Have you noticed that the chatter concerning the U.S.-China trade deal has gone down considerably? It probably reflects a good reset of expectations.
Our emerging markets timer is positive so it pays to be optimistic and keep investing in outstanding companies with strong fundamentals.
Today’s new recommendation has steadily rising net revenues, strong market position, a robust pipeline of products, an extensive family of patents as well as a strong cash flow and a strong balance sheet.
Cabot Global Stocks Explorer 697
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 positive, with EM stocks acting very well following their early-October low. You can see in the chart that the iShares EM Fund (EEM) hit a higher low than either May or August and has been in a persistent advance since. With the fund solidly above its lower (50-day) moving average, the intermediate-term trend is pointed up.
Of course, the usual caveats we’ve shared during the past few months still apply—there are lots of uncertainties, and there’s still overhead that EM stocks need to chew through. But just going with what we see, many weak hands have been worn out this year and the buyers are in control today.
Profit From the Global Fight Against Cancer
Key Strategic Takeaways
Chile is calling off the Asia-Pacific Economic Cooperation (APEC) summit in Santiago scheduled for mid-November. The cancellation was due to protests, according to Chilean President Sebastian Pinera.
President Trump and Chinese leader Xi Jinping were scheduled to meet at the gathering to discuss a possible “phase one” deal.
Alibaba (BABA) seems to be going forward with its Hong Kong IPO as early as November, according to Reuters. The company hopes to raise $10-$15 billion in the listing, which could happen in late November or the first part of December.
Tesla’s third-quarter positive financials highlighted some interesting trends.
While sales in the U.S. declined, sales outside the U.S. jumped, with China sales growing 64% to $669 million. This may reflect a strategy of focusing on growing its low-cost Model 3 and increasing market penetration in China.
A Wedbush analyst commented that “Musk & Co. are laser-focused on Europe and China for growth, while domestically, core demand is fading relative to other regions,”
The China bears have had the loudest voices lately but a recent Credit Suisse wealth survey paints a different picture.
The Swiss bank’s annual wealth survey released last week found 100 million Chinese ranked in the global top 10% as of the middle of this year versus 99 million in the United States.
The U.S. and China together represent about 37% of global GDP, and over the last year, created new wealth of $3.8 trillion and $1.9 trillion respectively, according to the survey.
Profit From the Global Fight Against Cancer
The biotech industry is known for its high upside potential as well as high risk and volatility.
This is not a field for fainthearted investors; it is capital intensive, and a failed drug trial or a regulatory issue can pour cold water on a promising product.
But once a new product hits the market, the profits can be staggering.
NovoCure is well positioned in the cancer treatment niche.
The spread of cancer is through cellular division (mitosis) of cancer cells.
Chemotherapy damages the genes inside the nucleus of cells. Some drugs damage cells at the point of splitting. Some damage the cells while they’re making copies of all their genes before they split. Chemotherapy is much less likely to damage cells that are at rest, such as most normal cells.
NovoCure is a mid-cap medical devices company that has a growing pipeline of clinical trials to treat cancer patients with its Tumor Treating Fields.
NovoCure’s breakthrough research has proven that cellular proteins such as tubulin and septin are strongly affected by Tumor Treating Fields. During cell division, tubulin and septin must position themselves in a particular way in order for the cell to divide.
Tumor Treating Fields exerts forces on tubulin and septin, preventing them from moving to their correct locations and disrupting cancer cell division.
As mentioned earlier, the company’s product, Optune, is not a drug; rather, it uses specially tuned electrical fields (Tumor Treating Fields) to disrupt the growth and division of cancer cells in tumors.
The company currently markets the treatment system actively in the United States, Germany, Austria, Switzerland, and Sweden, Israel and Japan.
NovoCure has a strong pipeline in the treatment of cancers affecting different parts of the human body. NovoCure’s pipeline includes trials of Optune as a treatment for six other cancers: non-small cell lung cancer, liver cancer, pancreatic cancer, ovarian cancer, liver cancer and mesothelioma.
