The markets remained under heavy selling pressure today, with stiff losses in both the Golden Dragon ETF (PGJ) that tracks Chinese ADRs and the iShares MSCI EM ETF (EEM) that represents the broader emerging markets. All of our stocks are taking a hit from a combination of U.S. market weakness and wariness about the possibility of a U.S.–China trade war.
Today also brought a two-pronged attack on one of our most recent buys, MOMO Inc. (MOMO). Yesterday, the company announced the issuance of $650 million of convertible senior notes, a move that will be dilutive to earnings per share. By itself, that move would have caused a small correction to MOMO. But today, Spruce Point Capital, a short-selling specialist, released a report critical of several aspects of Momo Inc.’s business practices and skeptical about Chinese reporting practices in general.
I’ve read the Spruce Point report on Momo Inc. and, while it looks to be about half actual allegations of wrongdoing or shady practices and half innuendo, there’s enough there to scare away some of the buyers who piled into MOMO in late May.
The stock dipped below 42 briefly today, and while it rebounded to above its 50-day moving average, it has still tripped our 15% loss limit. Accordingly, I’m recommending selling Momo Inc. (MOMO) and holding the cash.
It’s possible that tomorrow will bring a little rally to sell into, which will be beneficial. But the general market weakness and selling of Chinese ADRs may also continue. The portfolio is very defensive right now, with more than half of our capital in cash. But if the market pullback continues, we will continue to reduce our exposure to protect our investments.