The Cabot Emerging Markets Timer is sitting firmly on the fence and some of our stocks are taking breathers. It’s not anything like a time to over-react, but we’re pulling in our horns in an appropriate way. We also have a new stock that does a brilliant job of balancing a national presence with thorough local focus.
Cabot Emerging Markets Investor 648
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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.
After some big swings up and down in recent weeks, our Emerging Markets Timer is firmly on the fence. The iShares EM Fund hit a multi-year high just three weeks ago, sliced below its 50-day moving average last week and has since bounced back to that average. Combined with the fact that EEM is little changed since mid-September, the trend is mostly neutral at this point.
From here, we’ll be looking for a decisive move up (reaffirming the uptrend) or down (new downtrend). Right now, though, it’s best to simply take things on a stock-by-stock basis, holding your resilient performers and keeping tight stops on your losers and laggards.
Asking Why
It’s relatively easy to say that the stock market (or a part of the market, like China) is going up or down. A chart will tell you in half a second. It’s often much tougher to say why it’s going up or down.
Now, on the one hand, it doesn’t make any difference; either you’re making money or you’re losing money.
On the other hand, there’s a part of us that desperately wants an explanation for things. Knowing that a company missed its quarterly numbers won’t make its stock’s price bounce back by so much as a penny. But many investors just feel better if they can make sense of the loss.
To put the recent decline of Chinese ADRs in perspective, here’s a six-month chart of PowerShares Golden Dragon China ETF (PGJ), which looks at the group’s collective performance.
• One thing that jumps out at you from the chart is that PGJ has been through increasingly steep corrections in the latter half of that last four months. The pullbacks started on August 24, then continued on September 19, October 17 and November 24.
• In the first two months, the pullbacks found support at the 50-day moving average and rebounded quickly. October and November, not so much.
• It’s also interesting that from September on, PGJ has traced out both slightly higher highs and lower lows, a demonstration of higher volatility.
• Also, using closing prices, the corrections increase in severity from 3.9% in August, to 5.2% in September to 7.1% in October and 8.4% in November.
We don’t yet know how the rebound that started on December 6 will play out.
Why is this happening? There are three possibilities. First, Chinese ADRs gained 63% from their opening on January 3, 2017 to their peak on November 22. That’s the kind of gain that will encourage any investor to book a little profit as the end of the year approaches.
Second, mutual funds, private equity funds and hedge funds all look to wrap up their portfolios for the end of the year. Mutual funds are infamous for selling losers (so they won’t appear in annual reports) and stocking up on glamour names to make themselves look good. But year-end portfolio moves frequently have little or nothing to do with investors’ actual estimates of next year’s performance. So a little selling off isn’t uncommon.
Third, there are a few influences from specific stocks that can take a toll on a sector ETF like the Golden Dragon. Take a look at the heavy selling spikes in Taiwan Semiconductor (TSM) on November 27 and 29. TSM is a big component of many institutional portfolios, and a sharp dip like the 10% plunge the stock made from November 24 to December 6 can take a statistical chunk out.
But whatever the exact reason, we will remain tuned to the state of the Cabot Emerging Markets Timer, which is flashing the most tentative of new buy signals, and to the performance of our portfolio’s stocks. Today, that means working the safer end of the risk spectrum.
Featured Stock
Local Heroes
58.com (WUBA)
Our favorite Chinese stocks feature huge, national scale, with the potential to capitalize on the biggest maturing market in the world. But 58.com is a combination of national and local that puts it in an attractive niche.
58.com is an online marketplace, not in the sense that Alibaba is, with a platform for local merchants who want to address national and international markets.
58.com is thriving by serving the needs of local merchants and local shoppers in over 380 Chinese cities. The company offers listings for “housing, jobs, used goods, autos, pets, tickets, yellow pages and other local services.” The 58.com marketplace invites local consumers to get information about local merchants and allows easy interaction that flows both ways.
The company works ceaselessly to certify the information listed on its site, both encouraging consumers to post reviews and collecting feedback from users. Companies posting job listings are vetted for legitimacy by 58.com. Car listings are checked for accuracy. Working with local real estate agents, apartment listings show buildings, the number of floors, the number of apartments on each floor and the size and layout of each apartment. 58.com also provides online resources to allow merchants and customers to chat, exchange pictures and voice messages.
Growth is coming from the company’s push into more cities and from a relatively new program to find representatives in villages; Wuba.com is currently serving just 3,000 villages, but is targeting 30,000 of China’s 40,000 villages, which is where half of China’s population still lives. The company is also increasing its efforts to optimize its websites for mobile users.
The company’s fundamentals have been good, with revenue growing by 24%, 31% and 34% in the first three quarters of the year. Earnings also turned positive in Q1 and have been up 126%, 371% and 2,550% (Q1 to Q3). Analysts see earnings growing by 66% in 2017 and 62% in 2018.
The big news for 58.com came in April when the company entered into a strategic partnership with Tencent Holdings. Tencent will invest $200 million in Wuba.com’s year-old Zhuan Zhuan used goods trading app and will take a minority equity ownership position. Having Tencent as a partner has definitely given 58.com a higher profile and increased its credibility in investors’ eyes.
