01 NOVEMBER 2020

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1 November 2020

Dear Investors and Traders,

After bouncing off the 3230 level in early October, the SPX is now going through a second
pullback as we head towards the 3 November US elections. The SPX is 9% off its all-time
highs (3,588) and up +1.21% Year to Date.

The US market remains on a medium term and long-term uptrend (50MA above 150MA,
SPX above 200MA). However, the market is back into a short-term retracement. The SPX is
currently finding support at the 3,230 level. After being technically oversold on a short-term
basis, we should expect to see a bounce from here on Monday.

SPX Daily Candles

The question is whether we will bounce back strong enough to get back to new highs or it
will be a short relief rally before another leg down. No one can predict the future. If the SPX
bounces back and finds resistance (e.g. point R) with a bearish candlestick reversal pattern, I
may put on some Bear Put Option Spreads to hedge against a potential re-test of the 3,230
lows.

As long as we have a clear winner in Trump or Biden, the market would usually rally after
the election towards the end of the year.
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In the event of a ‘too close to call’ race and a contested election, where there is no clear
winner, the short-term uncertainty may bring about more short-term downside to the markets
till a clear outcome is reached. If this happens, I will take this brief opportunity to pick up
even more shares of fundamentally great companies at temporary discounts!

We can never predict how deep a retracement would go. Looking at the weekly charts of the
SPX, I see next strong support levels at 3138 and 2995. If the SPX sells down to these levels,
I would use the chance to buy more shares of the SPY. As investors, we cannot always pick
the absolute bottom.

SPX Weekly Candles

So, the easiest thing to do is to buy in stages and to dollar cost average in positions once price
pulls back (breathes in) to significant levels of support. Eventually, one of these support
levels will be the bottom before the market rallies back to new highs (breathe out).
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QQQ (Nasdaq ETF) Weekly Candles

The Nasdaq (QQQ), that comprises the majority of the US technology stocks is up +26.7%
year to date and is a lot more overextended. Hence, it is not surprising to see a sharper
pullback in this sector. For the QQQ, its currently finding support at the $266 level. If the
correction gets deeper, we could see it eventually find a bottom at $248 or $235. I would take
the chance to add shares at these two lower levels.
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VIX (Volatility Index) Rises on Cue as Elections Approach

In last month’s newsletter, I mentioned that I was

buying Call Option Spreads on the VIX futures. At
that time, it was at the low support of $29. It was a
no-brainer that as we approached the elections,
volatility would rise and the VIX would shoot up to
35 and beyond.

Sure enough, on cue, the VIX shot up to over 35 in

the last few days and many students and I made over
100% to 200% returns on trading the VIX futures
options.

One trader Derek even posted that he made

enough profits from this one trade to pay for all the investment and trading courses that
he took from Piranha Profits.

Many Great Businesses Have Pull-backed back to Potential Buy Levels!

Earnings season has just started and so far, a handful of companies have reported much better
than expected Quarter 3 earnings. My favorite MAGAF stocks (Microsoft (MSFT), Apple
(AAPL), Alphabet (GOOG), Amazon (AMZN) and Facebook (FB) have all reported better
than expected earnings. Even cyclical companies like Ford (F) has reported an earnings beat
on both their top and bottom line.
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Yesterday, US 3rd Quarter GDP reports came in much better than expected as well. GDP
grew at an annualized and seasonally adjusted rate of 33.1% between July and September.
This was a faster rate of expansion than economists had predicted. It was also the fastest
growth rate since the government began to track quarterly GDP data in 1947. It represented a
sharp, albeit partial, recovery from the prior three months, when the economy contracted at
an annualized, seasonally adjusted rate of 31.4%.

Despite the great fundamental news, markets continued to pull back, giving investors the
chance to once again add shares to great companies at reasonable prices. One of my theories
of why great companies like Lockheed Martin (LMT), Amazon (AMZN), CME Group
(CME), Intercontinental Exchange (ICE), Microsoft (MSFT) are pulling back is because the
market is pricing in a democratic sweep in both the Whitehouse and the Senate.

The market’s concern of increased regulations and higher corporate taxes under a Biden
administration may be causing the short-term irrational sell-off of these particular industries
(i.e. Defense, Financials, Oil and Gas). As an investor in these companies, I take it as an
opportunity to add more shares at temporary discounts. Eventually, they will bounce back
and rise in value.

History as shown that stocks markets and economic growth actually do better under a
democratic administration.

Chart: The Stock Market Has Returned an average annualized gain of 13% under
previous Democratic Presidents versus a 5.98% gain during a Republican President
administration.
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US Private sector job growth has also been 2.5X faster and US Real GDP growth has been
1.6X faster under Democratic administrations as compared to Republican administrations.

The good news is that no matter which party is in power, the US stock market ALWAYS
Goes up! As long as investors hold onto the Index ETFs (SPY, DIA, QQQ) and
fundamentally strong companies (wide economic moats), they will see their investments
increase in value over time.
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Watchlist of Stocks at Potential Buy Points

As investors, our decision to add shares to fundamentally great companies should be purely
based on valuation and price action. We do not attempt to predict the market nor do we pay
attention to macro-events and news (discussed only for entertainment purposes).

