Shesa's FEBRUARY 2020 Investment Blog

FEBRUARY 2020 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update     

The coronavirus originated from Wuhan; China rattled the stock market for a couple of days before bouncing back. Though the stock market has recovered, coronavirus still keeps spreading and no containment in site. As I write this blog it has spread to more than 37,592 people and more than 813 deaths reported mostly from China. I will have detailed analysis on this later on.

Meanwhile, fourth quarter earnings season is underway. Most of the big tech giants have reported their earnings. Some of them reported spectacular earnings, particularly Amazon and Apple, the only exception was Google who had lackluster revenue and earnings. Phase one trade deal was signed between U.S and China in mid-January but stock market had already factored in all the gains. Moreover, trade deal and good fourth earning reports could not able to provide momentum for the stock market due to sudden emergence of Coronavirus. Overall, World economy is going to be impacted but Chinese economy is expected to be hit very hard due to coronavirus. Economists’ estimate that it would cost more than $60 billion in lost growth. As the stock markets are hit by this epidemic, what should an investor do? I will have my analysis of the past epidemic and see what we can expect from the stock market going forward. But before that let’s take a look to stock market indexes.

Indexes	1/2/20	Close FRI (2/7/20)	Change in 2020	% Change in 2020	All Time High	Diff %
DOW	28,538.44	29,102.51	564.07	1.98	29,408.05	-1.04%
S&P 500	3,230.78	3,327.71	96.93	3.00	3,347.96	-0.60%
NASDAQ	8,972.60	9,520.51	547.91	6.11	9,575.66	-0.58%
BTK	5,067.45	5,105.78	38.33	0.76	5264.82	-3.02%
NBI	3,786.54	3,816.40	29.86	0.79	4165.86	-8.39%

Major Economy News

Q4 Earnings: According to FactSet, for Q4 2019, 45% of the companies in the S&P 500 reporting actual results), 69% reported a positive EPS surprise and 65% of the companies have reported a positive revenue surprise.

Earnings Growth: For Q4 2019, the earnings decline for S&P 500 is -0.3% but better than -1.6% projected on Dec 31, 2019. If -0.3% is the actual decline for the quarter, it will mark the first time the index has reported four straight quarters of year over-year earnings declines since Q3 2015 to Q2 2016.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 18.4. This P/E ratio is above the 5-year average of 16.7 and above the 10-year average 15.0. So, undoubtedly the stock market has been expensive on valuation basis.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.6. This P/E ratio is above the 5-year average (16.6) and above the 10-year average (14.9). For 2020: analysts see earnings growth of between 5% and 7% for the first half of 2020.

Trump is expected to extend individual Tax cut: In this election year the white house is proposing to continue tax cut for individuals till 2035 as part of Trump’s proposed “Tax Cuts 2.0” plan. It’s still not clear how when and how much.

GDP: The U.S. economy remains in growth mode. The gross domestic product (GDP) should be running at 2.2%, with personal consumption gaining 3.2%.

Job Report: The labor department said strong hiring in January added 225,000 new jobs blowing past economists’ expectations of 160,000, new federal data show.

Jobless Rate: The number ticked up slightly to 3.6% from a 50-year low of 3.5% in December. Per labor department it was a reflection of more people looking for work as more jobs opened up.

Wage growth: It got a small boost in January, with average hourly earnings climbed 0.2% month over month and 3.1% over the last year, compared with 0.1%  and 2.9% respectively in December.

Inflation Rate: Currently it’s mere 1.76% but in the long-term U.S inflation rate for 2020 is expected to be around 1.90%. Low oil prices due to coronavirus have brought the inflation further low.

Coronavirus – Its impact on the economy and Stock Market?

As I write Friday morning, the number of confirmed cases has exceeded 37,592 and the number of deaths has topped 813. On January 30, Thursday, the World Health Organization declared outbreak of a global health emergency. Since then there are travel ban by various countries to and from China. It has created havoc in China and economist projects could impact the Chinse economy more than $60 billion plus the Chines government has already allocated over $10 billion for medical treatment and equipment. There are some cities in China being termed as “Ghost City” by some media. Offices are closed, manufacturing have stopped, people are hardly coming out of home for shopping, restaurant or public places mostly closed. The situation has become scary. This is not only going to hit Chinese economy but global economy will also be impacted. There are not many Chinese customer in malls, stores and this is going to hit the retailers. For example, the luxury brand Burberry generates more than 40% of its revenue from Chinese customers. So, think the impact that can have on company’s top and bottom line due to the corona virus. This is just an example but numerous corporations are going to be hit including Apple and many other..

