WHAT TO DO NOW: The iShares EM Fund (EEM) is well on top of its moving averages, which keeps the Emerging Markets Timer firmly positive. We have one change tonight: We’re moving Weibo (WB) back to a Buy rating.
The new investment year is off to a good start, with all the major U.S. indexes hitting new all-time highs and both emerging market and Chinese ETFs doing the same. While there has been increased volatility in the Golden Dragon ETF (PGJ) that tracks Chinese ADRs, the market’s upward momentum isn’t in doubt. The negatives, like the Fed’s presumed three rate hikes, Britain’s exit from the EU and North Korea’s persistent belligerence, have all been fed into the market’s computer and been calculated as less important than the effects of U.S. tax reform. Investors are in a good mood, and only the fear that they may be in too good a mood is getting any real traction. Everyone knows that there will be a correction at some point, but they are making hay while the sun shines.
The Cabot Emerging Markets Timer is positive at this point, with EEM a little over 7% above its lower (25-day) moving average. That’s a little extended, but not dangerously so. There may be a little froth in the market, but not enough to warrant pre-emptively taking profits or limiting new buying. It’s a healthy market.
The next major events for the stocks in our portfolio will be Q4 and 2017 earnings reports. So far, we have three companies that have set firm dates for their reports. TAL Education will release results on January 25 before the market opens. Alibaba’s report will come on February 1 before the open and Grupo Supervielle will announce on February 19 after the close. Although we will keep track of analysts’ expectations for these reports. As usual, the most important factor in our management decisions will be the charts that show how investors react.
The markets were slightly down for the day, with the Dow taking the greatest hit, closing down 98 points (0.37%). The S&P 500 slipped by 4 points (0.16%) and the Nasdaq was essentially flat, losing two points (0.03%). The iShares MSCI Emerging Markets ETF (EEM) edged up 0.06 points (0.12%) at 50.03.
58.com (WUBA) celebrated the New Year with a run from its 71.5 close on December 29 to 85 on January 9. WUBA has slipped back to near 80 since that high, which looks like a good entry point. BUY A HALF.
Alibaba (BABA) also made a good run to start the year, climbing from its 2017 close at 172 to a scant new all-time high at 192 on January 9. The correction for Chinese stocks in general on January 16 took a substantial bite out of BABA, but it has leveled out over the past couple of days and is still above its moving averages. It looks like it will take some excellent numbers and/or guidance when Alibaba reports results on February 1 to get the stock moving again. (Analysts are forecasting revenue of $12.35 billion and earnings of $1.65 per share.) If BABA’s report is well-received, it will have a long consolidation base to build on. We’ll stay on Hold, but if you’re not in yet, you can start a small position ahead of earnings. HOLD.
Autohome (ATHM) broke out of a four-and-a-half month consolidation on the first trading day of 2018 and hasn’t stopped yet. The stock reached an intraday high on January 16, and its momentum is impressive. Look for a pullback of a point or two to get started. BUY.
Baidu (BIDU) is in a situation similar to BABA, consolidating after a gap down on October 27 with support around 230. The stock has finally filled the gap from that event, which is constructive. We sold half of our position in BIDU in last week’s issue, both because the stock isn’t a real leader and because we wanted to avoid increasing the portfolio’s exposure beyond 100%, which would be the equivalent of going on margin. If Baidu beats expectations when it reports on February 1, BIDU will have an excellent base to work with. (Analysts are looking for revenue of $3.57 billion and earnings of $2.05 per share.) Baidu is likely to be a long-term winner, but our horizon is measured in months, so the earnings reaction will be very important. HOLD A HALF.
China Lodging Group (HTHT) pulled out of a sharp correction at the end of November and rallied from 106 to 146 at the end of the year. Since 2018 began, HTHT has been digesting those gains, pulling back in a controlled way to support at 150. The company’s aggressive expansion strategy is likely to produce another great quarterly report, so this mild correction looks like a good entry point. BUY A HALF.
GDS Holdings (GDS) has been a challenge, falling from 25 on January 9 to 20 on January 16, then blasting off higher over the past two days on excellent volume. We knew GDS was volatile when we bought it, and we’re glad that our profit cushion allowed us to stay in the position. The business outlook is rosy, and if you can take the wild swings (a stock that can soar 10% in a day can also dip quickly), the stock looks good. BUY.
After trading flat at around 30 from the middle of December until January 9, Grupo Supervielle (SUPV) staged a four-day rally that ended at 33 on Tuesday. SUPV may trade sideways for a while as investors await quarterly results on February 19. Estimates call for $218 million in revenue and 52 cents per share in earnings. You can buy on any weakness. BUY.
Jupai Holdings (JP) looks like it wants to tighten up in the low 20s after a correction from 29 in October to 15 in early December. The stock’s rally to 24 last week was encouraging, but didn’t clear any of the October/November overhead. We like the Jupai story, and will keep watching. WATCH.
Melco Resorts and Entertainment (MLCO) has been surging and correcting since late August as the stock’s sensitivity to gross gambling revenues in Macau make it something of a weathervane. The stock is back near our buy price and we’re happy to stick with it. BUY.
TAL Education (TAL), our oldest holding, is still dealing with the aftermath of its October 26 gap down after a disappointing earnings report. The stock filled its October gap with a rally in early January, but fell below its 50-day moving average after a three-day correction that pulled it to 28 last Tuesday. Earnings are due a week from today and the fate of our half position (now on Hold) will very much depend on the reaction to that report. Not even our 300% profit will keep us in the stock if it takes another leg down. Analysts are expecting revenue of $419.2 million and earnings of six cents a share. HOLD A HALF.
Tencent Holdings (TCEHY) rallied to a new all-time high near 58 yesterday and looks to be in great shape. A Bloomberg article recently pointed out that Tencent is widening its lead over Facebook as the most valuable social networking company in the world. With investors apparently ready to move back into Chinese tech stocks, TCEHY looks very good. Look for normal weakness to initiate a position. BUY.
Weibo (WB) traded sideways from September through the end of 2017, but has caught fire in 2018. WB is up from its open at 105 on January 2 to near 130 in recent trading. We’ll move the stock back to a Buy rating, but advise that you should either start small or wait for a pullback of a few points before initiating a position. Weibo has been growing revenue at a lightning fast clip and has a string of triple-digit earnings growth that stretches back at least 12 quarters. With investors moving back into the stock, it’s a good time to buy. BUY.
Since YY Inc. (YY) returned to its trend line in November, the stock has been a model of consistency. YY dipped below its 25-day moving average to 99 on December 6, but has ridden that average higher ever since, powering ahead to 137 in recent trading. There’s a correction waiting out there somewhere, but we will stick to the message of the stock’s momentum. YY is a Buy, but look for one of its occasional down days to get started. BUY.
ZTO Express (ZTO) was sold in last week’s issue. The stock has improved by a point since then, but is still tumbling around at its November prices. SOLD.
