The shift from Wednesday’s pullback to today’s nice market bounce is just par for the course as investors scramble to figure out the fallout from alarming headlines and conflicting predictions. It’s not an easy market to navigate, and the portfolio is dealing with it by holding a heavy (50%) cash position and cutting back on most buying. But we’re still finding attractive stocks for our watch list, and will be ready when we finally get a green light from the Cabot Emerging Markets Timer.
Cabot Emerging Markets Investor 663
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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 firmly negative, continuing to tell us that the sellers remain in control. After skidding from 47 to 42 during June, the iShares EM Fund (EEM) has found a little support, but so far it’s far from conclusive—the Fund has only been able to rally to its declining lower (25-day) line before falling back.
A new buy signal requires a rise above that lower moving average and for that average to turn up, something that’s likely to take another week or two at least. Long story short, with the trend down, it’s best to stay close to shore with EM stocks, holding plenty of cash and waiting patiently for the next uptrend to begin.
The War and the Rules
Well, it’s on. The trade war between the U.S. and China (and involving many U.S. allies as well) is on like an episode of Wrestlemania. The U.S. is now preparing to impose $200 billion in additional tariffs on Chinese goods, which actually exceeds the total value of U.S. goods that China imports from the U.S. According to one theory, this will make it more difficult for China to impose retaliatory tariffs, which gives the U.S. the advantage.
I have no idea what China’s options are in matching the U.S.’s move in this conflict, but I don’t doubt that they will find some.
For investors in emerging markets, the trade war is just plain bad news.
The best gains in Cabot Emerging Markets Investor’s portfolio come when we have a rising market to support us, and this week’s declines seem to have stalled a promising bounce in emerging market stocks.
So I’m taking this opportunity to reflect on the importance of the Cabot growth investing system to what I do. Yes, picking good stocks is important, but without a detailed, thoroughly tested system of growth principles, good stock picks can get chopped to pieces by challenging market conditions … like the conditions we have now.
Most stock market advice—whether it comes from a book, an article or a conversation at a cocktail party—is pretty much useless unless it comes complete with a system that you understand, believe in and follow. And I’m especially skeptical about books written by successful investors, most of which follow the “When I started, I invested this way, and I was pretty successful, but then everything went wrong and I had to learn the rules all over again and then I discovered the real secret to investing and now I’m sipping wine in my French chateau overlooking the Loire valley. Thanks for buying my book.” It’s the basic, “Boy gets money. Boy loses money. Boy gets money.” kind of book.
Books like this are really just stock investing self-help books. The message is: I’ve done it. You can too. So get out there and try!
And individual investors, especially those getting started in stock investing, need that kind of encouragement. The market changes constantly and volatility (like the kind that comes with an escalating trade war between the two largest economies in the world) can make it daunting to dip a toe, much less dive in.
The Cabot Wealth Network includes advisories for most stock investing styles. But the one constant, from Cabot’s inception in 1970 until today has been the rules of growth investing. How do you find great growth stocks? How do you buy them, build them into a portfolio and sell them, and how do you factor the behavior of the market itself into your investing choices?
And it’s the Cabot growth investing system that guides me through these decisions. In its simplest form, the system is familiar to everyone: Buy stocks in uptrends. Demand strength in Story, Numbers and Chart. Let winners run. Cut losers short. Stay in step with the market.
As with any set of Commandments, there is a short shelf of commentary on these rules supplying details, exceptions and rules of thumb to aid decision-making. But if you just follow those five rules, you will go a long way toward blunting the market’s attempts to take your money—and be in position to greatly increase your wealth when the buyers return.
Featured Stock
Competence
WNS Holdings (WNS)
India-based WNS Holdings is an information technology company that practices business process outsourcing (BPO) for global clients in the banking, financial insurance and travel industries. The company has more than 36,000 employees in its 54 delivery centers in China, Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, Turkey, the U.K. and the U.S. Its more than 350 clients benefit from WNS Holdings’ expertise in customer care, finance and accounting, human resource solutions, research and analytics and industry specific back-office and front-office processes. The secret of WNS Holding’s success seems to be a combination of vertical (industry-specific) expertise combined with great execution in general outsourcing skills that makes its consultants a valuable part of a client’s business.
BPO has been a key market for Indian companies for a long time, and WNS Holdings has been at it since 1996, achieving solid profitability in 2006. The company has grown earnings in 12 of the last 14 years, including a 29% jump in fiscal 2018, which ended in March. After four years of single-digit revenue growth, revenue also popped higher by 26% in fiscal 2018.
WNS Holdings is a fairly defensive pick, as we acknowledge the general uncertainty about the economic health of China due to the evolving trade dispute with the U.S. While the company is headquartered in India, its fortunes are not tied to a specific country or region. There is likely to be plenty of growth happening to at least part of the company’s client base at any time.
And the chart for WNS is another big selling point. When the market was breaking out in a hot sweat on Wednesday, WNS was up slightly. Bigger picture, WNS shows a breakout from a 17-month consolidation in April 2017 and a rally with just one losing month since then. The weekly and daily charts show that there has been plenty of volatility, but all pullbacks are short (the longest being a six-week correction to end 2017) and buyers move back in quickly. The stock is at an all-time high, which is a very good thing.
WNS Holdings will report its fiscal Q1 results next Thursday (July 19) after the market closes, which presents us with a choice. Analysts are expecting revenue of $193.6 million and earnings of 51 cents per share.