WUBA came out of a 20-month correction in early 2017, coming off a double bottom at 28 in December 2016 and January 2017and bouncing strongly in February. The incipient rally was reinforced in April, and the stock soared to 68 in August. After spending September and October trading under resistance at 68, WUBA took off again in November, hitting a high of 79 before general market weakness took the wind out of its sails.
With the Cabot Emerging Markets Timer flashing a green light by the skin of its teeth, we’re not going to jump in WUBA with both feet. We like the stock’s calm trading over the past week after correcting from 79 on November 22 to 65 on December 5. We think WUBA will use its August-through-October resistance as support, and will strengthen as the broader picture improves for emerging market stocks. BUY A HALF.
58.com (WUBA 69)
Building 105
10 Jiuxianqiao North Road Jia
Beijing 100015
China
86 10 5956 5858
http://g.58.com
Model Portfolio
Invested 90% Cash 10%
Updates
After months of volatile up-and-down trading, our Emerging Markets Timer (EEM) turned negative last week, though the rebound since then has put the reading back into the neutral category. Not surprisingly, the Golden Dragon Fund (PGJ) is in a similar position.
That’s not bearish, but it tells you to keep a close eye on all your stocks, trying to hold strong performers while ditching any stocks that crack.
Our only change tonight is placing ZTO Express (ZTO) on Hold.
Alibaba (BABA) stock’s stalling-out phase from September to November, combined with the five straight days of big-volume selling two weeks ago, is a sign the stock needs some time to re-set itself, and today’s action says the same thing. That’s not hugely unexpected after the stock’s uninterrupted run this year. If you have a loss, you should keep a relatively tight stop in place (maybe near the recent lows around 165). But if you have a good-sized profit, we advise patience, giving the stock a chance to build a new base—long-term, we still think BABA will see higher prices ahead. HOLD.
Baidu (BIDU) continues to tiptoe above support in the 225-230 area, which keeps us in the Hold column. The big question going forward is earnings next year—because of investments, analysts see the bottom line up just 4% (to around $9.50 per share), despite a 23% gain in revenues. The company continues to ink deals in the artificial intelligence space (the latest with Qualcomm), which could be big, but for our part, we’ll just play it by the book. With BIDU holding above support, we advise hanging on. HOLD.
China Lodging Group (HTHT) has bounced back nicely in recent days, which is a definite plus. That said, like many big winning growth stocks this year, HTHT likely needs some time to rest. If you’ve been following along, you should hold your half position (we sold half a couple of weeks ago) and give your remaining shares room to breathe. HOLD A HALF.
GDS Holdings (GDS) had a quick shakeout to its 10-week moving average last week (dipping as low as 17) before recovering back near its highs. While the stock could rest a bit, the first test of the 10-week line during an advance, which this was, usually marks a decent buy point. And, of course, it doesn’t hurt that the fundamentals remain in great shape. We’ll stay on Buy. BUY.
Grupo Supervielle (SUPV) is a good example of a stock that recently tested its 10-week line for the first time since its breakout. SUPV did so in mid-November (actually diving below the line for a couple of days) before quickly rebounding and, this week, lifting to new highs. With analysts anticipating a 28% earnings gain next year and the stock showing strength, you can buy some here or on minor dips. BUY.
TAL Education (TAL) has done a nice job of building a low in the 26 to 30 area during the past six weeks, which is acceptable given its prior run and big breakdown in late-October. There’s little doubt that demand for its education services in China will continue to mushroom, and earnings estimates (up 72% next year) look terrific. Now we need to see the stock hold above its long-term moving averages (near 25 and rising) and round out a new launching pad. If you own some, sit tight. HOLD A HALF.
Tencent Holdings (TCEHY) has taken on some water along with most technology leaders, but it remains in better shape than most, holding above its 50-day line for most of its retreat. The company continues to make a bunch of moves to spread its dominance in a variety of fast-growing businesses. Already this month, Tencent agreed with Spotify to swap 10% stakes in each other ahead of expected IPOs for each next year, and it took a 5% stake in Yonghui Superstores (and a 15% stake in its supply chain subsidiary), which has a market cap north of $14 billion. Back to the stock, some further short-term wiggles would be normal, but we’re OK picking up shares here or (preferably) on dips into the high 40s. BUY.
Weibo (WB) looks more like an egg than a tennis ball recently, with the stock unable to bounce much after its sharp decline. There is plenty of support in the high 90s/low 100s, and there’s no sign of any slowdown in the firm’s terrific growth story (revenue growth has actually accelerated over the past few quarters). But we have a loss, and in an iffy market environment, we aren’t willing to let the loss grow much larger. Hold on, but keep your shares on a tight leash; we have a mental stop near the recent lows around 98. HOLD.
YY Inc. (YY) has bounced well in recent days and is currently north of its 25-day line, so we’re staying on Buy. Analysts expect earnings growth to slow to just 23% next year—we’re dubious that will happen, but even so, YY trades at just 18 times earnings and is the leader in its niche. You can grab shares here if you’re not yet in. BUY.
ZTO Express (ZTO) is being switched to Hold because of its recent slide back into support. Honestly, the chart doesn’t look that bad, as there’s lots of support in this area, and such wiggly action in a tricky market isn’t abnormal for a recent IPO. Even so, our loss is growing on our half position, and the stock is below its 50-day line. It’s prudent to switch to Hold and use a mental stop in the low 14s. HOLD 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 ISSUE IS SCHEDULED FOR December 28, 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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