The Cabot Emerging Markets Timer continues to offer a green light, so we’re forging ahead as our stocks enter the heart of earnings season for emerging ADRs. We also welcome back a mega-cap old friend into the portfolio.
Cabot Emerging Markets Investor 632
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Cabot Emerging Markets Timer
The Emerging Markets Timer is our disciplined method for staying on the right side of the emerging markets. The Timer is bullish when the index is above the lower of its two moving averages and that moving average is trending up.
Our Emerging Markets Timer remains bullish following its rebound during the past two weeks. The iShares EM Fund (EEM) tested its 50-day line for the second time since its Buy signal early this year and responded just how we wanted it to—by snapping higher and registering new highs! Today, EEM is about 2% above its lower (50-day) moving average, so the trend remains up.
With earnings season still underway and with many uncertainties in the world, we’re on the lookout for any change in trend from stocks or the market. But right now, with most stocks acting well and the Timer positive, you should stick to your bullish guns.
Demands on Our Attention
For the next couple of weeks, at least, the biggest influence on the health of our portfolio will be the quarterly earnings reports of the companies we own. Counting Melco Resorts (MLCO), which reported this morning, we are expecting quarterly results from JD.com (May 8, pre-market), China Lodging (May 10, after the close), LATAM Airlines (May 15) and Alibaba (May 18, pre-market).
We don’t have confirmed dates from Momo, Inc., Vedanta or Tencent Holdings yet, but each of them will likely also drop their numbers during the next couple of weeks.
The ETFs that we use to determine how emerging markets are doing are healthy enough, but neither has opened up a big gap between itself and its 25-day moving average. The iShares MSCI Emerging Market ETF (EEM) is less than 1% above its 25-day moving average. A combination of a four-week correction from mid-March to mid-April (which pulled it down to its 50-day) and Wednesday’s Apple-fueled pullback has kept things cool. The Golden Dragon ETF (PGJ) that follows just Chinese ADRs is 2.7% above its 25-day, but that’s still pretty calm.
Our individual holdings show more variation. China Lodging (HTHT) and Melco Resorts (MLCO) are 7% and 10%, respectively, above their 25-day moving averages, which often leads either to flat patches while the averages catch up or corrections to restore something closer to contact. But even there, the results from earnings reports will likely be a more potent influence.
While investors are watching the action of the major indexes and popular stocks—Apple!—they also have a small portion of their attention fixed on France and the upcoming presidential runoff between Marine Le Pen and Emmanuel Macron. The contest is being headlined as an election for the future of Europe, as Le Pen has been outspoken in her determination to take France out of the European Union and out of the euro.
Just like Brexit before it, the French election represents a huge unknown. A unified Europe has created a major market with predictable trade policies, ease of capital movement, free borders and consistent regulations. If, as many believe, the departure of France from the EU would spell the end of this unified regime, the results will likely be a hugely expensive return to national currencies, national trade policies, less-open borders and travel restrictions. Investors don’t have any idea how smooth or how bumpy the transition might be, but the uncertainty doesn’t seem to be hurting the markets given that Macron is a heavy favorite.
Also still demanding attention is the North Korea problem. Nobody can believe that Kim Jong Un would actually start a war with the U.S., but the young man isn’t noted for his rational approach to decision-making. The hope here is that China and the U.S. will build on their common goal of containing and de-nuclearizing North Korea. But again, the uncertainty hasn’t been holding the market back.
In any case, we won’t let what might happen spoil our enjoyment of what is happening. Our Cabot Emerging Markets Timer gives us a pretty simple signal, and right now it’s flashing a green light. We will pay the most attention to that.
Featured Stock
All Ducks In a Row
Tencent Holdings (TCEHY)
Picking stocks for our portfolio is sometimes an odd process. It’s hard to pick a stock when the board is loaded with winners as it is now, because the competition among strong charts is fierce. And it can be hard to find a worthwhile stock when investors are in their fallout shelters and good charts are thin on the ground.