As always, I’m not a big fan of buying a stock when a quarterly report is bearing down on us like a charging rhino. There’s probably a slightly greater probability that the company will meet analysts’ predictions than not, but the negative reaction to disappointing revenue, earnings or guidance can be all out of proportion to the scale of this miss. (And WNS won’t have a big corporate tax cut to bolster its results.)
WNS trades at a reasonable 24 P/E and would be buyable here if it weren’t for the impending earnings report and a yellow light from the Cabot Emerging Markets Timer.
Accordingly, I’m going to place WNS on the watch list until I get a look at next Thursday’s results. WATCH.
WNS (Holdings) Limited (WNS)
Godrej & Boyce Complex
Gate 4 Pirojshanagar Vikhroli West
Mumbai 400079
India
91 22 4095 2100
http://www.wns.com
Model Portfolio
Invested 50% Cash 50%
Updates
After a brutal June, emerging market stocks have stabilized a bit in recent days, which is a nice first step. But our Emerging Markets Timer is still clearly negative, and barring a monster rally, will probably need at least another couple of weeks to turn positive—and that, of course, is only if EM stocks head higher from here.
Bottom line, the intermediate-term trend is still clearly down, which argues for a cautious stance. It’s fine to hold onto your resilient performers, but holding some cash makes sense, as does being tight with losers and laggards.
In the portfolio, we came into today with about half the portfolio in cash. Tonight, our only change is that we’re dropping coverage of Noah Holdings (NOAH), which we never bought into.
51Job (JOBS) is on the edge here—after a sharp correction through its 50-day line, the stock has been unable to bounce. That said, we still have a small profit (we got in around 88), and after a big run some sort of base-building effort isn’t abnormal. We’re not going to lose money on the trade, but right here, we advise holding your half-sized position. Earnings are likely out in early August. HOLD A HALF.
Alibaba (BABA) continues to get tossed in the trade-war surf on a day-to-day basis, but we’re more interested in the overall picture. The recent failed breakout is a negative, but the stock has (so far) held support near its 200-day line during this dip, and overall remains within a long consolidation phase that began last fall. A total meltdown below major support in the mid-160s (perhaps caused by a market implosion and/or a massive trade war escalation) would be a major red flag, but right now, we’re practicing patience—we think BABA will eventually have another leg up, but more time is likely needed before that happens. Earnings are probably out in early August. HOLD.
Autohome (ATHM) probably also needs some time, but the stock has bounced decently from its low of 95 during the late-June correction. We doubt any of the trade shenanigans will affect the company’s business much, and analysts still see earnings growing in the 20% to 25% range both this year and next. A move back above the 50-day line (now at 106.7) would be a positive sign. HOLD.
BeiGene (BGNE) has also gotten off its knees in recent days, rallying from a correction low near 145 to the mid-160s and featuring two solid-volume up days. We’re not big fans of holding speculative stocks in a tumultuous market environment, but we have a small profit, a half-sized position and already have a good-sized cash hoard in the portfolio. Thus, we’re OK holding on here and seeing if this bounce can gather steam. HOLD A HALF.
GDS Holdings (GDS) fell sharply from 46 to 36.5 during the late-June correction, but found support and snapped nearly back to its old highs—just the type of action you want to see. The stock caught a “strong buy” rating from a Raymond James analyst this morning, though that didn’t help the stock. (Nothing unusual about that given GDS’ recent rebound.) Short term, further wiggles from the stock are possible given the market downtrend, but long term, we think the path of least resistance is up. We’ll stay on Buy, though keeping new positions on the small side makes sense given the environment. Earnings are likely out in early- to mid-August. BUY.
iQIYI (IQ) is still hovering around 30 (give or take a couple of points) as it attempts to etch out a low following its recent correction. The 50-day line (now at 28.4 and rising) should offer some support in the days ahead. The stock was dented for a couple of days last week after Baidu said it was trimming its position in IQ (it still owns nearly 70% of the firm), though it’s shaken that off, which is a plus. All told, if you own shares, we advise sitting tight and giving IQ a chance to etch a bottom and get going again. HOLD A HALF.
JD.com (JD) has a lot of support in the 35 to 38 range, and showed some legitimate signs of accumulation in the first half of June. With many weak hands already out of this stock due to its correction in recent months, and with still-strong sales and earnings growth, JD is a good name to keep near the top of your Watch List. WATCH.
Noah Holdings (NOAH) is a good example of why owning a “bull market stock” (a stock of a company that’s heavily tied to the health of the financial markets) in a market downtrend can be treacherous—the stock has tanked all the way to its 200-day line and hasn’t been able to get off its knees. One day NOAH will set up again, but it’s going to take a ton of repair work before that happens. Given that it’s unlikely to be a leader of the next advance, we’ll drop NOAH here. Glad we didn’t buy! DROP.
ZTO Express (ZTO) is one of our two best-looking stocks, having bounced about 80% of the way back after its June slippage. When thinking about ZTO, most investors focus solely on Alibaba’s investment, which is obviously a big deal. But ZTO was a large ($2.1 billion of revenues during the past year) and growing outfit even before that, with sales (up 34%, 45% and 50%) and earnings (0%, 35% and 70%) growth both accelerating during the past three quarters. You can go ahead and buy a half-sized position here—and a breakout above 22 or so (along with a better market environment) could have us filling out our position. 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 ISSUE IS SCHEDULED FOR July 26, 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 2018. 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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