While the company is still not profitable, net revenue is steadily increasing and has beaten the forecasts twice in the last four quarters.
In the most recent report, for Q2 2019, the company showed a loss of 1 cent per share, well ahead of the forecast 7 cent loss and far better than the year-ago loss of 17 cents. Gross margins came in at an impressive 76%.
Revenues came in at $86.7 million, beating the estimates by 6.4% and NovoCure has demonstrated positive free cash flow in 3 out of the last 4 quarters. Importantly, cash flow is funding investment in its clinical pipeline. NovoCure also owns 145 patents worldwide with expected expiration dates between 2021 and 2037.
Finally, the company has a strong balance sheet and as of June 30, 2019, NovoCure had $286 million as cash with only $160 million in long-term debt.
To sum up, this recommendation is based on NovoCure’s steadily rising net revenues, strong market position, robust pipeline of products, extensive family of patents, and its strong cash flow and balance sheet. BUY A HALF.
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Alibaba (BABA) is expected to release earnings tomorrow morning.
Consensus estimates are that fiscal second quarter 2020 earnings will grow by around 8% to $1.50 per share. Meanwhile, revenue is expected to rise by roughly 33% to $16 billion. Alibaba earnings have disappointed in recent quarters due to a strong dollar and declining margins.
BABA still represents the best near-term and long-term quality play on the rise of China’s consumer class. It dominates China e-commerce and its stock is valued attractively at about ten times expected 2020 earnings.
Alibaba’s goal is to build out from its current 730 million annual active users to over 1 billion users by the end of fiscal 2024. The company’s e-commerce business lends itself well to a natural monopoly as Alibaba has more than a 50% market share.
To get more, Alibaba will need to launch new products and services, tap into new more rural parts of China and expand into new overseas markets.
BABA can get back to 200 level and beyond 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) shares added a point this week in a tough market, which is a win for this high quality conservative play on Singapore and Southeast Asia financial services.
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.
Despite all of these strengths, DBS is trading at only eleven times trailing earnings. Plus it comes with a 4.8% dividend yield. I encourage you to buy at these levels for this great core holding. BUY A HALF.
Grupo Televisa (TV), a recent recommendation, is like having CBS, Comcast and 21st Century Fox tied together in one package.
While TV shares soared 8% last Friday morning after the company’s executives said they would explore stepping up buybacks, it gave almost all of this back this week.
The company owns an appealing group of businesses, including a dominant set of Mexican TV stations; a controlling stake in the country’s largest satellite TV business; and a 36% interest in Univision, the big U.S. Hispanic broadcaster. It’s also Mexico’s top provider of cable TV services and has a profitable programming contract with Univision that is one of its most prized assets.
While the Mexican economy and the peso have not been strong, Mexico features very favorable demographics with almost half of the country’s population what we would term working age. Plus, 27% of Mexicans are under the age of 14. All of this is very positive for TV and I encourage you to begin with a half position. BUY A HALF.
Huya (HUYA), China’s leading e-sports platform and game-streaming brand, had a good week. The firm’s next earnings report is expected November 12.
Huya has large, open pathway to grow beyond China in emerging markets. This is important since 72% of frequent e-sports viewers live outside of the U.S. and Europe and the company is expanding aggressively in Asia-Pacific and Lain America with the logistical support of Tencent.
Its latest quarter posted monthly users growing 57% year over-year to reach 144 million and revenue growth of 94%. In addition, gross margins improved slightly and sales and marketing expenses are only 6% of revenue.
Huya, now trading at 22, could break out above its March 2019 high of 30. This is an aggressive, high-growth China idea so I advise putting in place a 20% trailing stop loss and starting with a half position. BUY A HALF.
ICICI Bank (IBN) shares remained unchanged on the back of mixed second-quarter financials.
Net interest income, revenue and loans and deposits all increased but earnings per share, while positive, declined relative to last year due to higher expenses.
Net interest income jumped 26% year over year and the net interest margin was a healthy 3.64%. Non-interest income was up 21% but this was somewhat offset by operating expenses increasing 24% year over year.