My best wishes go to those who are sick or have experienced loss due to this unfortunate outbreak. Undoubtedly, the situation is scary but to keep things in perspective. The “flu” causes lot of fatalities each year. The Centers for Disease Control and Prevention estimates 8,200 people have died during flu season this year in the U.S. And the total deaths from the flu from all of last year in U.S was estimated to be around 34,000. Such flu death remains unknown to people but when an epidemic like coronavirus hits it becomes scary. The reason is many people know about flu and take precautionary measure but in this case of coronavirus it was a sudden emergence. There are many questions still remain unanswered for coronavirus. For example, whether the sustained transmission begins in other countries, whether it can be contained? how severe the illness is among those who are infected? There are companies trying to come out with some vaccine like Gilead Science. But nothing conclusive as yet! As investors, how should we view this coronavirus crisis?

Now let’s take a quick look to the past outbreaks and how stock market reacted afterwards. Look at the table below from Dow Jones Market Data. It shows the 12 U.S. disease outbreaks over the last 40 years. During all these outbreaks the initial reaction from stock market was very negative and which is obvious because all these put dent on corporate profits and GDP. Now let’s see the impact of these epidemics on the stock market over a period of 6-12 month. The table below is used to demonstrate return for S&P 500.

If we observe the above table and look at the history then we could see that invariably the stock market gained in the next 6-12 months, except a couple of instances where there were losses but very minimal. History may not always repeat but often it tends to repeat itself. So, the reaction of stock market in the current environment is expected, particularly seeing that the stock markets had a huge run and most of the indexes were at their all-time high. This was an opportunity for investors to pull some chips out of the table. I think such pull backs are healthy for the stock market for long-term.

Bottomline: It’s obvious to be little nervous with the current phenomena. But in my view, it creates a good buying opportunity for long-term investors, particularly buying good stock which got beaten down. In this context, I believe a few Chinese stocks like BABA, NIO, IQ and JD.com seems to have good long-term opportunity. But if somebody is not comfortable then it’s OK not to buy on a dip but probably it’s advisable not sell on panic.

Major Stock Market Performances in 2019

Indexes	52 week (% age change)	YTD % Change
DOW	15.92%	1.98%
S&P 500	22.89%	3.0%
NASDAQ	30.45%	6.11%
China Shanghai Index	9.84%	-5.71%
India BSE Sensex	12.57%	-0.27%
Japan Nikki	17.19%	0.87%
Hongkong Hang Seng	-1.94%	-2.79%

Source: Wall Street Journal

Sectorial Performances 1 Year (U.S Stocks)

IT	45.44% (TOP)
Communication and Services	23.64%
Utilities	22.48%
Consumer Staples	19.99%
Financials	18.65%
Consumer Staple	19.99%
Consumer Discretionary	18.79%
Real Estate	16.55%
Health Care	14.26%
Industrials	14.10%
Energy	-14.22%

Source: Fidelity.com

Now let me discuss about my current month’s inclusion to my Blog Portfolio.

NIO Limited (NIO)

NIO designs, manufactures, and sells electric vehicles in China, Hong Kong, United States, UK, and Germany. The company offers five, six, and seven-seater electric SUVs. It is also involved in marketing, design, and technology development activities; manufacture e-powertrains, battery packs, and components. The company also offers charging solutions, including home charging solution, battery swapping service, mobile charging service through charging trucks; and 24-hour on-demand pick-up and drop-off charging service.

A brief glance to the past

On September 12, 2018 NIO went public in the New York Stock Exchange at a price of $6.26 and raised $1B with total valuation of $6.4B.  After the IPO, the stock went to almost $12. However, during 2019 March there were some bad news and battery problem in the electric cars, there were issues with its funding. Thus, it created a golden opportunity for the short sellers that devastated NIO stock and came as low as $1.19 in October 2019. People thought this company is going to be bankrupted. However, the delivery of electric car started improving, there were some partnership announced and some funding came to its rescue causing the stock to turnaround.