As long as the current price is undervalued (below intrinsic value) and has retraced to a level
of support, I take the opportunity to add shares. Here are a couple of examples…

Lockheed Martin (LMT)- Large Cap Predictable, Defensive

LMT recently reported better than expected results. Earnings from continuing operations rose
8.7% to $6.25 per share, beating analyst estimates by 18 cents. Revenue rose 10.2% to $16.4
billion, beating estimates for $16.34 billion. At an intrinsic value of $402-$433, it has now
retraced to $350 (13%-20% discount to valuation).

Lockheed Martin (LMT) Weekly Candles

Johnson and Johnson (JNJ)- Large Cap Predictable, Defensive

JNJ reported third-quarter earnings and revenue that beat Wall Street’s expectations, led by
higher sales in its medical-device unit and higher demand for some of its drugs.

J&J reported an adjusted earnings of $2.20 per share, higher than the $1.98 per share
projected by analysts.. The company generated $21.08 billion in revenue, higher than the
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$20.2 billion expected. The company also raised its full-year guidance, expecting adjusted
earnings of $7.95 to $8.05 from per share from $7.75 to $7.95 per share.

At an intrinsic value of $141-$151, it has now retraced to $137 (10% discount to valuation).

Johnson and Johnson (JNJ) Weekly Candles

Amazon (AMZN)- Large Cap Growth

AMZN reported a blockbuster Q3 that below away expectations with sales skyrocketing
37% year-over-year ( $96.1 Billion revenue versus $92.7 Billion expected) and Earnings per
Share of $12.37 versus $7.55 expected. At an intrinsic value of $3,500-$3,800, it has now
retraced to $3,029 (14%-21% discount to valuation). On the daily charts, AMZN has retraced
to its 100MA, representing a potential entry point. This would be a potential initial level to
buy for investors who want to start a first position.
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Amazon Daily Candles

Since I already have a fairly large position in AMZN, I am looking at the weekly candles
(chart below) and would only add more shares at deeper retracement levels at $2,728 and
$2,471. On the weekly chart, price still seems slightly technically overextended from the
50MA.

Amazon Weekly Candles

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The China Market is Outperforming the US

Given the fact that China has gotten the pandemic under control (with their rigorous testing,
contact tracing and quarantine) and better than expected 3 rd Quarter GDP results (+4.9%
growth), it’s not surprising that the Shanghai Composite Index is up +5.72% TYD, beating
the S&P 500.

Shanghai Composite Index Year to Date (Day Candles) +5.72%

Sure enough, my best performing stocks this year (besides MAGAF US stocks), have been
my china stock and ETFs like GXC ETF, ASHR ETF as well as Alibaba (HK 9988), Meituan
Dianping (HK 3690 and Tencent (HK 700).

Tencent (HK 700) Up +57% Year to Date

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Alibaba (HK 9988) Up +41.5% Year to Date

Xtrackers Hvst CSI 300 China A-Shs ETF

(ASHR) Up +20% Year to Date
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This is why it is crucial to have a diversified portfolio of BOTH US and China companies.
While US stocks have been pulling back, the China stock gains have offset the temporary
portfolio pullback.

The Hotly Anticipated Ant Group IPO

On the 5th of November, Ant Group will start trading on the Hong Kong Stock Exchange
(Ticker: 6688). I don’t usually like to invest in IPOs (Initial Public Offerings) because the
majority of them are high risk bets, given that they are usually unprofitable with little or no
economic moat in their early stages of growth.

Ant Group has caught my attention because it is

already a wide moat large cap company with strong
sales, earnings and cash flow growth. It also has a
conservative level of debt. It passes all my criteria
of a great business.
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Source: Ultimate Investors Playbook

Ant Group started as Alipay, a digital payments platform that millions of Chinese use to buy
goods and services online through the Alibaba E-commerce platform and other online sites.
This may sound very similar to Paypal. However, Alipay is like Paypal on steroids. Alipay is
more like a combination of “Paypal +Visa/Mastercard + Apple Pay+ Square”.

Chinese no longer use Alipay exclusively for online purchases. Alipay is used by 1 billion
annual active users (4 times the population of the US) for both online and offline purchases.

If you take a trip to China, you would know that when you go to a restaurant or a shop,
merchant’s main mode of accepting payments is through Alipay (55% market share) and
Wechat Pay (38.8% market share). Credit cards are rarely accepted in China. If you attempt
to pay in notes and coins, merchants will give you a dirty look, like you are an uncivilized
barbarian from the stone age.
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Even beggars in China accept payment through Alipay’s QR code via mobile.

Today, Ant group has a created a powerful eco-system which goes beyond just a digital
payments system. Once consumers and merchants are part of the eco-system, Ant Group
offers micro-financing services (Credit Tech), Investment Services (Investment Tech) and
Insurance Services (Insure Tech).

