Please ensure Javascript is enabled for purposes of website accessibility
The World’s Best Stocks

Cabot Emerging Markets Investor 650

The year began with five straight days of advances for emerging market stocks, which was pleasant. And the little rap on the knuckles from the market on Tuesday and Wednesday brought us back to reality without doing much damage. So the bottom line is that our stock universe is still in an uptrend and the prospects for 2018 looks just fine.

Cabot Emerging Markets Investor 650

[premium_html_toc post_id="143253"]


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 a choppy, up-and-down consolidation for three-plus months, our Emerging Markets Timer has come alive, ripping to new highs as 2018 has gotten underway. In early December, the iShares EM Fund was slightly below its 50-day line and no higher than it was at the start of September. But it picked up steam from there and has moved straight up in recent days, reaffirming the intermediate-term uptrend.

There are lots of crosscurrents in January, and earnings season will throw another wrinkle at the market, but the choppy, multi-month pause, combined with the recent strength, bodes well. Hold your winners, and look for new leaders that are emerging from rest periods.


2018: So Far, So Good

There’s never a shortage of information for anyone interested in financial markets. In fact, anyone who tries to take in the flood of news stories, economic reports, opinions, recommendations, warnings and analyses will find themselves swept out to sea like a rowboat in a tsunami.

But even if you try to reduce the amount of news you pay attention to to a reasonable level, there will always be conflicting opinions.

Morgan Stanley has released its headline prediction for 2018, which is that we’re now in the euphoria stage of an eight-and-a-half year bull market, a stage that’s usually the last leg of a rally. Morgan looks at tightening financial conditions and sees a market that has already priced in the effects of the Republican tax reform. Conclusion: This overconfident market is ready to fall.

On the other side of the prediction scales, there’s Citigroup, hardly a dabbler in the financial world, which maintains a “Bear Market Checklist” that identifies the valuations, sentiment, Capex, profitability and balance sheets that have preceded other “proper bear markets,” and sees only 3.5 out of 18 factors as “worrying.”

Citi’s conclusion is that the chance of a bear market in 2018 is slim, and that the next dip will still be buyable.

What to do? What to do?

First, remember that a long ton of prediction about what the market will do is worth less than a golden ounce of information about what the market is doing right now.

And right now, emerging market stocks, having pulled out of their November/December correction, are
in a solid uptrend. That means that the market is continuing the rally that began in late December 2016.

Second, remember that emerging market stocks are short- and medium-term investments, and that we are always ready to get out of an investment that turns sour. My evidence for this is that we made 23 Sell recommendations in 2017. Our two longest-held stocks are TAL Education, which we bought in December 2015, and China Lodging, which was bought in March 2016.

As we face the New Year, I have a few questions you need to ask yourself as a kind of tune-up for the challenges ahead. These are questions any responsible growth investor should have on a self-help poster.

Is the market working for you or against you? This is the big one. A supportive market (as we have now) will increase your odds of success more than any other factor.

Do your growth stocks meet the SNaC test? Do your stocks have sound Stories, strong Numbers (revenue, earnings, etc.) and a bullish Chart? I can vouch for the stocks in the Cabot Emerging Markets Investor’s portfolio, how about yours?

Do you have the right concentration/diversification balance? I think 10 equal-dollar positions is the Goldilocks point for an aggressive growth portfolio. Too few stocks and you’re vulnerable to a correction in any one stock; too many and you lose part of the benefit from a strong performer.

Do you know when you will sell your stocks? Loss limits are the seatbelts, airbags and body armor for growth investors. Knowing beforehand when you will let a position go will give you the calm to sleep at night, no matter what 2018 throws at us.

Featured Stock

Back in the Driver’s Seat
Autohome (ATHM)

China is the world’s largest car market, having grown at double-digit rates for years. And while that growth rate cooled to a 15-year low in 2017—just 3%—the sheer scale of the market—28.9 million vehicles sold in 2017—makes it a tempting playground for any ambitious company. (By contrast, U.S. auto sales of 17.2 million vehicles last year represented a decline of 1.8% from 2016.)

