Factory to the World
My Favorite Donation
A Chinese Stock with Great Potential
China has been the fastest-growing big economy in the world for many years, but all most investors see is the dangers. And that’s been keeping them away from one of the most profitable plays around, investing in China.
I won’t go over the elements of the China story; it should be pretty prominent in the mind of any investors who have the vision to look beyond their own national borders.
You remember China, right? The country with 1.3 billion people and an economy that has “slowed” to annual growth rate of just 7.5%? The manufacturing dynamo that’s still the default “factory to the world”? A place that’s being transformed by the Internet and cellular technology and a new city of one million people being built every month? Yes, that China.
Well, some investors are beginning to take notice. Here are a few charts for you to look at. You can almost see the increase in investors’ appetite for these stocks happening while you watch.
This is a six-month chart of a major Chinese internet stock that’s consistently popular and profitable.
This chart is a consumer stock (which has been in the portfolio of Cabot China & Emerging Markets Report since January) that’s emerging as an online sales giant in China.
And there are so many more that it’s getting harder and harder to decide which one to buy.
The excitement in stocks outside the U.S. is widespread. And my newsletter doesn’t confine itself to China. I’ll look at any investment outside the U.S., as long as it trades on a U.S. exchange so everyone can buy it.
Here’s a six-month chart for a major international index that’s been recovering strongly after a long time in the weeds. This is also in my portfolio.
I know that there has been a lot of bad publicity for investing in China in the past. Stories about heavy-handed government, pollution, human rights abuses and stocks that simply went down.
But how long should your memory be?
For professional athletes, a short memory is a virtual requirement. Batters in the Major Leagues need to forget that they are unsuccessful at the plate in about two of every three appearances … and that’s only if they’re having a very good year.
Golfers need to be able to put a bad shot behind them and concentrate on the next shot if they ever hope to succeed at that most humbling of games.
But what about stock investors? Does having a great memory help you to thrive and survive when the market flatters and pampers you one day and flicks a booger on your windshield the next?
Or should you wipe the slate clean every morning and greet the new trading day with an optimistic smile on your lips and a song in your heart?
As always, the answer is that it depends.
As a growth investor, you need to remember what a maturing bull market feels like so you can be prepared to bail out before the wings come off. Conversely, you should remember enough about market bottoms to be watching a deepening bear market (while sitting heavily in cash) with a gleam in your eye while you wait to spot the birth of the new bull.
You need to forget your losses enough to enable you to try investing in China again. And you should forget your past huge winners because you will only make money from the next winner if you can stop obsessing about the old one (like Apple) like a lost, lamented love.
And finally, you need to remember that everything that made an investment risky can make it a great opportunity if you have the clarity of vision to see the change!
China and the emerging markets (and, yes, even the frontier markets) are still on many investors’ no-go list. Their long memories are blinding them to what’s happening right now.
Here’s a warning! There are still dangers out there. Not all Chinese stocks are going up, and not all of the stocks that are going up deserve your investment. But together, we can separate the gold from the dross. My experience, plus the Cabot growth disciplines that keep risk in check and keep us in sync with the markets, will give us the edge we need.
If this story appeals to you, you need to sign up for a subscription to Cabot China & Emerging Markets Report. I will find the stocks you need to know about and let you know. It should be fun.
Click here for more on Cabot China & Emerging Markets Report.
I hope you’ll indulge me, because this section of today’s Cabot Wealth Advisory isn’t about making money, so you can skip to the stock recommendation if that’s what you’re interested in.
We don’t talk about charity much in the Cabot Wealth Advisories. The rewards of charity are deep, but—except for that all-important tax deduction—wealth isn’t one of them.
But I’m going to recommend a charitable donation that has a unique combination of benefits. It’s giving blood, and it’s my favorite donation for a couple of reasons.
First, it’s incredibly personal. The money I give to veterans’ groups, food kitchens and environmental causes is money well spent, but my cash just goes into the pool along with everybody else’s.
That doesn’t happen with my blood. It goes from me to another person. I won’t ever know who that person is, but it’s still a good feeling.
The second reason is that it’s the only contribution I make where I’m absolutely sure that the person who gets it really needs it. The people who receive blood have usually lost theirs due to an accident, a surgery or a disease. They need blood to stay alive.
Not a bad reason in my opinion.
I only started keeping track of my blood donations when I moved to New Hampshire, and I’m about to finish up giving my 11th gallon of B Positive. This isn’t a huge amount compared to some people, but I’m pretty sure there are people walking around who are alive now because I could give them what they absolutely had to have.
Summer is a tough time for blood banks, as the need rises and the number of donors falls. I hope you’ll consider seeking out a blood drive and making a contribution. It’s a great feeling.
My stock recommendation today is a conditional one. The company is Chinese Internet portal Sina.com (SINA) that offers a huge bundle of news, weather, sports, games, email, mobile services, affinity groups, specialized content and, most important of all, the Sina Weibo micro-blogging service.
Sina.com uses a relatively conventional business plan, offering a wide array of information and services to attract people, then selling advertising space to merchants. This kind of advertising contributes about three-quarters of Sina’s revenue, with most of the rest coming from wireless value added services.
Much more sexy is Sina Weibo, which is like a Chinese version of Twitter, with a couple of big differences. First, Twitter is banned in China, as the government worries about its potential for inflaming anti-government sentiment, organizing demonstrations and disseminating subversive content. Weibo gets more tolerance because the government is more confident that the company will enforce content rules.
SINA stock has had a rough time of it in recent years, dropping from a high of 147 in 2011 (the height of Weibo excitement) to just 59 in recent trading. Competition has eaten into the company’s profitability and it has probably allowed its content to get a little stale.
Despite this, more than four out of five analysts rate SINA as a buy, probably because of its improved valuation and its long-term potential for growth.
The big story about Sina.com is that Alibaba Group, the largest e-commerce company in China, has bought an 18% stake in Sina’s Weibo service for $586 million. This tie-up got investors’ attention; SINA jumped from 50 to 55 on April 29 when the news came out.
That’s a big catalyst for change. But in the near term, the bottom-line truth about Sina.com will come out on Thursday, May 16 when the company reports its Q1 results. Analysts are looking for a loss of 11 cents per share, which would be a major improvement over year-ago losses. And the forecast for 2013 is for earnings of 69 cents per share.
There’s a lot of long-term upside potential for SINA, but you’ll have to wait for the reaction to Thursday’s announcement to see how things will fare in the short run.
(And just as a reminder, if you had a subscription to Cabot China & Emerging Markets Report, I’d be watching the reaction for you. Just saying.)
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report