Things are looking up for emerging market equities. They’re not fully healthy, yet, but there has been definite improvement since the August 16 low. In today’s issue, I have some thoughts about whether or not this is a bottom in emerging markets, and how we will know one when it appears. I also have an intriguing new IPO for you to consider.
Cabot Emerging Markets Investor 666
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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 downtrend in EM stocks reasserted itself in recent weeks, which keeps our Emerging Markets Timer firmly negative. After a decent July, the iShares EM Fund (EEM) took another leg down earlier this month, hitting new lows around 41. That action easily erased the shaky buy signal from a few weeks back; the intermediate-term trend is clearly down.
That said, we’re not sticking our heads in the sand—the bounce since EEM’s low has been solid, and while a new buy signal isn’t imminent, the fact that the fund dipped under its June low but has snapped back is a ray of light. The focus now is on capital preservation and building a Watch List of stocks that can make big moves during the next uptrend.
Bottom?
The Cabot Emerging Market Timer is based on Cabot’s unusual approach to market timing. When most financial commentators talk about market timing—especially the ones who insist the loudest that it can’t be done—they mean anticipating what the market will do in the future. Most especially, they insist that you can’t know what the S&P or the Dow will do tomorrow. So don’t even think about trying to jump in and out of the market.
When I (and the other Cabot growth analysts) talk about market timing, I am absolutely not referring to predictions about the future. Rather, I’m referring to knowing, with as much certainty as possible, the state of the markets today.
If I can confidently say that markets are in an uptrend today, I think I have a useful piece of information. Knowing the direction and tone of the market today is news I can use, because it tells me whether the market is working in my favor or against me.
Both the MSCI Emerging Markets ETF (EEM) and the Golden Dragon China ETF (PGJ) have been in strong downtrends, EEM since late January and PGJ since the middle of June. Both hit a correction low on August 15, and both have been bouncing since then.
Neither of these ETFs has climbed back on top of its 25- and 50-day moving averages, so I know that the intermediate-term trend of the stocks in my investment universe is down. The trend may be improving, but it’s still down. And that’s a valuable piece of information I can use in making decisions about new buying and how to handle stocks that are in the portfolio.
Of course, I notice how close EEM is to its moving averages, and that another good day or two might just get it back above them. But in order to get a new Buy signal, the bottom moving average must be trending up, and that will take a little longer. (The 25- and 50-day MAs are right on top of one another now, but that will change.)
The good news from Alibaba’s earnings report this morning could give emerging market stocks a shot of energy. BABA is one of the most widely owned and followed stocks in China, and good news there will sprinkle a little pixie dust on the whole sector.
But despite these welcome rallies—EEM is up around 5% from its August 15 lows and PGJ is up closer to 8%—we don’t have a Buy signal. And it’s important to keep that in mind, no matter how tempting it is to say that the bottom is in on the correction in emerging market stocks.
There’s an old market maxim that says, “If you think it’s a bottom, you’re too early. If you know it’s a bottom, you’re too late.”
It’s a saying from the same family that tells you that nobody (except liars) buys at the bottom and sells at the top of a stock’s movement. Bottoms and tops are only visible in rear-view mirrors, but we think the Cabot Emerging Market Timer will generally give us a quicker answer and will always give us a more confident answer than any other method.
Featured Stock
Waiting for the Big One
Bilibili (BILI)
In recent weeks, I’ve mentioned again and again the weak action in emerging market stocks, but there are actually emerging market stocks out there that are going up. Indian software company Infosys (INFY) and Taiwanese chip designer Silicon Motion (SIMO) are examples. But Cabot Emerging Market Investor isn’t about finding steady, dividend-paying, long-term investments.
Aggressive growth investing is our meat and potatoes, and that’s about finding stocks with the potential to turn into big winners, and INFY and SIMO (although we’ve had both in the portfolio over the years) don’t seem to be positioned for that kind of action right now. (But if you like the idea of a stable company with steady growth and an attractive dividend yield, I’d say INFY is the better choice.)
I would rather add a recent IPO with great prospects to the watch list while we wait for the trend in emerging markets to turn up, and that’s exactly what BILI is.
Bilibili is an online entertainment company that caters specifically to the tastes and interests of China’s Generation Z, those born between 1990 and 2009. The company launched its website in 2009, and began building a community of young users who were fascinated by anime, comics and games, a content category labeled as ACG.
While ACG remains a part of Bilibili’s offerings, the website has broadened into a full-spectrum entertainment experience that includes licensed videos, live broadcasting and mobile games. The company’s broader offerings include a growing supply of professional user-generated content (which uses the acronym PUGC).
One technological differentiator for Bilibili’s users is a “bullet chatting” feature that enables live commenting by those who are viewing online content. The stream of thoughts and feelings displayed during broadcasts is said to build a bond among the viewing community.
In the two full years for which we have data, Bilibili’s revenue trends have been great. After a 284% jump in 2016, revenue soared by 377% in 2017 and 124% in Q1 2018.
The company isn’t profitable yet, but its Q1 earnings report showed 77.5 million monthly active users (MAU), which was a 35% increase from the prior year, and average monthly paying users reached 2.5 million, a 190% year-on-year. increase. Revenue from advertising was up 144% and revenue from live broadcasting and value-added services rose 151% from 2017 levels.
When the company reports its Q2 results next Monday (August 27, after the market closes), analysts are expecting revenue of $148 million and an EPS loss of three cents per share. Analysts are also forecasting profitability for the company in 2019.
