Despite the sting of today’s pullback that included just about the entire market, the Cabot Emerging Markets Timer is holding on to its buy signal. We’re watching the big Party Congress in Beijing and are paying attention to the flat performance of a few of our stocks over the past few months. But with good profits in many of our stocks, we’re willing to be patient as we head into earnings season.
Cabot Emerging Markets Investor 644
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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 clearly bullish, telling us the intermediate-term uptrend for the sector continues to point up. The iShares EM Fund (EEM) has had two sharp pullbacks recently (one in August, one in September), and it’s possible today’s action could be the start of another multi-day dip. But with EEM still solidly above its lower (50-day) moving average, the trend remains up and the odds favor higher prices in the weeks ahead.
Of course, earnings season for our stocks is set to rev up in a week or two, and that almost always leads to added volatility. But given the uptrend, you should just follow the plan—hold your strong stocks, keep all losses small and look for new buys, preferably on normal dips.
The Congress and the Market
The Chinese Communist Party kicked off its 19th five-year meeting yesterday, and for such a high-profile event, there’s still a lot of mystery surrounding it. We don’t even know how long it will last or what its legislative agenda will be.
The one thing we know for sure is that China’s president, Xi Jinping, will use the National Congress to demonstrate his consolidation of power. Xi is now being referred to as China’s “core leader,” a title that was previously used only in reference to Chairman Mao and Deng Xiaoping, and there is even a little speculation that Xi might be given the title of “emperor for life,” although that’s a long shot.
The Congress is very much a spectator sport, as several events, like the dramatic reveals of the new 200-member Central Committee, the 25-member Politburo and the ruling Politburo Standing Committee will keep all China watchers in suspense until near the end of the Congress.
There are plenty of other substantial stories, including possible changes to the Chinese constitution to reflect Xi’s vision and the particulars of the Party’s new five-year plan that will set the country’s agenda through 2022. Observers will be looking for structural changes to the country’s economic system, possible tolerance for other political parties (not likely) and language about Party discipline. (“Party discipline” is a euphemism for not using Party positions to enrich yourself and not making ostentatious displays of wealth. It has even been hazardous for Party members to be seen playing golf over the last year or so.)
It’s always challenging to sort out the motivations of powerful leaders, but Xi Jinping seems to be genuinely dedicated to the long-standing Communist Party goal of producing a “moderately well-off society” by 2021. And that means that the country’s relationship with its richest citizens will continue to be slightly cranky. The legacy of the Communist Party, even in a determinedly capitalistic economy, is still in favor of a level society.
So what will we be watching during the Party Congress? Mostly we will be keeping an eye on our stock charts, which will show us when investors like what they see. And when they don’t. We’re also interested in any “big numbers” that China throws around when it comes to its five-year goals. In the past, these outlooks have occasionally added fuel to an already-hot sector. We’ll see how it plays.
If you want to follow along, the best way to see investors’ reactions will be to look at PowerShares Golden Dragon ETF (PGJ). PGJ has been in an uptrend all year, with a flat patch in May and June and another in August. There have been only four times this year when the ETF approached its 50-day moving average. In June, August and September, PGJ bounced nicely off that average, and the ETF spent only a few days below it in July.
In fact, it’s always a good idea to use PGJ as a supplement to the Cabot Emerging Markets Timer. PGJ follows only those Chinese stocks that trade on U.S. exchanges as American Depositary Receipts, so it’s a more accurate reflection of investors’ attitude toward the Chinese stocks that make up the bulk of our portfolio.
We already have reporting dates for four of our portfolio’s stocks. Baidu and TAL Education will both report on October 26, TAL Education before the open and Baidu after the close. Alibaba will report before the open on November 2 and Grupo Supervielle will release its numbers after the close on November 8. We will keep you informed as new firm dates become available.
