The so-called smart-money guys don’t get much smarter than legendary investor and Bridgewater Associates founder Ray Dalio. The son of a professional jazz musician and homemaker in Queens, Dalio has invested his way to great success, amassing a personal fortune of $18 billion, which Forbes says makes him the 46th richest person in the world.
That’s why I’m excited to bring to your attention today two companies that Dalio recently bought lots more of – companies that have been additionally vetted by another smart investor, our own contributor Dr. Thomas Carr.
— Bob Bogda, Editor
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Ray Dalio may not be a household name to most Americans, but to anyone interested in the stock market he is a legend, a true “Market Wizard.” At the age of 12, Dalio purchased $300 worth of Northeast Airlines stock and tripled his money in a year. After graduating from Harvard with an MBA, Dalio launched his own fund, Bridgewater, from his New York City apartment. Today, Bridgewater is the largest hedge fund in the world with nearly $140 billion under management.
While Dalio has recently expressed concern that all the central bank stimulus is pushing price-to-earnings ratios beyond historic norms, he knows that U.S. stocks are really the only game in town. This is why Bridgewater in the second quarter increased its position in SPY (the S&P500 exchange-traded-fund), two big finance funds, and added shares of several consumer discretionary and industrial companies.
Two stocks among Dalio’s recent purchases really stand out. When we run these stocks through the ranking database on TipRanks.com, we see that both stocks are rated “strong buy,” and both have seen their price targets raised in recent weeks to levels well above 20% appreciation. They also both happen to be Chinese companies, which means they carry unique geopolitical risk. But this also means that they should enjoy a significant tailwind if and when a U.S.-China trade deal can be cut.
The first of the Dalio purchases is Tencent Music Entertainment (TME). Tencent is the largest online music company in China with over 800 million registered users. Dalio added nearly 700,000 shares to his holdings, bringing his total stake to over $9 million. While we’re not sure exactly what Dalio values in the company, it would certainly include the fact that Tencent’s second-quarter 2020 subscriber growth came in at a whopping 57%, a full 2% above analyst expectations (4.4 million subscribers added vs. 2.8 million in the first quarter). This contributed to a year-over-year subscriber gain of nearly 25%. Subscriber ARPPU (Average Revenue per Paying User) also grew 8% and subscription retention rates are strong and improving at 80%.
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Even stronger growth is seen in Tencent’s music licensing service, with long-form audio licensing titles increasing 300% year over year, and with a market penetration of 9.4% vs. only 4.6% last year. Adding to this growth is the company’s recent deal with GMM Grammy, Thailand’s largest record-publishing firm, which was announced on August 16. This new partnership will open several new markets for Tencent. GMM Grammy owns the rights to several million-record-selling artists, most of which are very popular throughout the southeast Asia region.
Action to Take: I like TME up to a price of $16, with a view of selling at a new IPO high of $24.
Dalio also increased his holding of Zai Lab, Ltd. (ZLAB), a Chinese biotech firm engaging in the development and licensing of proprietary therapeutics that address medical needs in the fields of oncology, autoimmune, and infectious diseases. Dalio added nearly 64,000 shares last quarter, increasing the value of his holdings to $5.2 million.
It may be that Dalio was responding to the same data that got Guggenheim analyst, Seamus Fernandez, excited about Zai Labs. Back in April, Fernandez sent a note to clients saying he was initiating shares of ZLAB with a “buy,” calling it “a uniquely compelling opportunity.” Fernandez noted that the company has now become the preferred late-stage commercial partner to U.S. pharma companies selling in China.
Fernanzdez notes that Zai’s 2020 first-half revenues of $19.2 million “blew (his) prior predictions out of the water.” The strong result was largely driven by the company’s launch of a new ovarian cancer drug, Zejula, in China. Total sales of the drug topped $13.8 million, nearly doubling the analyst’s $7 million projection.
By way of explanation, Fernandez said ZLAB management highlighted the fact that it has “nearly 4x the coverage list for hospitals (touching nearly 800 to 900 hospitals with 150 sales reps) for Zejula versus its competitors (AstraZeneca ‘s Lynparza) and has deep penetration in the hospital sector within two quarters of launch of Zejula in China.” ZLAB has said it expects to receive approval for Zejula’s first-line maintenance ovarian cancer indication in the first half of 2021.
Fernandez is also optimistic about Zai Lab’s in-human trial of a new CD47 drug, which puts Zai ahead of six other competitors in the space (CD47 denotes a particular approach to cancer treatment using the suppression of an immunoglobulin found on the surface of cancer cells). On top of this, Zai has kicked off its first in-human Phase 1 study for a topical treatment for chronic plaque psoriasis.
With this strong pipeline, and with two drugs in Phase III set to report early in 2021, there are plenty of catalysts to accelerate ZLAB’s share price over the next few months.
Action to Take: Consider buying ZLAB up to $85, with a sell price of $140.
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