BILI was priced at 11.5 before its IPO, but came public on March 28 at 9.8 and traded sideways for about a month before starting a strong rally in May that ran to near 22 on June 18. The stock’s peak coincided with the peak for the Golden Dragon ETF (PGJ) that tracks Chinese ADRs. Both BILI and PGJ bounced downhill until August 15 (Wednesday of last week), when a quiet rebound started.
BILI has now had its post-IPO rally and its post-IPO correction and is trading right about where it came public. There may be more volatility ahead, especially with earnings due in just a couple of days. But we like the story and the company’s strong identification with a specific slice of the Chinese demographic. If management makes the right choices in content, this could be big.
And just so you know, on July 30, Bilibili announced a significant slap on the wrist from China’s Central Cyberspace Administration (CCA) when its app was ordered removed from July 26 to August 25. As is usual in these cases, the company announced its full cooperation, saying that it will “continue to proactively fulfill its corporate social responsibility, enhance its self-regulation and welcome public supervision to provide better content services for users.” That’s how things work in a country with stringent content controls and self-policing requirements. Analysts don’t seem concerned.
We’ll add BILI to our watch list for now as we await improved market conditions and next week’s earnings report. WATCH.
Bilibili (BILI)
Guozheng Center
Building 3 No. 485
Zhengli Road Yangpu District
Shanghai 200433 China
86 21 2509 9255
ir.bilibili.com
Model Portfolio
Invested 30% Cash 70%
Updates
Early August was punishing for emerging market stocks in general (and Chinese stocks in particular), easily erasing the nascent green light from late July and driving many stocks lower. With the trend still pointed down, we’re keeping our portfolio in a cash-heavy stance.
As we mentioned on page 1, though, we’re not sticking our heads in the sand either. The recent snapback has been a plus, with the iShares EM Fund (EEM) back above its June low. The selling in Chinese stocks may have reached a crescendo earlier this month with all the negativity there. And we’re begining to see some individual stocks in the early stages of setting up.
Of course, we’re not predicting anything, and given the evidence, we advise practicing patience. But just remember that, after a horrible few months for the EM space, another rally is out there somewhere, so keep your eyes open
Alibaba (BABA) held support in the mid 160s for the umpteenth time this year, bounced with the market and, initially today, rallied nicely following a solid quarterly report. Revenues soared 61% in local currency (65% in U.S. dollars), thanks to a 61% bump in its core ecommerce businesses and a 93% gain in its cloud computing segment. Earnings were basically flat from a year ago due to the company’s big investment spree, but that was baked into the cake a while ago; free cash flow totaled nearly $4 billion in the quarter. The stock opened higher, then dipped to 174, edged back to 178 and finally finished the day below 173. We will hold on, but will be keeping a close eye on support in the high 160s. HOLD.
Autohome (ATHM) was sold in last week’s issue after it sank below its longer-term 200-day line. And, interestingly, the stock has been unable to get off its knees in recent days despite the bounce in EM stocks. We think there will be much better names to own once the trend turns back up. SOLD.
BeiGene (BGNE) was one of the few stocks that actually hit a higher low this month (it was down at 145 in late June, but “only” fell to 155 last week), which is a plus. The firm has been quiet on the news front since August 9, when it announced its quarterly results and the start of a key Phase III study for its key drug candidate. With a profit on our half position, we’re hanging on. HOLD A HALF.
Huya Inc. (HUYA) is still working to rebound after it got whacked on earnings last week. Still, we’re very comfortable keeping the stock on our watch list as the fundamental potential is huge, the recent numbers are steady and excellent (revenues have grown between 130% and 133% each of the past three quarters), with the sub-metrics (paying users of 3.4 million, up 41% from a year ago; mobile users up 25% to 43 million) also looking good. A move back into the mid 30s (the stock is hugely volatile so such a move isn’t as large as it seems) would be very encouraging, but we’ll just see how it goes. WATCH.
iQIYI (IQ) continues to slip with Chinese stocks, but we’re still OK with it given that is sank as low as 24.5 last week before snapping back to 30 this morning. As with HUYA, a move back into the mid 30s would be very intriguing, making the recent dip look like a big shakeout. If you own a little, we advise sitting tight. HOLD A HALF.
JD.com (JD) is still a Hold, but if it doesn’t show life soon we might cut the loss. When we bought shares, they were holding support near 35, but not only did JD crack that level during the recent selloff (not a mortal sin given the wipeout among Chinese stocks), but volume was giant on the break and there hasn’t been much of a rebound since. The news flow remains fine, but we’re keeping our half position on a tight leash. HOLD A HALF.
RYB Education (RYB), has tested and thus far held the lower end of its three-month trading range, which is impressive action given the environment. This is a thinly traded stock, and earnings are due out August 27, so there’s certainly risk. But we like what we see—hold on if you own some, and if you want to nibble, we’re OK with that here. BUY A HALF.
WNS Holdings (WNS) rebounded more than halfway back from its late July fall and has tightened up nicely during the past couple of weeks despite the market’s shenanigans. It might need more time to consolidate regardless of what the EM space does, but WNS has been a longer-term winner and we expect slow, steady earnings growth for a long time to come. WATCH.
We got knocked out of ZTO Express (ZTO) last week after its plunge. Unlike ATHM, though, ZTO has rebounded decently, and we still think very highly of this story. Right here, there’s nothing to do if you sold—but we’ll be keeping an eye on it. If it sets up again during the next market uptrend, we could revisit it. SOLD.
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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 September 6, 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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