting signs that the company is 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 took a rest this week after surging 10 points the previous week. One issue to keep an eye on is the progress that Amazon is having in Southeast Asia, where it launched operations one year ago. Amazon is bringing to Singapore free two- to three-day delivery on a broad assortment of local products for all customers with an order minimum, free one-day delivery for Prime members, free two-hour delivery on groceries and household essentials, and access to Prime Video. Amazon priced its Prime subscription in Singapore at just a little more than $2/month, aiming to grab market share.

Keep in mind that a majority of Sea’s sales come from its Garena digital gaming platform, which would not be disrupted by Amazon. No change in my hold rating but aggressive investors can add to their position incrementally. If you haven’t already done so, you should take some profits off the table to lock in gains. HOLD A HALF

Taiwan Semiconductor (TSM) shares were flat this past week but we expect the latest earnings report out today. This company is a dominant global semiconductor chip fabricator with tremendous economies of scale in a capital-intensive industry. Since the beginning of 2004, Taiwan Semiconductor shares have returned almost 1,000%; Samsung’s have gained more than 400%; and Intel’s are up less than 100%. I maintain a buy rating. BUY A HALF

VanEck Rare Earth/Strategic Metals ETF (REMX)’s share price was up marginally this past week and the stock seems to be facing some resistance in the low 40s. Rare earths global production is not much more than $1 billion each year but they are essential to more than $15 trillion tech products. I view this ETF basket of rare earth and strategic metals stocks as an effective hedge on rising U.S.-China tensions as well as a play on overall growth in advanced technology. BUY A HALF

Vipshop Holdings (VIPS) was up 11.7% in its second week in the portfolio. It is often overlooked as the sixth largest e-commerce company in China and has a bit of a different strategy as an online discount retailer. You might think of the company as a 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.

Management expects the company’s third-quarter revenues to be just over $3 billion. Its fourth quarter, which includes China’s big Singles Day splurge, could reach $4.8 billion. Trading around 17 a share, it is far from its 52-week high of 24. On price to sales and price to book value, VIP looks inexpensive compared to its larger rivals. Build a half position in advance of expected strong third and fourth quarters. This is an excellent entry point for this stock. BUY A HALF

Virgin Galactic (SPCE) shares moved sideways this week as the company seems unable to pin down the timetable for commercial launch in 2021. This week the company gave an update on the next steps for its SpaceShipTwo powered test flights. “We expect our first spaceflight from Spaceport America to occur later this fall and we are pleased to confirm that we are still on track to meet this time frame.”

The first powered flight will have two pilots on board and will contain three payloads that are part of the NASA Flight Opportunities Program. It will be the first to take off from Virgin Galactic’s Spaceport America in New Mexico. A second powered test flight will follow with a crew of two test pilots in the cockpit and four mission specialists in the cabin. The primary objective of the second powered flight will be to evaluate the full customer cabin and hardware, as well as procedures and training details.

I remain positive on this stock and encourage you to build a position if you have not already done so. BUY A FULL

Visa (V) shares are up 9% so far in 2020 with little change this week. This represents one of the most conservative fintech stocks because of its dominant position in the marketplace and because it has no loans to worry about collecting, so its profit margin consistently stays at or above 50%. Visa will be an excellent core holding supported by a dominant market position. With 55% of its net revenue coming from international markets, Visa has still put up double-digit top-line growth numbers in each of the past seven years. 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 29, 2020.

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