WHAT TO DO NOW: The iShares EM Fund (EEM) is holding above its moving averages, which keeps the Cabot Emerging Markets Timer a bright green. But the weakness in Chinese stocks is hitting the portfolio hard. In response, we have six moves today. We are selling Autohome (ATHM) and HDFC Bank (HDB), and moving Alibaba (BABA), Jupai (JP), Sina.com (SINA) and TAL Education (TAL) to Hold.
There isn’t a clear reason for the market’s falling out of love with Chinese stocks, but it’s an easy change to see. The iShares emerging markets ETF (EEM) has been behaving pretty well, falling from its mid-October high to its 25-day moving average. That keeps our Cabot Emerging Markets Timer positive, but without much margin for further corrections. The PowerShares Golden Dragon ETF (PGJ), on the other hand, shows that Chinese ADRs, which also peaked on October 16, have come under selling pressure since that date and have broken below their 50-day moving average. That weakness in PGJ is a large part of our decision to pare back our Chinese holdings today.
It’s possible that the virtual coronation of Xi Jinping—including writing him into the Chinese constitution, his failure to designate an heir apparent when his second five-year term is up and his demonstrated total control over the Party apparatus—has chilled investors a bit. That’s hard to say.
We will just continue to manage our stocks individually based on what their charts (and the news) tell us.
Earnings season is moving into high gear, with TAL Education (TAL) and HDFC Bank (HDB) already on the books and Baidu (BIDU) reporting today after the close. The other four firm report dates we have are: Alibaba (BABA) on November 2 before the open, Grupo Supervielle on November 8 after the close, Tencent Holdings (TCEHY) on November 15 after the close and Sociedad Quimica (SQM) on November 22 after the close.
As a general rule, you should always assign a mental stop to each stock in your portfolio based on your own buy price.
The markets were mixed today, with the growthier Nasdaq slipping to a loss at the close. When the bell rang, the Dow was up 71 points (0.31%), the S&P 500 rose 3 points (0.13%) and the Nasdaq fell 7 points (0.11%). The iShares MSCI Emerging Markets ETF (EEM) was off 0.31 points (-0.68%), to finish at 45.48.
Alibaba (BABA) has been in correction mode since October 12, when it peaked at a new all-time at 185. That’s a pullback of about 7.5%, which isn’t unreasonable. We expect BABA to trade sideways ahead of earnings, which will be released on November 2 before the market opens. The consensus numbers for Alibaba are revenue of $7.86 billion and earnings of $1.04 per share. Alibaba is still one of the premier stories in China, but we will put BABA on Hold for now as a precaution against further declines. HOLD.
Autohome (ATHM), which had been holding support at 57 since the start of October, dipped below 57 today. The portfolio bought at 43, so our profit is still substantial. But the stock has never really recovered from its double top at 67/68 in August and September, and nervous investors don’t seem to be getting over the resignations of the firm’s president and CFO. With that in mind, we will sell ATHM and hold the cash. SELL.
Baidu (BIDU) actually caught a small updraft today after a little more than a week of a moderate correction. Baidu will be reporting its Q3 results tonight after the close, with analysts predicting revenue of $3.56 billion and earnings of $2.04 per share. We will stay on Buy, but if you’re not in already, it’s a good idea to wait to see the reaction before jumping in with a major position. BUY.
China Lodging Group (HTHT) announced on Monday that it will pay a special cash dividend of 64 cents per American Depositary Share (ADS) to holders as of December 4. The dividend will be paid on or around December 15. The company also announced an offering of convertible senior notes of up to $425 million, with the proceeds going toward paying off existing debt and financing a capped call transaction. HTHT dipped to 123 early in today’s session, but rebounded quickly to above its 25-day moving average. Still no word on the company’s Q3 earnings date, but it will probably be around the middle of November. BUY.
Grupo Supervielle (SUPV) has stayed true to its pattern of popping higher, then giving part of its gains back in a quick correction. The stock tagged 27 on Monday and Tuesday and has pulled back less than a point from there. Grupo Supervielle will report its latest quarterly results on November 8, with the consensus numbers at $197.6 million in revenue and 44 cents per share in earnings. The stock’s temporary weakness looks like a good buying opportunity. BUY.
HDFC Bank (HDB) reported earnings on October 24, and the market reaction wasn’t positive. The stock dipped from its 95 close the day before to 89 on October 25. HDB rebounded to 93 at today’s open, but fell back closer to 90 as the session wore on. The numbers appeared to meet analysts’ estimates, but there was pressure on margins, which may have discouraged investors. Given that HDB has been trading sideways since the beginning of August, we will sell HDB, which is trading a point or so above where we bought it. That’s not how a growth stock should act. SELL.
The timing of our investment in Jupai Holdings (JP), which was officially made at 26.9 on October 20—three points higher than the stock’s close on October 19, the evening we recommended it—was unfortunate. We have always known that volatility is a knife that cuts both ways, and JP closed at 13 on the last trading day of September. We have come close to selling, but will give the stock another day or two to right itself, as the opportunity here is tempting. HOLD A HALF.
Sina.com (SINA) has been battling with Aristeia Capital, a hedge fund that owns 3.5% of Sina’s shares and is seeking a seat on the company’s board. It’s hard to determine how much of SINA’s recent weakness is due to concern about this conflict and how much comes from general weakness in Chinese ADRs. Weibo, Sina’s spinoff messaging service (and one of Sina’s biggest assets) has announced a huge offering of convertible senior notes, with the $800 million proceeds to be used for acquisitions. We have a loss of about 8.5% at this point and won’t tolerate much more weakness. We’ll hold for now. HOLD.
Sociedad Quimica y Minera (SQM) rode its 25-day moving average higher from late September through the middle of October and it’s been trading flat over the past eight trading sessions. The company has set November 22 (after the close) for its Q3 earnings call and analysts estimate revenue at $519 million and EPS at 41 cents. We will stay on Hold until we see evidence that SQM is back on the move. HOLD A HALF.
TAL Education (TAL) released its Q3 results before the market opened today and the results didn’t impress investors. The company reported a 68% jump in revenue (to $456 million) and flat earnings at 12 cents per share. Enrollments were up by 101%. Management’s guidance for the next quarter were pretty much in line with analysts’ expectations. TAL was already losing ground following a report by rival New Oriental Education earlier this week that beat on revenue but missed on earnings. The portfolio bought TAL at a split-adjusted price of 8 back in December 2015, so our profit cushion is adequate to hold through this pullback. On the other hand, you need to manage your position based on your portfolio’s buy price. I will change the rating of TAL to Hold, but you should read the thoughts on loss limits above to make your own decision. HOLD A HALF.
Tencent Holdings (TCEHY) has rounded off calmly under resistance at 45 and is sitting right on top of its 25-day moving average. With earnings scheduled for after the close on November 15, we think this is a good spot to pick up shares. There are no analysts’ estimates to work with, so when the report comes, we will need to watch management’s comments and projections very closely. BUY.
YY Inc. (YY) pushed to a new high at 98 earlier this month, so its three-day step down to its 25-day moving average isn’t alarming. Management hasn’t scheduled Q3 earnings yet, and it’s possible that the stock will trade flat until the numbers are revealed. We think it looks like a fine buy right here. BUY.
