As the year winds to a close, we find ourselves in the grip of a mild but long bull market in emerging markets stocks, and the big question on all investors’ minds is whether the trend will continue into the new year. No one knows, of course, but the Cabot system says there’s no reason to fight the trend!
Cabot Emerging Markets Investor 649
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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.
The Emerging Markets Timer is definitely positive again, benefiting perhaps from a year-end buying surge as it tries to top its November 22 peak. Meanwhile, its Chinese counterpart, the PowerShares Golden Dragon ETF (PGJ), is also positive, but only marginally so, as the index has made little progress since mid-September. Still, up is better than down, and by choosing the best stocks, we can benefit from this uptrend, slight as it is.
Today, recognizing that the greatest strength is outside the Chinese mainland, we have chosen a company with a thriving business in Macau and beyond.
A Chance to Catch Our Breath
With Christmas now in the rear-view mirror, and nothing but a New Year’s Eve celebration standing between us and some serious winter, it’s probably a good time to take a look at the year behind us.
It’s been a good year, one of the best, in fact. Investors took emerging market stocks to their hearts and our portfolio is filled mostly with stocks we bought during the year. (The exceptions are TAL Education, which we bought in late 2015 and China Lodging, which was first picked in March 2016.)
The main story of the year shows up well in a daily chart of iShares MSCI Emerging Markets ETF (EEM), which is the basis for the Cabot Emerging Markets Timer.
From its close on December 30, 2016, EEM soared to a high of 47.22 on November 22, for a gain of 37.5%.
The correction that began on November 24 (the day after Thanksgiving) spiked in volume on November 30 and hit a price low on December 7.
I wrote in last week’s Update that EEM’s current flat patch dates back a little over two months, which isn’t a pleasant period to have no net progress. But our stocks have shown considerably more resilience, with many pushing out to new highs or rebounding well from November/December corrections.
The chart also has a couple of less obvious lessons to reveal. The first is that this isn’t the first extended period of no progress this year. The periods from February 23 to April 20, March 21 to May 18, May 16 to July 10, August 9 to September 28 and September 18 to December 13 were all net neutral, although there was plenty of action along the way and the general trend was definitely up.
As the volatility of emerging market stocks boosted EEM up and dragged it down, we followed the loss limit rules that must be obeyed if we are to survive the market’s constant testing. A few of these (like Beigene, which we bought in February at 41 and sold in April at 37 and is now trading at 99) tried to make us doubt the wisdom of “cutting losers short,” but that lesson isn’t really subject to review. It has decades of testing under its belt, and you can’t let the market tease you out of following it just because of one unusually strong and steady year.
We approach next year with a conscientiously open mind. The principled refusal of Cabot’s growth analysts to predict the future is one of our strengths, I think. We will take what the market gives us and make the most of it.
I’m looking forward to it.
Featured Stock
Playing the Rebound in Macau
Melco Resorts & Entertainment (MLCO)
First, a little background.
Hong Kong and Macau are special regions within China, both former colonies of Western nations, and each has a unique status that was negotiated when they reverted to Chinese control. Hong Kong was handed back to China by the British in 1997, and is a global financial center with its own currency and one of the highest per capita incomes in the world.
Macau was returned to Chinese control by Portugal in 1999, and the two regions—Hong Kong on the western edge of the Pearl River delta and Macau on the eastern edge—became unique spots for economic development. Hong Kong is a cash-rich center of capitalism and Macau is the only place in mainland China where gambling is legal.
It’s not cultural stereotyping to say that the Chinese love to gamble. So when the number of Chinese millionaires started to increase, the proximity of Hong Kong and Macau, two regions on either side of the Pearl River delta, made it a natural for Melco International Development to make a deal with Australian gaming company Crown Limited to start building casinos as Melco Crown in 2004. The funding came from Hong Kong and Australia and the gamblers came from across China to Macau.
The company enjoyed triple-digit percentage revenue growth from its founding through 2008, and lower, but still steady growth until 2014, when Chinese authorities, worried that Macau casinos were 1) being used to launder money from corruption and 2) were encouraging Communist Party officials to flash too much inappropriate cash, cracked down on gambling.
Melco’s revenue fell by 6% in 2014 (after growing by 25% in 2013) and fell an additional 17% in 2015. And this came after the company, which was competing with U.S. gambling companies like MGM Resorts, Wynn and Las Vegas Sands, had built the City of Dreams, a 420,000 square foot casino with 450 gambling tables, 1,500 gaming machines and 175,000 square feet of retail space along with theaters, hotels, live acts and other attractions for families.
Melco Resorts became independent of its Australian backers in 2017 and Macau began to grow revenue again in 2016 as China relaxed its grip on gambling operations. Melco has now booked seven quarters of increasing revenue (including a 19% jump in Q3) and three quarters of triple-digit earnings growth.
Melco is also still building. Phase III of the City of Dreams complex is underway, and the company is scheduled to launch its NUWA luxury hotel brand in Macau and Manila in January 2018. A potential integrated resort in Japan is also being discussed.