Featured Stock
Catching a Financial Rocket
Jupai Holdings (JP)
Jupai Holdings (JP) isn’t the first Chinese financial services provider we’ve recommended—that honor would go to Noah Holdings (NOAH), which was in the portfolio back in 2015—but it’s certainly the hottest. The company is following a strategy that’s popular among smaller U.S. wealth management houses by concentrating on high net-worth clients, in Jupai’s case defined as having investible assets in excess of three million yuan (about $453,000). The company has an extensive string of client service centers in 18 cities in thriving regions like the Bohai Rim, whose largest cities include Beijing and Tianjin, the Yangtze River Delta (Shanghai and Nanjing) and the Pearl River Delta (Guangzhou and Shenzhen). In other words, they’re where the money is.
In addition to its in-house advisory and management services, Jupai offers a fairly standard mix of third-party products like bonds, private equity, venture capital and real estate funds, insurance and customized alternative investments.
Jupai was incorporated in 2010 and reported its first revenue in 2012, and has since built a remarkable record of revenue growth, with a 171% gain in 2013 (off a very low base), then 73% in 2014, 142% in 2015 and 78% in 2016. The company has been consistently profitable throughout its history, with EPS of 13 cents in 2012, 30 cents in 2013, 49 cents in 2014, 78 cents in 2015 and $1.08 in 2016. EPS grew by 175% in Q1 2017 and 150% in Q2. After-tax profit margins have routinely topped 20%, registering 28.7% in the most recent quarter.
One downside to investing in a small-cap (market cap is $730 million) Chinese stock that’s fairly thinly traded (averaging around 450,000 shares a day) is that there isn’t much institutional research to rely on. The company has no analysts following it and only four institutional investors on board. That means there are no estimates of revenue and earnings growth, which makes quarterly earnings reports even dicier than usual.
But the company’s excellent history of revenue and earnings growth is too tempting to pass up. And the lack of institutional sponsorship means that the potential for gains as the whales move in is virtually unlimited.
JP came public at 10 in July 2015 and traded a respectable 4.2 million shares in its IPO week. But the next two years were a wasteland of disinterest, with the stock never so much as hinting at a run to new highs and frequent dips to support around 7. And 7.5 is where JP was trading on August 3, just before the stock began its remarkable ascent.
JP made a run to 13 on August 18 on steadily increasing volume. The stock paused for a few weeks and was trading at 11 on September 19, a day before it began another surge higher. The rally that began on September 20 hasn’t really stopped, and JP is now trading around 24, a dip of a point from its October 18 high at 25.8.
JP is a speculative stock, pure and simple. It has scant trading history and hasn’t been through a significant correction since it began its breakout run. So this isn’t a stock to bet the farm on. We are encouraged by the company’s admirable revenue and earnings history (and its 2% annual dividend yield), but are fully aware that we lack the support of institutional research and ownership in making this buy.
We recommend taking a small position in JP. We will buy a half position, but you may want to go even smaller, with a one-third or even one-quarter position. But we don’t want to let this intriguing opportunity get away from us. BUY A HALF.
Jupai Holdings (JP 25)
Yinli Building
8th Floor
Shanghai 200072
China
www.jpinvestment.cn
Model Portfolio
Invested 105% Cash 0%
Updates
Emerging market stocks remain in a solid overall uptrend, though among individual stocks, we are seeing the wheat separate from the chaff, with some names stagnating while others continue on their merry way higher. That said, we haven’t seen much in the way of abnormal action yet, so we continue to remain heavily invested.
Going forward, it’s all about following the plan as earnings season progresses. We’ll be looking to take profits (or partial profits) if any winners really go over the falls, but we’re also expecting some new leaders (including some stocks that have sat out the dance thus far) to emerge. We’re watching things closely, but tonight, we have no changes.