But Tencent Holdings (TCEHY) is a fairly easy choice, despite the competition from a platoon of strong emerging market stocks that are tracing excellent charts. And the main factor simplifying the selection is scale.
Tencent Holdings, which started as a simple text messaging company offering the popular QQ platform, is now an integrated Internet messaging, social media and value added services giant with a market cap of $303 billion. The company’s Weixin and WeChat smartphone communities now boast 889 million monthly active users and its Qzone social network, online games, news, video and music services, mobile security, mobile browser and online app store all rank #1 by monthly active users. The company has a web of alliances with other online leaders that include JD.com for shopping, BitAuto and Didi for transportation, Leju for real estate, the NBA, Warner Brothers and HBO for video and several online game and music services. All in all, Tencent has built a huge community of rich content providers.
Tencent has also used its enormous cash flow to form alliances, acquire interesting competitors and take equity positions in lots of other companies. The company now owns a 5% equity stake in Tesla Inc. and a 10% position in Seasun Games. Other investments include Didi (the Chinese Uber), Chinese auto shopping site BitAuto and Flipkart (a rival to Amazon in India). Tencent also has over 600 million mobile payment monthly active users, a field in which its only rival is Alibaba.
All of these moves have shown up in Tencent’s quarterly results. The company’s revenue growth slowed to 28% in 2015, but rebounded to 40% in 2016. Q4 2016 results showed a 27% jump in earnings on a 35% gain in revenue, with a 28.1% after-tax profit margin.
CEO Pony Ma (no relation to Jack Ma, the CEO of Alibaba) is also pushing Tencent into interesting new fields, including an investment in a Seattle artificial intelligence lab and the rollout of Tencent Cloud, a public cloud platform for both corporate and individual users.
On top of Tencent’s scale, rapid growth, aggressive moves into pretty much every related field and great financial results, TCEHY is also a stock in an uptrend, both in the long run from its IPO back in 2008—an advance punctuated by at least six corrections that shook out most investors—and in the short term from its rebound from a three-month correction in late December.
TCEHY is an over-the-counter (OTC) stock, which means it doesn’t offer investors the protection that a full listing on a major exchange does. The pre-IPO grilling given to candidate stocks by the exchanges is a good protection against inflated numbers and imaginary opportunities. But TCEHY has earned its stripes over the years by its performance and its energetic rallies.
The OTC listing also keeps a lid on trading volume, as it excludes the stock from consideration by most institutional investors who would otherwise be quite interested. TCEHY has only 71 whales on board and they own only 13 million shares. The stock trades well under a million shares a day (878,000 shares on average), but that’s plenty for our purposes.
We all know that this lovely bull market won’t go on forever, and that the uptrends we’re enjoying in many of our stocks will eventually go into consolidations and corrections. But we also know that bull markets are made to be used. We’ll buy a full position in TCEHY. BUY.
Tencent Holdings (TCEHY 31)
Tencent Building
Kejizhongyi Avenue
Shenzhen 518057
China
www.tencent.com
Model Portfolio
Invested 95% Cash 5%
Updates
Emerging market stocks remain in good shape, with the iShares EM Fund (EEM) bouncing nicely off its 50-day line during the past couple of weeks and with many individual stocks racing up the charts. We remain bullish, though we’re also keeping our feet on the ground as many of our recommendations report earnings during the next two or three weeks.
We have no changes tonight, but we’re keeping a close eye on our stocks, and if we have any changes in advice (because of earnings reports or some other reason) before next week’s update, we’ll send out a Special Bulletin.
Alibaba (BABA) rallied about 10 points during the past two weeks, closing in on its all-time high near 120 before backing off a bit. Earnings are due out on May 18, which will be the key near-term event, but going with the evidence right now, it appears BABA’s long post-IPO consolidation is coming to and end. Hold on if you own some, and if you don’t, you can buy a little on dips of a point or two. BUY.