Autohome plays a vital role in the auto industry in China. The company’s website is a virtual showroom for every manufacturer, make and model, both foreign and domestic. And the site’s extensive information resources and links to financing, insurance and guidance through the challenging Chinese auto registration process make it a valuable resource. And the value works both ways, as sellers and service providers can advertise to attract business from the motivated shoppers and browsers, generating qualified and motivated leads.

Autohome gets revenue from the media services it provides to dealers in setting up and maintaining their online showrooms, from fees for lead generation for dealers and ancillary businesses, and from transaction fees from its online marketplace for used cars and financing.

Autohome’s revenue grew by 62% in 2016, and has risen by 16%, 11% and 5% in the first three quarters of 2017, respectively. Earnings were up 15%, 39% and 58% in those same three quarters, with a solid 30.7% after-tax profit margin in Q3. Analysts are looking for revenue of $262.5 million when the company reports its Q4 results, and earnings of 68 cents per share, up 22% from a year ago.

While not completely immune from a slowdown in auto sales, Autohome is about as bulletproof as any automotive-sector player can be. That’s because the company’s website and services will remain a vital part of the Chinese automotive scene no matter what. While growth in conventional vehicle sales slowed last year, electric vehicle sales quadrupled, raising the percentage of EVs to 2.7% of total auto sales. And EV shoppers will need just as much information and services as conventional auto users. Also, a lower growth rate will increase competition, which will strengthen Autohome’s position as the most popular site for car shoppers.

ATHM has been in and out of the portfolio several times over the past few years. Most recently, we bought the stock in June 2017 at 43 and sold for a nice profit in late October at 55 after a tedious 10-week decline. ATHM strengthened in November, but didn’t break out above its August high at 67 until the market began its exuberant New Year’s rally on January 2.

Bigger picture, the stock built a long cup-shaped correction from its high of 59 in May 2015 to a low of 19 in July 2016. It’s a stretch to interpret the stock’s pullback from 68 in August to 53 in December as a handle, but ATHM’s breakout after that kind of substantial correction is constructive.

ATHM ran to 80 on Tuesday, January 9, which was a little extended from its 25-day moving average. Its pullback over the past two days helps a little, and the stock’s 25-day has started to turn up as the late-November slump has been outdistanced. ATHM has just 321 institutional investors on board, so there’s plenty of room for more. We think ATHM is a good deal right here. BUY.

Autohome (ATHM 77)
CEC Plaza, Tower B 10th Floor
Beijing 100080



Model Portfolio


Invested 100% Cash 0%


After a tedious time for many Chinese and Emerging Markets stocks during the fourth quarter, the group has come to life so far this year. Volatility is almost always elevated in January as big investors reposition their portfolios, but there’s no question the action is encouraging.

That said, our portfolio is getting a bit big for its britches; it’s a good problem to have as most of our stocks are acting well. But without action, our new purchase tonight (Autohome) would put the portfolio on margin.

Thus, tonight, we have a couple of changes. First, we’re going to sell our half-sized position in ZTO Express (ZTO), which hasn’t been able to get going. And second, we’ll sell half our shares in Baidu (BIDU), which has bounced nicely, but is still well short of its high. Those moves will keep the portfolio at 100% invested.

wubacem650-200x118.png (WUBA) continues to act just fine, lifting from its tight area in December to new highs on solid volume so far this month. Earnings likely aren’t out until late February. We’ll stay on Buy, with dips toward support at 80 marking good entry points. BUY A HALF.


Alibaba (BABA) has rallied nicely this year, right back to its November high. It’s encouraging, though the stock’s relative performance (RP) line is still a ways from its prior peak (basically, the stock has been underperforming the market for the past couple of months). Long-term, we’re very optimistic that BABA has further to run; we still think it’s one of the overall market’s top liquid leading stocks. Short-term, we’re not opposed to a little new buying, but officially, we’re going to stay on Hold for the moment and see how the stock acts now that’s it’s pushed to its prior peak. HOLD.