There is nothing certain about Melco Resorts. It will always be subject to the whims of Xi Jinping’s regime in China and its anticorruption campaign. But the City of Dreams and Melco’s other casinos—Altira Macau, Studio City and Mocha Clubs and a Manila branch of the City of Dreams in the Philippines—are competing at a high level with Western casinos. And the situation in Macau has improved materially; gambling revenue rose 23% year-over-year in November.
MLCO (the symbol was changed from MPEL when the company shed its Australian connection) was a favorite of ours for years until the crackdown on gambling dropped it from its high of 41 in March 2014 to 11 in February 2016. The stock turned around after forming a double bottom at 11 in February and July 2016 and has soared to 29 in recent trading, hitting its highest levels since August 2014.
With MLCO performing well (and paying a dividend that yields 1.3%), and the Cabot Emerging Markets Timer in good health, I think MLCO looks like a good bet. We will add it to the portfolio tomorrow. BUY.
Melco Resorts & Entertainment (MLCO xx)
The Centrium, 37th Floor
60 Wyndham Street
Central
Hong Kong
www.melco-resorts.com
Model Portfolio
Invested 100% Cash 0%
Updates
2017 has given us the best bull market in years, and now, with economic news generally positive and trends generally up, we’re about to find out what 2018 has in store. I have no preconceived notions—though I remain optimistic about growth in China in particular. As always, we will simply follow the system.
As to our current portfolio, the one major takeaway from studying the charts is that the big old Chinese names are lagging while less well-known stocks are moving up. But I’m making no changes today; that can be foolish in response to low-volume year-end trading. Instead, I’m waiting eagerly to see what 2018 brings.
58.com (WUBA) remains in the early stages of a consolidation/base-building phase following the stock’s December 1 bottom at 65, but there’s a slight upward bias to the base—which is good. The stock’s 25-day moving average is at 72, while its 50-day moving average is at 70, so there’s a lot of support right here. BUY A HALF.
Alibaba (BABA) had a great run this year, so from a long-term point of view, the stock’s high-volume selloff in late November and the subsequent base-building activity are acceptable. From a short-term perspective, however, it’s a little concerning that the stock has totally sat out the December rally. Fundamentally, Alibaba has one of the biggest stories in China, so I will be as patient as I need to be, though if weakness develops in 2018, I might advise taking partial profits. HOLD.
Baidu (BIDU) looks a lot like BABA, though its correction began a month earlier in October. Thus BIDU has a longer base, which is likely eventually to provide support for a renewed advance. HOLD.
China Lodging Group (HTHT) also suffered in November like BABA, but since bottoming at 102 on November 29, the stock has come roaring back, and this week it equaled its October highs! There may be a pause to digest the advance here, but there may not! China Lodging Group has an excellent fundamental story, with enormous potential to grow as it consolidates the very fragmented lodging industry in China. BUY A HALF.
GDS Holdings (GDS) hit a record high on December 21 and has held tightly to those gains since. There are no motivated sellers here, only increasing numbers of investors discovering the story of GDS’s growth prospects as its data centers are increasingly used by the giants of the Chinese internet. BUY.
Grupo Supervielle (SUPV) has been stair-stepping higher since mid-November—hitting new highs on a regular basis—and looks like it could easily keep going. The Argentinean bank is clearly succeeding, and the investors getting on board today expect more success ahead. BUY.
TAL Education (TAL) is another Chinese giant that’s fairly slumbered through December. But that’s not bad, especially in light of the fact that the stock climbed out of trend to the upside in the months prior to its November selloff. The long-term view says that patience will pay with this stock, but if you don’t have it (patience), you’re welcome to jump on a faster horse like SUPV (with all the risk that entails). HOLD A HALF.
Tencent Holdings (TCEHY) tagged 56 on November 21, and then corrected sharply until it just dipped under its 50-day moving average on December 6, but then the uptrend resumed as if nothing had happened. Next stop: the old high of 56. BUY.
Weibo (WB) has been trading flat since the middle of September (with a dip to 90 and spike to 120), but the long-term trend for the Twitter of China remains up. If you don’t own it, you could buy a little here. Otherwise, holding is fine. HOLD.
YY Inc. (YY) has had an impressive run in the second half of 2017, staying well above its 50-day moving average for the entire time, and now it’s aiming to equal—or top—its November high of 123. Will the turn of the calendar bring profit-taking? Possibly, but our system says you should buy any dips. BUY.
ZTO Express (ZTO) is a fast mover—not unlike the company’s express carriers. Since bottoming at its 200-day moving average at 14.50 just seven trading days ago, the stock has rallied 11%, and is now building a little base around 16. It’s tempting to restore the stock’s buy rating here, but this year-end rally is not convincing, not least because volume on the advance has faded all the way up. ZTO has a great growth story, but we need to see a better chart. 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 January 11, 2018
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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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