Cabot Global Stocks Explorer 730

Tech stocks are having a tough week as interest rates and inflation fears creep up. This is uncomfortable for many because five companies, Microsoft, Apple, Amazon, Alphabet and Facebook, make up almost 25% of the market value of the S&P 500. My view is that this pullback is providing new entry points for some tech stocks that have been on a good run. For perspective, most non-tech stocks are weathering the increase in bond yields quite well.

Today, we’re selling two profitable ideas that have lost some momentum, and our new Explorer recommendation centers on turbulence on the high seas.

Cabot Global Stocks Explorer 730

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From Digital Currencies to Shipping Containers
The market is hitting a little turbulence, which is natural as it feels its way across the timing of the pandemic economic recovery, concern over debt, interest rates, and inflation – and the big issue that will not go away for the balance of this decade: the U.S.-China rivalry.

You may think I’m overstating the issue but perhaps you might change your mind if you read my forthcoming book: Power Rivals, out later this year.

One U.S.-China battleground I will cover is financial technology. For example, China has since 2014 been working on an initiative to launch a digital yuan.

America is finally starting to get serious about a central-bank-backed digital dollar, with recent comments from top officials laying out the strongest support yet. Last Tuesday, Fed chair Jerome Powell told Congress that developing a digital dollar is a “high priority project for us,” but added that there are “significant technical and policy questions.”

Increasingly, more and more consumers and financial institutions are transitioning toward digital payments, putting greater pressure on policymakers to ensure the dollar’s status as the world’s reserve currency remains intact.

A key driver is that cash accounted for just 20% of all in-store payments globally, down by nearly a third from 2019, according to a new report from financial services company FIS. Perhaps more important than the decline in cash usage is the growing popularity of cryptocurrencies.

China is well on its way to becoming a cashless society with its central bank reporting more than 330 billion cashless transactions in 2019.

In addition, China’s large platform companies such as Tencent and Ant are already leaders in e-commerce and financial technology and payments. Beijing wants to both harness and co-opt these digital payment platforms.

Furthermore, a digital yuan, also referred to as a “digital banknote,” allows the government to collect extensive data and intelligence regarding the sender and receiver of funds. The digital currency is traceable and programmable whereby cash can be placed under the control of a computer program also known as a smart contract.

Perhaps most importantly, China would like to both further the internationalization of its currency and bypass U.S. dollar inter-banking platforms that could literally shut its economy down.

In the coming months, I will offer you several ideas that capture the growth of fintech and the competition between these two rivals at the heart of finance and technology.

Meanwhile, below is a new recommendation that takes advantage of the rivalry in the physical world—specifically on the high seas, where 90% of traded goods traverse the vast oceans in shipping containers.

New Explorer Recommendation

Atlas Corp. (ATCO)
The pandemic has led to distorted trade flows and a worldwide container shortage crisis. And in a closed loop, the lack of containers has a ripple effect across supply chains, disrupting container-shipping costs.

Shipping costs have skyrocketed as companies wait weeks for containers and then face premium rates to get them, according to industry watchers. Ikea’s Singapore operations called it a “global transport crisis” and estimates 850 of its 8,500 products are facing serious shortages caused by shipment delays.

What is going on? There are about 180 million containers worldwide, but they are unfortunately in the wrong places as China’s much faster economic comeback has led to three containers leaving Asia and China for every one that comes back.

Exacerbating the shortage is that orders for new containers were largely canceled during the first half of last year as most of the world went into lockdown. Containers stopped moving and carriers sharply reduced their seagoing operations.

Demand for these shipping containers is surging and supply is frozen, so shipping rates are skyrocketing. Southeast Asia to U.S. rates have spiked from around $2,000 up to $4,500 per 40-ft. container.

For example, Alphaliner, an online source of information about the liner shipping industry, reports that carriers can get 66 cents (per 40 ft. container per nautical mile) on the Shanghai to Los Angeles route against less than 10 cents on the return. Even better rates exist from Shanghai to Melbourne, with 88 cents, or Shanghai to Santos, Brazil, with 75 cents. The pressure is on to get containers back to Asia so that carriers can take advantage of these profitable rates.

Making matters worse is that the global container fleet is shrinking and, you guessed it, containers are largely manufactured in China.

Chinese container manufacturers have increased prices for new containers from $1,600 last year to $2,500 now. Container leasing rates have also jumped, up by around 50% in the last six months.

We can profit from this developing situation with Vancouver-based Atlas Corporation (ATCO), which operates as an independent charter owner and manager of containerships. The company charters its containerships to various container liner companies. It operates a fleet of 118 containerships and also provides fast-track mobile turbine power to various industries. In addition, the company plans, finances, and constructs permanent power plants.

Atlas reported operating margins of 40% in its latest quarter, with revenue increasing for the quarter, year over year, 36.6% and earnings growing 96.6%. I suggest starting with a half position in ATCO, with a target price of 20.