The bank posted robust 22% loan growth in the retail segment with deposits rising 25% as credit quality improved.
IBN is a solid India play in and 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. HOLD A HALF.
Luckin Coffee (LK) is an exciting young growth story but its shares are up only marginally over the last month. It is expected to report its next quarterly numbers on November 11.
With Starbucks (SBUX) pulling back over the past several months, you should take a good look at Luckin Coffee shares, which gained 5% this week. The stock is trading at 21, down from a previous high of 26, but this aggressive company continues to open new coffee shops at a breathtaking rate in China.
Its CFO has publicly stated it plans to be at breakeven by the end of next year, and Luckin believes there is room for more than just Starbucks in a market of 300 million-plus middle class consumers.
Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half of Starbucks’. Most of its shops are set up for takeaway and delivery.
Luckin is an aggressive stock that just went public so I need to see next quarter’s numbers before moving this to a buy. HOLD A HALF.
Marvell Technology Group (MRVL) shares were flat this past week.
Marvell is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware to talk to each other.
Most of Marvell’s customers are located in Asia. Sales to customers with operations in Asia accounted for 85% of Marvell’s net revenue in fiscal year 2019. The Marvell team has created a franchise that is a powerhouse in Storage Networking, embedded processing, security, and encryption.
Marvell is headquartered in Bermuda with operations in the U.S., China, Taiwan, Japan, India, South Korea, Vietnam and several other countries.
It has trimmed its exposure to consumer markets such as PCs and has instead focused on infrastructure markets such as enterprise, data center and service provider networks. Marvel offers products under two broad groups, storage and networking, with the former accounting for 52% of 2018 revenue and the latter 40%.
New markets are emerging in which Marvel has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics.
I have high expectations for this stock and encourage you to start with a half position if you have not yet done so. BUY A HALF.
Rakuten (RKUNY) shares have been treading water since the company announced a six-month delay for the launch of its wireless network.
Rakuten, the “Amazon of Japan,” is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. 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.The company’s core business is as an Internet sales platform akin to Amazon with its market share in Japan at about 25%.
And the stock is trading at just ten times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 19% return on equity. If you haven’t yet bought shares, this would be a good time to buy a half position since it is trading at just 11 times trailing earnings. BUY A HALF.
Sea Limited (SE) shares are sitting at 29, up over 100% in 2019 but down from a high of 36 two months ago.
Sea is a more aggressive e-commerce and gaming play than Alibaba and is focused specifically on Southeast Asian markets representing 650 million consumers.
Popular games are the path to profits, and SE announced a 203% year-over-year revenue gain in Q2 2019, reporting $665.4 million compared to $219.6 million in the prior-year quarter. Quarterly active users (QAU) gained 93% year-over-year, reaching 310.5 million.
SE climbed from 10 in January to a peak above 38 in July, and then pulled back, finally touching its 200-day moving average at 26 in mid-October. Since then, the stock is up sharply.
Sea goes head to head with Alibaba in e-commerce and comes out on top, and its gaming group is also quite strong in Southeast Asia. Over the past two weeks it has developed a tenuous uptrend moving 10% so I’m moving this to a buy.
Sea is expected to report earnings on November 12. MOVE FROM HOLD A HALF TO BUY A HALF.
Yandex’s (YNDX) just-released quarter showed strong top-line growth with overall revenue up 38%. Shares moved up only one point which is less than what I would expect from such strong numbers.
Search and portal related revenue rose 21% as the company maintained a market share above 50%. Yandex Taxi’s revenue surged 89% during the quarter and it is reportedly considering an IPO.
The numbers came in above consensus estimates with net income slightly below expectations. However, strong fundamentals continue to be overshadowed by uncertainties over the ownership law, which we will have to monitor closely.
Yandex is primarily viewed as only a search engine play that has cornered 57% of the Russian market. Alfa Bank has an outperform rating and a price target of $48, implying 58% upside potential.
I’m keeping this stock to a hold until the regulatory issue becomes a bit clearer. HOLD A HALF.
The next Cabot Global Stocks Explorer issue will be published on November 14, 2019.
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