Emerging markets are seeing a boost from positive news out of Hong Kong and on the U.S.-China front. Our Emerging Markets Timer has raced higher in recent days, putting it within striking distance of a new buy signal. Our new recommendation comes from an unexpected country, but a well established semi-monopoly industry.
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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 has raced higher in recent days, putting it within striking distance of a new buy signal. You can see in the chart that the iShares EM Fund (EEM) held support in the 39 area for much of August, and recently, has spiked nicely above its lower (25-day) moving average. Now we need to see that 25-day line itself turn up to get a green light.
Examining the chart, the Timer could flash a green light early next week if EEM holds (or extends) its gains in the days ahead. We’ll be watching for it, but importantly, we don’t anticipate these signals—right now, the intermediate-term trend is effectively sideways, so you should still tread carefully.
Hong Kong Backs Down, U.S. & China Talking = Markets Go Up
International markets and our portfolio got a boost this week as Hong Kong’s embattled leader Carrie Lam has finally backed down by fully withdrawing a controversial extradition bill that sparked three months of high profile protests.
This was a dramatic U-turn for Lam (and Beijing) but the protests will likely go on as they have for other demands that are unlikely to be met.
And remember, about 60% of all foreign investment in China goes through Hong Kong. The stakes are high across the board.
In addition, America and China appear to have agreed to resume face-to-face meetings. While welcome news, this is a far cry from a “deal.”
All this has improved our Emerging Market Timer (EEM), it’s in an uptrend, above its 20-day moving average and right at its 50-day moving average.
One portfolio manager I closely watch is Jeremy Grantham, who leads Boston-based asset manager GMO. Grantham is a canny value investor whose model expects emerging-market value stocks to return 9.8% per year over the next seven years.
We’ll strive to have a rough balance between growth and value in the portfolio.
The India growth story – so strong early this year – seems to have hit a bit of a speed bump as car sales fell by over 30% in the first half of 2019, the fastest drop in 19 years. Even Parle, the country’s largest biscuit-maker, has warned that it may have to lay off up to 10,000 people due to poor demand.
I’ll keep my eye on this and the two high quality Indian stocks in the portfolio, which are holding up nicely.
Although I try to make things as simple as possible in describing companies, the big Chinese conglomerates are an intricate blend of a myriad of businesses. Take a look at this chart from Tencent highlighting the company’s many businesses—almost all are related to China mobile services.
Finally, while Mexico has struggled over the past decade as the value of the peso has been halved, there are some great companies that are trading at 80% of their highs. The key is, of course, timing the recovery and identifying catalysts that will unlock value.
One of the Mexican stocks I’m researching is Grupo Televisa (TV), the leading Spanish-language media and content company. Televisa’s programming includes everything from news to live sports.
More on this in coming weeks but today we go to a country at the bottom of my usual wish list with an overlooked and intriguing business model.
Featured Stock
New Recommendation: Yandex (YNDX)
Russia’s Google in Uptrend
Yandex (YNDX) is overlooked by even sophisticated investors and even then, is primarily viewed as only a search engine play that has cornered 57% of the Russian market.
Yandex, which Tim Lutts mentioned at last month’s seventh-annual Cabot Wealth Summit in Salem, Mass., is incorporated and based in the Netherlands but its core business is online search.
That core business is up 20% over the last year, but I believe it has room to run and the market is not recognizing some key growth drivers such as Yandex Taxi, a food delivery service, and its (loss-making) autonomous driving technology through a partnership with Hyundai.
Founded in October 2011, Yandex Taxi is a technology company that operates a ride-hailing and food technology business in more than 300 cities across Russia, CIS, Eastern Europe, Africa, and the Middle East.
In July 2017, the company signed an agreement with Uber to combine their operations in many of these markets. The company also went into the food delivery business with the purchase of Foodfox in December 2017.
Yandex Taxi revenue grew 117% in the last quarter on a year-over-year basis.
Pricing and profitability should increase substantially if and when the company’s purchase of Vezet, which is active in 123 cities and has the potential to add up to 500 million rides in 2020, is finalized. In addition, Yandex Taxi is planning to pursue an IPO in the next two years.
The food delivery business within Yandex Taxi is also promising.