Baidu (BIDU) has rallied to its highest levels since its earnings gap down in October earlier this week, which is a good sign. That said, given what we wrote above about the portfolio (nearly on margin!), we’re going to sell half our shares here and hold the rest through earnings (likely out in early February. We still like the potential here, but BIDU isn’t as strong as some of our other holdings. We’ll take partial profits and hold the rest. SELL HALF, HOLD THE REST.


China Lodging Group (HTHT) has been incredibly impressive, storming back from a sharp November correction on huge volume, tagging new highs last week and holding those gains in recent days. The company is likely to release preliminary quarterly results (mostly hotel statistics—how many were opened, occupancy, revenue per room, etc.) in mid-January, which could move shares, but there’s no reason to expect anything but another quarter of rapid growth. Analysts see 2018’s earnings up 42%. You can buy a small position here or on dips if you’re not yet in. BUY A HALF.


GDS Holdings (GDS) remains in good shape, having hit new highs earlier this week before pulling back. With the 25-day line down around 22, the stock could certainly pull in further, but the odds favor dips being buyable. The company just inked a non-binding letter of agreement to help build new data centers for the Chinese government, China Unicom and China Telecom. Earnings are likely out in mid-February. BUY.


Groupo Supervielle (SUPV) has met with some selling in the 30-31 area since mid-December, but that’s normal action following a nice rally. In fact, the stock’s tightness recently is a good sign that the path of least resistance remains up. The firm is presenting at three investor conferences this month; we’ll see if there are any analyst commentaries that stem from their talks. BUY.


Jupai Holdings (JP) has perked up nicely with most Chinese stocks, though it’s just now resting in an area of resistance (in the 25-27 area). It’s worth keeping an eye on, as the bull market in China (and around the world) should boost this wealth manager’s bottom line. WATCH.


Melco Resorts and Entertainment (MLCO) has stabilized near its 25-day line after taking a hit on worse-than-expected December gaming numbers from Macau last week. A drop through 26 or so would be a yellow flag, but right here, MLCO is still in a solid uptrend and business looks good. You can pick up shares here if you don’t own any. BUY.


TAL Education (TAL) is usually among the first Chinese stocks to report earnings, and that’s the case again this month, with the firm’s quarterly report due out the morning of January 25. (Analysts see revenues of $419 million, up 61%, and earnings of six cents per share.) Interestingly, the company announced last week that an unnamed “long-term equity investment firm” agreed to buy $500 million of newly-issued shares of TAL, which will represent about 5% of the company. It’s pretty vague, but we take it as a positive. As for the stock, it’s pushed back to within three points or so of its prior (October) peak. We’ll stay on Hold and see how shares react to earnings. HOLD A HALF.


Tencent Holdings (TCEHY) has gotten a bit sloppier recently (a 10-point dip after Thanksgiving, followed by an 11-point rally to new highs earlier this week), but is still in a solid uptrend. At some point, shares will probably need a breather, but there’s no question TCEHY remains a leader of the Chinese bull move. Try to buy on dips of a couple of points. BUY.


Weibo (WB) looks a lot like BABA, with a sharp correction in late November/early December, some consolidation for a few weeks and a nice-volume spike back to its highs. The growth story here is about as good as it gets, but we’ll stay on Hold and see how it acts after this push higher. Sit tight if you own some. HOLD.


YY Inc. (YY) never fell much below its 25-day line during the Chinese and growth stock selloff after Thanksgiving, and it’s busted to new highs in 2018. It sounds like YY has plans to spin-off its e-sports live-streaming platform (dubbed Huya) that allows gamers to interact with each other while playing, unlocking value for that business and raising capital, too. YY is a leader, but with the 25-day line around 115, try to buy on a dip of a couple of points. BUY.


ZTO Express (ZTO) has slipped further so far this year and, even more important, has failed to get going despite a solid launching pad. Eventually, we could revisit ZTO should the stock get going; its long-term story remains enticing. But there’s no question it’s not a leader now. We’ll sell our shares and focus on stronger situations. SELL.


Send questions or comments to
Cabot Emerging Markets Investor • 176 North Street, Salem, MA 01970 •

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.


We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to:
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, write to or call 978-745-5532.