Alibaba’s (BABA) advance has slowed a bit lately. After holding its 25-day line for many months, it’s dipped below it twice in recent weeks, and net-net, it hasn’t made much progress for the past seven weeks. That could be an early change in character—but at the end of the day, the stock is just a few points off all-time highs and remains in an uptrend. On the news front, Alibaba announced it has a 29% stake in BEST Inc. (currently worth around $1.2 billion), a Chinese supply chain firm that came public last month. We’ll stay on Buy here, though with earnings due out on November 2, keep new positions on the small side. BUY.
Autohome (ATHM) continues to hold support in the 57 area, which was the low it set last month (and retested in recent days) after its CFO and President jumped ship. Fundamentally, we still think this story has huge potential, so we’re happy to given ATHM a chance as long as shares hold up. HOLD.
Baidu (BIDU) got whacked today with everything else, but this dip is coming out of strength, as shares have run from their tight consolidation near 230 in August to nearly 275 yesterday. Earnings are due on October 26, which will obviously be key, but at this point, BIDU’s dip seems buyable to us. Keep new positions small ahead of earnings, though. BUY.
China Lodging Group (HTHT) released preliminary results for its hotel operations for the third quarter, and they once again depict a company on a steady growth path. For the quarter, the occupancy rate was 83% (up from 89% a year ago), the average daily room rate was up 12% while the revenue per room owned rose a solid 17%. As for total rooms, they rose 3.6% from the prior quarter, continuing the cookie cutter-type story. The stock has chopped around in the 125 to 135 area for the past few days, but remains north of its 25-day line. We’ll stay on Buy. BUY.
Groupo Supervielle (SUPV) had a wild reversal yesterday, but that’s to be expected after such a strong, steady run. SUPV remains in a firm uptrend, and you can look to buy on any dip of 50 cents or so. BUY.
HDFC Bank (HDB) looked like it was getting going last week, when it nearly zoomed to 99, but the sellers showed up again and have driven the stock back to support in the low 90s. It’s tedious, but as long as support holds, we’re willing to give this long-term growth stock a chance to resume its major uptrend. HOLD.
Sina.com (SINA) dipped to support at 110 this morning (also near its 50-day line) and bounced. A break into the mid-100s would cause some worries, but right here, the stock’s trading range is reasonable—in fact, the past month looks like a tight pause after a solid run-up during the prior few months. We’ll stay on Buy; earnings for Sina and Weibo are likely out in early November. BUY.
Sociedad Quimica y Minera (SQM) is acting as good as we could have hoped after its sharp September retracement—the stock has crept higher since it bottomed near 53 and is still above its 25-day line. Interestingly and encouragingly, news today that Potash (which owns 32% of SQM) must divest its shares during the next 18 months didn’t affect SQM much, though we’ll see how that plays out. We’ll stay on Hold here, but another week or so of resilient trading could have us restoring our Buy rating. HOLD A HALF.
TAL Education (TAL) was smacked around a bit today after a huge, persistent run from early July (from 21 to 36!). Still, it’s overall uptrend is intact, and the real tale will be told on earnings, which are due on October 26. We’ll be looking to see if there’s any bump in 2018 estimates (which already call for a bulky 67% hike in earnings). Right now, hold on if you own some, and if you don’t, you can take a small position on this dip. A drop below 30 or so would look abnormal, at least for the intermediate-term. BUY A HALF.
We almost never buy stocks that trade over the counter because of a lack of sponsorship, but we’re glad we made an exception with Tencent Holdings (TCEHY), as shares continue to trend nicely higher along their 25-day line. The stock hasn’t dipped much below its 10-week line all year, so there’s risk that a “real” pullback could develop; earnings, which are likely out in mid-November, will be key. That said, TCEHY remains very resilient and until we see definitive signs of distribution, the odds favor dips leading to higher prices. We’ll stay on Buy. BUY.
YY Inc. (YY) has had a bit of a “trend knockout” move during the past three days, with a good-sized drop from 98 to as low as 90 this morning. But like many of our stocks, this dip takes place after a strong upmove in recent weeks, so we view it as buyable. Earnings are likely out in early- to mid-November. BUY.
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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.
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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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