NIO Turnaround

The company had a tough 2019. However, in November NIO and Mobileye (the Israeli-based automotive sensor company acquired by Intel in 2017)  announced a partnering agreement wherein NIO can develop autonomous vehicles for consumers in China and other major territories. This strategic collaboration is aimed to bring highly automated and autonomous vehicles to consumer markets in China. Several companies invested in NIO, including Tencent, Temasek, Baidu, Sequoia, Lenovo and TPG. In September, the company had big trouble on the funding front and forced to raise about $200 million worth of bonds, accelerated cost-cutting programs to slow cash burn as the company sought to attract more investors in a slumping EV market. Tencent CEO and NIO CEO William Li infused about $200 million. However, the year 2020 started with many positives for NIO:

• On December 30, NIO reported third quarter Revenue of $257 million, well above analysts’ estimates of $230.08 million for the period. Also, they beat consensus loss by 1 cent. It sent the stock up around 95% at one time on the day of earning.
• On January 6, company reported an increase of 25.4% month-over-month in December vehicles deliveries. The company sold 2,537 E6s and 633 ES8s luxury electric vehicle. The company also beat Q4 deliveries totaled 8,224 vehicles, ahead of the 8,000 estimation.
• On January 13, Chinese government signaled it won’t continue reducing subsidies for the industry at the same pace this year.
• On January 16, it was rumored that NIO got financing and shares rose substantially. However, this is still not done yet.
• Late January: The scare of Coronavirus took the tool on China and shattered the move. More detailed below.

The current situation

Due to coronavirus the manufacturing activities are highly likely to be impacted as many factories in China are/were being closed and there was government shutdown. As I stated above, this virus problem is going to hurt the whole Chinese economy. We have to see how long it continues. It’s not specific to NIO though, coronavirus has been a general phenomenon in China. In addition, if people are sick or scared to be sick then they may push their buying decisions. This has brought down the shares of NIO in last few days. But I foresee it as a good buying opportunity for long-term investors. I keep accumulating when a stock is down if I see it has potential based on my analysis. Once coronavirus fears fade this stock can start moving up.

Why do I like NIO?

• As I said above, NIO has been on a turnaround path.
• After Tesla started producing car in China, there is a momentum shift on EV hype in China. Add to that Chinese government officials did not cut EV subsidies this year. This is going to increase demand. 
• China alone represents a humongous EV market and its upper middle-class is on the rise. The country’s central government is aggressively backing electric vehicle development through subsidies, in a bid to curb the rampant pollution in its major cities. This mega trend is going to last for decades, not for years even if the subsidies goes away.
• What makes me this stock intriguing despite its risk is that the company is much earlier in its growth curve than Tesla at this time.
• Based on China Car News, NIO has established 22 NIO Houses and 55 NIO Spaces in 57 cities and plans to expand the total number to about 200 from the existing 77 by the end of 2020.
• NIO has four models in production. Most of these are luxury model high quality car and cheaper than Tesla.  One major advantage NIO has over other EV manufacturers is its battery swapping, which takes less than 10 minutes and NIO is building hundreds of battery swapping stations across the country.
• Momentum from the company’s new car, the ES6 has brought back growth into the company’s delivery and revenue trends. These trends should continue to improve in 2020.
• In the last quarter (Q3 2019) NIO delivered a total of 4,799 ES8 and ES6 vehicles representing a 35.1% increase from the second quarter of 2019 despite substantial softness on EV sales due to reduction of EV subsidies in China. Despite all these challenges, NIO’s sales improved substantially since September 2019.
• At the end of 2019 NIO had delivered just 31,913 vehicles in its history and as Wall Street projects full-year revenue should nearly triple just between 2019 and 2021.
• The company expect a record 8,000 vehicles delivery in the fourth quarter. The three models ES8, ES6 and EC6 that NIO has can go to 580km, 610km and 615km respectively. ES8 is well positioned to become the most competitive electric SUV in the mid to large size segment.
• Not everybody can afford Tesla in China. However, they get high quality NIO luxury EV car on at less price. 
• NIO ranked the highest in new vehicle quality among all brands in JD Power’s 2019 New Energy Vehicle Experience Index Study.
• The company also ranked No.1 in electric SUV sales and top 10 ranking in premium SUV sales, including ICE and electric vehicle models, in China during October and November 2019. The company also implemented comprehensive cost control measures across the organization to improve operational efficiency.
• For 2020, if NIO can maintain the same market share of 2019 i.e. 1.7% of total China’s EV sales which is projected at 2.5 million units, NIO unit share would be 42,500 units. Thus, NIO can potentially  generate about $2.2 billion in Sales, which is pretty good.
• NIO expected to announce January vehicles delivery update in next few days which is anticipated to be very good.
• Funding announcement is expected on any day. This is one of the key limitations NIO has. The company is already in talk of acquiring funding. If it happens then it will be a major plus point.
• The 4th quarter earnings announcement is expected in late March 2020 and the company is expected to report over 8,000 EV deliveries.
• NIO is planning to have its own plant which was stopped last year due to lack of demand and lack of fund. Currently, it manufactures its vehicle on the facility of its partner JAC Motors. So, new plant announcement should be a very positive development.
• NIO officially launched the EC6, a 5-seater smart premium electric coupe SUV, in December 2019 and plans to commence deliveries in later part of 2020 unless coronavirus impacts the schedule.
• There is a possibility for NIO entry into European market though it still seems unknown at present.
• There is uptick in institutional investments and as the company starts selling more and more cars, we can find more institutions jumping to buy this growth stock causing further share price appreciation.