China Lodging Group (HTHT) has surged off its 50-day line during the past couple of weeks, tagging new all-time highs above 70 before easing a bit. That’s obviously good to see, but the stock is now out of trend on the upside, plus HTHT has a history of pulling back after thrusting higher. Bottom line, we’ll stay on Buy, but look for pullbacks, possibly to 68 or below, before picking up shares. BUY.
JD.com (JD) continues to act just fine, rising out of a five-week consolidation in early April and pushing up about 10% since then. Keep any new positions small ahead of earnings next Monday. BUY.
LATAM Airlines (LFL) has pulled back since mid-April, but this looks like the first test of its 50-day line since its powerful breakout-and-follow-through action in March. It’s probably a good entry point, so you can pick up a small position here if you don’t own any. BUY A HALF.
Melco Resorts (MLCO) reported a great first quarter this morning, with revenue rising 16% and EBITDA (a measure of cash flow) lifting 42%; all of the company’s resorts produced strong results, and a redesign of the firm’s Hard Rock hotel should be complete next March, which will be a nice boost. The stock opened higher but quickly reversed on the news, but that’s not terribly surprising given the stock’s big run in recent weeks. Expect some near-term volatility, but we’re staying on Buy. BUY.
Momo (MOMO) remains very volatile, but is still in very good shape; the stock hasn’t closed below its 25-day line since the start of the year! And there’s good reason for that, as the company has been posting mind-boggling growth in recent quarters. Earnings are likely out in a couple of weeks, so keep new positions small. BUY.
Pampa Energia (PAM) remains in a firm uptrend, as the recent dip toward the 10-week line has again been met with buying. Eventually, this long upmove will come to an end, but with earnings expected to soar to nearly $4 this year and nearly $6 next, investors should stay interested for a while. Earnings are likely out in a couple of weeks, so keep new buys on the small side. BUY.
TAL Education (TAL) has extended its uptrend after another very strong quarterly report last week. Sales soared 81%, student enrollments rose nearly 70% (bolstered by its move into the small school and online formats) and earnings of 47 cents per share more than doubled from a year ago and easily topped estimates. Management also gave a bullish outlook (the current quarter’s revenues should rise 56%), and analysts see the bottom line rising nicely this year and next. As we’ve written before, TAL has been advancing strongly for the past 18 months, so it’s not in the first inning of its advance, but we haven’t seen any clear signs of distribution and topping action. Bottom line, we’re staying on Buy, though a dip toward the 25-day line (now at 110 and rising quickly) would offer a better entry point. BUY.
Mining stocks have been poor performers in recent weeks and months, but Vendanta (VEDL) is still holding its own, just a couple of points below multi-year highs. We think a turnaround in the group could lead to a solid upmove here, but until then, we’ll just keep watching. WATCH.
Weibo (WB) hasn’t generated many headlines, but we actually like the long-term set-up we see here—the stock had a gigantic run from April through October last year (we made great money during that move), and has now been consolidating for about six months. Yet growth remains excellent, and analysts see huge earnings expansion going forward. As for the present, WB has crept back toward its highs, and earnings (likely out later this month) could prove to be a catalyst for a new advance. Right now, we’ll sit tight with our half position. HOLD A HALF.
Yum China (YUMC) has followed through excellently from its earnings-induced breakout in early April. Given the stock’s nature, it’s due for a rest, so we’ll keep our Buy A Half rating, and will look to fill out our position should the stock pull back or tighten up for a bit. BUY A HALF.
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Send questions or comments to paul@cabotwealth.com.
Cabot Emerging Markets Investor • 176 North Street, Salem, MA 01970 • www.cabotwealth.com
All Cabot Emerging Markets Investor buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT EMERGING MARKETS INVESTOR IS SCHEDULED FOR MAY 18, 2017
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Cabot Emerging Markets Investor is published by Cabot Wealth Network, an independent publisher of investment advice since 1970. Neither Cabot Wealth Network, nor our employees, are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. © Cabot Wealth Network 2017. Copying and/or electronic transmission of this report is a violation of the copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, visit www.cabotwealth.com, write to support@cabotwealth.com or call 978-745-5532.
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