Now, this is Russia, so there’s some regulatory risk, but internet penetration in Russia and surrounding countries has a way to run and is on a growth path.
Yandex’s core search business is healthy and it seems that at current prices, nine times trailing earnings, investors are getting exposure to Yandex’s taxi and food businesses at little or no cost. BUY A HALF POSITION.
Yandex (YNDX)
Schiphol Boulevard 165
Schiphol 1118 BG
Netherlands
31 20 206 6970
http://ir.yandex.com
Model Portfolio
Updates
Alibaba (BABA) shares increased $6 this week as investors liked its latest quarterly results, with revenue jumping 42% over last year comparisons, crushing estimates by $880 million, while earnings per share came in at $1.83, beating Wall Street estimates by $0.34.
In addition, BABA posted an increase of 20 million active customers, up 17% from last year, and higher-margin customer management revenue increased 27% since last year. All-important cloud revenue saw an increase of 66% over last year.
Alibaba’s business is in good health and though the back and forth between China and the U.S. has hurt its share price, its business is mostly insulated from its impact.
Reported revenue during its last quarter was up 51%, or 39% excluding acquired businesses. The volume of merchandise moved on its platform was up 20% and Alibaba’s mobile monthly active users was up almost 18%
The company’s e-commerce business lends itself well to a natural monopoly as BABA has better than a 50% market share. Alibaba’s cloud infrastructure business also benefits from its scale and lower costs.
BABA remains a great core China holding and can get back to the 200 level provided that trade tensions ease. I encourage you to buy a full position in this stock if you have not already done so. BUY.
DBS Bank (DBSDY), a high quality play on growth in Southeast Asia, made incremental gains this week.
DBS is also a solid dividend/income play since dividends have climbed by more than 100% in the last five years. In terms of annualized growth, it’s around 20%.
It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.
Its tentacles reach out through 200 branches in 50 cities. DBS produces steady profit margins, revenue, and earnings and is also increasing market share in consumer and corporate banking.
Wealth management is also a strategic priority and a growing part of its business. Despite all of these strengths, DBS is trading at only 11 times trailing earnings and sports a solid 4.5% dividend yield. Any tangible improvements in the U.S.-China relationship will get this stock moving.
BUY A HALF.
ICICI Bank (IBN) shares seem to be retracing the gains achieved over the last three weeks.
India’s second-largest private lender recently reported a quarterly profit compared with a loss a year earlier, helped by lower provisions and higher retail loan growth. Net profit for the fiscal first quarter was $277 million.
The bank’s corporate loan book grew at a pace of 13% in the quarter, while its retail loan book grew 22% and net non-performing assets (NPA) at the end of the June quarter were down 51%.
IBN is a solid India play as there are still 191 million Indians without a bank account, which means a lot of potential new customers. This is a good entry point to take a stake in IBN if you have not yet done so. BUY A HALF.
Infineon Technologies (IFNNY) shares climbed 7% this week in part due to renewed optimism on U.S.-China trade talks.
Infineon, founded when the company was divided from its Siemens parent in 1999, is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors.
While the company has spun off of its low-margin wireless baseband chip business to Intel, Infineon is in the process of acquiring Cypress Semiconductor (CY) with plenty of cross-selling opportunities for these complementary companies.
This is an excellent time to begin building a position in this high quality stock. BUY A HALF.
LexinFintech (LX) surged 8% this week due to last week’s impressive financial results.
Here are just a few highlights:
• Registered users increased 72% to more than 50 million
• Active users hit 1.3 million, a 153% increase
• Total loan originations rose 57% to reach $3.6 billion
• Its 90-day loan delinquency ratio remains low at 1.49%
• Adjusted net income jumped 35% on a 140% increase in sales
• It now has more than 100 institutional funding partners.
LX operates an online consumer finance platform aimed at young adults in China. More than 90% of LexinFintech’s customers are young, educated, and between the ages of 18 and 36.
This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and based on this and its solid quarter I encourage you to build a position if you have not already done so. MOVE FROM HOLD TO BUY.
Luckin Coffee (LK) shares lost some ground this week, slipping below 20.
Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations in its most recent quarter, and plans to eclipse Starbucks with 4,500 stores by the end of the year.