BUY A HALF

Model Portfolio

Portfolio Changes
ElectraMeccanica (SOLO) Moves from Hold to Sell
NovoCure (NVCR) Moves from Hold to Sell

Updates
Afterpay (APT.AX) shares held their own in a tough market as the company announced that it delivered $10.1 billion in sales on a constant currency basis for the first half of the fiscal year, ending December 31, 2020. Afterpay’s balance sheet remains healthy with cash and equivalents of more than $1.7 billion. This stock has lost some momentum over the last month so I’m keeping it a hold for now. HOLD A HALF

Anglo American (NGLOY) demonstrated some relative strength as the company reported this week earnings of $9.8 billion compared with $10 billion a year earlier. Copper reached its highest price level since 2011 and prices of even iron ore have also surged. The company is the largest producer of platinum with about 40% of world output and explores for diamonds, copper, platinum group metals, coal, iron, nickel, and manganese ores. Anglo American plc was founded in 1917 and is headquartered in London. I recommend you buy a half position if you have not already done so. BUY A HALF

Cloudflare (NET) shares fell from 75 to 70 this week and are down from a February high of 93. The share price is close to where it started 2021. Given the growth potential of this sector and stock and the fact that we have taken some profits off the table, I’m going to keep this a hold and will watch the stock to see if it forms a base and then a new uptrend. HOLD A HALF

ElectraMeccanica (SOLO) shares retreated from 6.6 to 5.6 this past week and given the sharp pullback in EV shares and that we have taken profits at significantly higher price points, I think we should exit this stock and wait for another entry point. This is an aggressive electric vehicle play, way ahead of the fundamentals, which is why I have been recommending taking some profits. MOVE FROM HOLD A HALF TO SELL

Fisker Inc. (FSR) shares fell 13% yesterday but over the past month have gone from 15 to 24 – up 60%. The company had no sales revenue in the last quarter and lost just a nickel a share. The big news driving the stock is that Foxconn, the Taiwanese company that assembles iPhones, will be making a future Fisker model electric vehicle. Luxury auto veteran Henrik Fisker heads up Fisker and the company’s first product is the Ocean, a mid-priced SUV. I’m maintaining a hold rating on this stock. HOLD A HALF

Foley Trasimene Acquisition II (BFT) (merging with Paysafe) shares performed well this week as this SPAC is trading at a reasonable valuation in a promising sector of fintech. Foley Trasimene is merging with Paysafe Group and plans to eventually list on the New York Stock Exchange under the symbol PSFE. Founded in 1996, Paysafe, based in London, is a payments platform that connects businesses and consumers across 70 payment types in over 40 currencies globally. I still rate this stock a buy and recommend you purchase shares if you have not already done so. BUY A HALF

International Business Machines (IBM) proved this week why having some conservative blue chips in your portfolio makes sense. IBM is a high quality play on the high growth markets of quantum computing software and cloud computing. The stock is trading at 10 times projected earnings, which is less than half the average for the S&P 500 index and offers a 5.4% current dividend yield. I encourage you to buy IBM as a great core holding if you have not yet done so. BUY A HALF

LogiQ (LGIQ) shares traded in their normal choppy fashion this week, dipping from 7.5 to 6.8, pretty much in line with the tech selloff. LogiQ is a New York-based leading global provider of e-commerce, mobile commerce, and fintech business enablement solutions in Southeast Asia, Europe and the United States. LogiQ’s stock is attractive for very aggressive investors. BUY A HALF

NovoCure (NVCR) shares were moved to a hold last week and have broken down since then. This is a promising company but given that we have taken profits on this stock, I recommend we sell all shares at this point. MOVE FROM HOLD TO SELL

Sea Limited (SE) shares held firm this week as the company reported fourth-quarter and full-year 2020 numbers with 101% year-over-year revenue growth. Revenue increased to $1.6 billion in the last three months of 2020 from $777.2 million a year earlier while its net loss widened to $523.6 million from $283.8 million. Sea’s e-commerce business’s fourth-quarter sales increased 178% to $842.2 million and the company expects e-commerce revenue to double in 2021. The momentum continues and I’m keeping this stock a hold. HOLD A HALF

Taiwan Semiconductor (TSM) shares slid this week from 130 to 122 in line with weakness in tech markets. If you haven’t yet bought any shares, I think this is a good entry price as Taiwan Semiconductor is the undisputed leader in this sector and the company recently announced it will raise capital expenditures to $28 billion in 2021, a 47% year-over-year increase. With a microchip shortage in the headlines every day, I maintain a buy rating on the stock. BUY A HALF

Virgin Galactic (SPCE) shares were hit by an announcement that the company’s next test flight will not take place until May. This delay of Virgin’s next powered test flight of its SpaceShipTwo vehicle pushes any potential revenue into the fourth quarter of 2021 and was not received well by the market. If the next retest is successful, the company plans a second powered flight, a key step needed before revenue-generating commercial flights can begin. Shares more than doubled in the first month of 2021 and we took some profits, so we will hold the remaining shares for now. HOLD A HALF

The next Cabot Global Stocks Explorer issue will be published on March 18, 2021.

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