Catalyst those could move this stock

• NIO expected to announce January vehicles delivery update in next few days which is anticipated to be very good.
• Funding announcement is expected on any day. This is one of the key limitations NIO has. The company is already in talk of acquiring funding. If it happens then it will be a major plus point.
• The 4th quarter earnings announcement is expected in late March 2020 and the company is expected to report over 8,000 EV deliveries.
• NIO is planning to have its own plant which was stopped last year due to lack of demand and lack of fund. Currently, it manufactures its vehicle on the facility of its partner JAC Motors. So, new plant announcement should be a very positive development.
• NIO officially launched the EC6, a 5-seater smart premium electric coupe SUV, in December 2019 and plans to commence deliveries in later part of 2020 unless coronavirus impacts the schedule.
• There is a possibility for NIO entry into European market though it still seems unknown at present.
• There is uptick in institutional investments and as the company starts selling more and more cars, we can find more institutions jumping to buy this growth stock causing further share price appreciation.

My Investment Framework

I bought this stock around $7-8 and sold everything after taking loss as the stock started declining like a rock. In the later part of 2019, I realized that the stock is on turnaround path and the company has huge future potential, I re-invested in NIO. I always invest in the stock, particularly volatile stock in a phased manger. It’s very risky to buy everything at once. Hence, I buy the stock partially for long term and a small portion for short-term trading. If the stock goes up certain percentage then I tend to trim some portion of the holding to recover some cost. One can also have a very long-term option strategy but that’s extremely risky. I keep accumulating the stock over a period of time and keep making dollar cost average. Nobody knows how far a stock will go up/down. Hence, to mitigate risk, one has to be very diligent. I do not generally invest on the outcome of few days or months unless something is purely for trading purpose. It’s equally important to have a trading and investment strategy and take some chips out of the table when a stock goes up certain percentage points. As an investor, we should have an entry and exit strategy.

Risks: As said NIO is a volatile Chinese stock. With the emergence of coronavirus scare, it further increases the risk of production and sales of car. People are not going for shopping or public places, so it’s going to impact NIO in the first quarter. In addition, NIO needs funding and cash infusion to sustain its business operations. So, one should risk only that much cash comfortable of losing in a worst-case scenario. The risk in this stock is high, so also the reward. But in long run, I see this stock has a great future potential though short-term it may have bumpy ride. If NIO can make it through to profitability, the long-term opportunity is enormous. This company is roughly just having $4 billion market capitalization comparing to Tesla’s $135 billion valuation, merely 2.9%. So, do your own math. However, this stock is not for somebody who can’t digest volatility. It’s for the investors who can accept it and have patience to wait for long-term and occasionally take advantage of buying on dip and taking some profits on rally.