Ant Group is now the leading digital payments provider and

leading financial platform in China, based on Total Payment
Volume (TPV) and Transaction Volume. Ant’s TPV of
US$17.7 trillion is more than the combined TPV of Visa
(US$8.8 trillion), Mastercard (US$6.3 trillion) and Paypal
(US$791 billion).

There are currently more than 1 billion Annual Active Users (AAUs) with 711 million
Monthly Active Users (MAUs), 80 million merchants, and over 2,000 partner financial
institutions.

Alipay is a super app is a one-stop shop for digital payment and digital finance
services, and also contains more than 1,000 daily life services and over 2 million
mini programs.
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Largest IPO in History

Ant Group will dual-list in Hong Kong Stock Exchange (HKSE) and Shanghai Stock
Exchange (SSE), with the share capital split equally between the two exchanges. Based on
the IPO offer price of HK$80 (HKSE) and RMB69 (SSE), Ant will have a market
capitalization of US$313.7Billion and raise US$ 34.5 billion from the listing (~11% of share
capital), making it the largest IPO in history.

This would make Ant more valuable than Bank of America, Citigroup and all the other Banks
in China. Once the stock price trades above the HK$80 offer price (which is highly likely),
Ant will be larger than JP Morgan as well. It will be the largest financial company in the
world.
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Ant’s Valuation and Share Price

For the majority of us, we will not be so lucky to be able to buy the shares at the pre-trading
price of HK$80. This offer price has been over 872x oversubscribed (getting to buy the
shares at this offer price is like winning the lottery or unless your surname is Ma). Even many
of my friends who use private bankers were not able to get a placement of the shares.

So, we will have to wait for the stock to list on the 5 th of November on Hong Kong and to
buy it through the secondary market. I expect the price to jump on the first day of trading
given the strong demand for the shares.

Ant is indeed a great business. However, remember that a GREAT business can be a LOUSY
investment if you overpay for it. However, a great business will be a great investment, if you
pay a fair or undervalued price for it. So, the trick is to know the intrinsic value of the Ant
shares and have the discipline to wait for the price to reach or go below that level.

Given that Ant already has consistent growth in sales and net income (though only for 3.5
years), I am able to do a 20-year Discounted Net Income Valuation on the shares. The
challenging part is to use an appropriate projected growth rate for the earnings. So, I have to
make many assumptions. Ant’s historical growth rate (CAGR 3.5 years) has been 94.83%.

Base Case Valuation

In my base case scenario, I am going to assume earnings will grow at half the rate of 40% in
the first 5 years, 20% in the next 5 years and 7% (china GDP plus) in the last 10 years. I am
going to use the same discount rate as Alibaba.

This gives me a valuation of RMB 104.7 (HK$121.45 per share)

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Conservative Valuation

In my conservative scenario, I am going to assume earnings will grow at half the rate of 29%
(historical revenue growth rate) in the first 5 years, 14% in the next 5 years and 7% (china
GDP plus) in the last 10 years. I am going to use the same discount rate as Alibaba.

This gives me a valuation of RMB 60.80 (HK$70.53 per share)

If I take the mean of both, I get an average valuation of HK$95.99. So, if Ant trades way
above HK$95.99 on 5 November, then it may not be good deal. If the price can trade near
this price or below it, I will start to build a position.

I remember that when Facebook (FB) another super-hot IPO listed in 2012, its share price
popped initially but went on to fall 50%... before eventually stabilizing and starting its strong
ascent.

So, never have the ‘Fear of Missing Out’ (FOMO). No matter how great a business is, wait
for the price to come to you. If it does not, move on and find another target. Have the
patience to wait for some short-term bad news or panic that will send the shares to your price.

Do subscribe to the Ultimate Investors Playbook (https://insight.piranhaprofits.com) for a

more in-depth deep dive research into Ant Group and many other great businesses every
month with live updates whenever I enter and exit an investment position!

Ant Group PE Ratio and PEG Ratio

From a PE and PEG ratio perspective, you can see that Ant (based on the HK$80 offer price)
is reasonably priced vis-à-vis similar businesses like Mastercard, Visa, Paypal and Tencent.
This is again based on the IPO offer price. We have to wait to see the actual trading price and
its subsequent PE and PEG to see if it still remains attractive
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Ant
Mastercard Visa Paypal Tencent
Group
PE Ratio 56.8 44.0 36.1 92.0 49.7
PEG Ratio 1.42 3.98 4.13 3.95 2.40

Final Note on US Elections

Although fundamentally good stocks will do well under any presidential administration, it
may be interesting to note that there will be certain industries that will get a boost and meet
challenges under different administrations. Here is a summary I have put together.
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If you notice, the Trump stocks have been selling-off and the Biden stocks have been
rallying… which tells us that the market is pricing in a potential Biden victory. It will be
interesting to see if it comes true. My stomach is rooting for Biden and my Wallet is rooting
for Trump. If don’t get this inside joke, it means you have not been watching my latest
Youtube videos.

If you want to get the highest quality stocks presented to you every month with an in-depth
analysis with real-time buy and sell alerts, do check out the Ultimate Investor’s Playbook at
insight.piranhaprofits.com

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Adam Khoo
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