According to Iyiou’s estimate, Starbucks China sold 400 million cups in 2018, which implies only 311 cups per day per store. Luckin currently operates at 345 orders per store at the day level, an increase of 18% from a year ago and 41% from the previous quarter.
Since Luckin sells its coffee at less than half of the price as Starbucks, it obviously needs to generate more orders to make profits. Keep in mind that while Taiwan consumes 209 cups of coffee per person each year, China consumes only six cups of coffee per person.
This sort of growth comes at a cost as it posted $379 million in operating expenses in the first half of the year while generating $202 million in revenue. It will be a while before the company posts a profit.
However, some big hitters have accumulated substantial ownership of LK.
The American Funds mutual fund company Capital Group has a 15.6% stake, followed by Singapore’s sovereign wealth fund GIC with 13% and Qatar’s Investment Authority at 8.8%.
Luckin is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.
If you have not invested in Luckin, which is an aggressive idea given the absence of profits, I encourage you to do so up to a half position with a 20% trailing stop loss in place. BUY A HALF.
MakeMyTrip Limited (MMYT) was up marginally but has not yet made a major move since being added to the portfolio.
A play on India’s travel industry as well as digital payments and marketing,
MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services.
The company has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group.
If you have not yet done so, I encourage you to take a half position in this India stock at the heart of a growth sector. BUY A HALF.
Rakuten (RKUNY) shares were up 6% during the past week despite delaying for six months the launch of its wireless network. If you haven’t yet bought shares, this would be a good time to buy a half position.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of room for international expansion.
Many of you may not have heard of Rakuten but I assure you that very few Japanese are not part of its ecosystem in multiple ways.
Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank, #1 credit card and one of the country’s leading travel platforms.
Rakuten’s core business is as an Internet sales platform akin to Amazon’s.
The company’s market share in Japan is about 25%.
Rakuten is a growth conglomerate with multiple drivers and a sterling balance sheet with cash and short-term investments worth roughly $12.5 billion. And the stock is trading at just 10 times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 30% return on equity. BUY A HALF.
Sea Limited (SE) had an up and down week and seems to settling in the 31-32 range after hitting a 36 high a few weeks ago.
Its ‘Free Fire’ survival game is a star performer in Asia. In addition, Sea’s e-commerce platform is doing well as JP Morgan reports that some of their Shopee Mall’s platforms have raised their seller commissions from 1% to 5%. SE benefits from high-growth target markets outside of China in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets. Its gaming segment is the key driver and the other is e-commerce, which is equally robust.
I have been recommending that we take some profits over the last three months and last week moved this stock to a hold. HOLD A HALF.
Tencent (TCEHY) was up 5% this week and recently reported solid 20.6% revenue growth for its latest quarter while net profits surged 35%.
Its gaming business, which accounts for 30% of total revenue, was up only 8% but this a big improvement after three consecutive quarters of negative comparisons.
Though many consider Tencent as primarily a Chinese company, this ignores its sizable and growing overseas influence. For example, the company has invested in over 700 companies in recent years and many of the most intriguing of these are outside of China. It is thought that between 30% and 40% of its investments are in non-Chinese companies.
Tencent has been making a series of investments in India including into e-commerce marketplace Flipkart, ride-hailing service Ola, and food-delivery company Swiggy.
Tencent is a great core China/Asia holding and I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
ZTO Express (ZTO) shares were up 8% no doubt due to a combination of good news on the U.S.-China front and a solid quarter as revenue grew 24.6% to $790 million while parcel volume jumped 49% to 3.1 million parcels.
Based in Shanghai, ZTO is one of the largest express delivery companies, not just in China but globally. It offers services to millions of traditional merchants, e-commerce sites, and online sellers using a proprietary tracking system, a state-of-the-art transportation management system, and more than 5,000 trucks, as well as hundreds of business partners. And ZTO serves foreign customers through partnerships with many international express delivery companies. I’m keeping this at hold for now. HOLD A HALF.
Watch List
Baidu (BIDU) shares pulled back to 104. We’ll get interested in BIDU as a value play if the stock falls below 100 or lower.
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Send questions or comments to carl@cabotwealth.com.
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All Cabot Global Stocks Explorer 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.
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