My final thoughts: I am not saying this is the next Tesla of China, but can we forget the stock performance of Tesla which went up more than 150%  in two months and about 250% in 3 months? I will not be surprised if NIO someday come up with similar performance though I do NOT want to overhype. Having said that, the future potential is enormous. If things go right, only time will tell about its tremendous potential. Finally, one must be sensible in investment and do not keep too high expectations to be disappointed. It’s advisable not to invest more than 2-4% of portfolio value.

Shesa’s Blog Portfolio (As of FEB 9, 2020)

Equity	Suggest Price	Current Price	Suggest Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	320.03	1/25/13	520%	HOLD
FB	47	212.33	11/13/13	352%	Accumulate
MA	77.18	327	12/12/13	324%	HOLD
AMZN	311.73	2079.28	4/12/14	567%	BUY
BABA	67.28	216.53	2/21/16	222%	BUY
BRK-B	206.96	227.38	3/18/18	10%	HOLD
EDIT	36.53	26.35	5/28/18	-28%	HOLD
IQ	26.13	24.62	9/18/18	-6%	Accumulate
SHOP	134.81	478.69	11/25/18	255%	HOLD
NFLX	297.57	366.77	1/6/19	23%	HOLD
AMRN	17.66	17.66	2/17/19	0%	Accumulate
CGC	20.16	19.63	12/10/19	-3%	BUY
ACB	9	1.7	4/18/19	-81%	Accumulate
SQ	64.66	78.86	5/26/19	22%	BUY
NBEV	4.66	1.92	6/30/19	-59%	HOLD
GH	87.53	78.48	9/1/19	-10%	HOLD
SDC	8.74	14.54	1/1/20	66%	BUY
NIO	4.27	3.81	1/29/20	-11%	NEW ADDITION
ETF
IHF	139.1	201.37	8/16/15	45%	HOLD
XLY	77.76	128.31	8/16/15	65%	HOLD - Trimmed
MUTUAL FUND
FBIOX	11.46	22.52	3/1/13	97%	HOLD - Trimmed
PRHSX	47.25	82.48	2/2/14	75%	HOLD - Trimmed
PRMTX	59.45	131.93	12/20/14	122%	HOLD - Trimmed
MCDFX	12.37	16.03	12/9/15	30%	HOLD
FSRPX	9.05	17.16	1/15/16	90%	HOLD - Trimmed
FBSOX	37.32	81.24	3/20/16	118%	HOLD - Trimmed
FSMEX	43.66	61.11	9/24/17	40%	HOLD - Trimmed
FOCPX	11.72	13.61	10/21/18	16%	HOLD - Trimmed
Note: Dividends are not adjusted on the price.

Earnings Update

Amazon joined Apple, Alphabet, and Microsoft in reaching a $1 trillion market cap, and in doing so, confirmed a massive change in our economy and our investment markets. Amazon had a blockbuster earnings report. The company's fourth-quarter earnings of $6.47 per share crushed estimates of $4.03 per share. Shares surged nearly 10% after the earnings.

Amazon

EPS: $6.47 vs. $4.03 estimated.

Revs: $87.44B vs $86.02B estimated.

Facebook

EPS: $2.56 vs. $2.52 estimated.

Revs: $21.4B vs $20.9B estimated.

Apple

EPS: $4.99 vs. $4.55 estimated

Revenue: $91.8 billion vs. $88.50 billion estimated

iPhone revenue: $55.96 billion vs. $51.62 billion estimated

Services revenue: $12.7 billion vs. $13.07 billion estimated

Positions CLOSED since last Blog

BZUN sold on 1/31 @30.40: The earnings were below expectation and recovery in this stock could take longer. Hence, I thought of putting this in other equity. Also, please remember that I included this stock for trading purpose. But that did not work, hence sold everything.

That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time. If you want to get alert on my investment action, then please subscribe to shesagroup_invest@googlegroups.com or you can also join my WhatsApp group, if interested.

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do NOT provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions. Please contact a professional money manager to buy/sell any security. I do not charge any fees or commission by writing the blog except anything from Google AdSense. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow. Anybody buying or selling the equities mentioned here would do it on their own risk.

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