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Cabot Emerging Markets Investor Bi-weekly Update

The iShares EM Fund (EEM) has been through a bad week, pulling it decisively below its 25- and 50-day moving averages. It’s a clear red light, and we’re taking action to reduce our exposure while we await both quarterly earnings reports from our holdings and a return of the buyers to emerging market stocks.


WHAT TO DO NOW: The iShares EM Fund (EEM) has been through a bad week, pulling it decisively below its 25- and 50-day moving averages. It’s a clear red light, and we’re taking action to reduce our exposure while we await both quarterly earnings reports from our holdings and a return of the buyers to emerging market stocks. We sold Vipshop Holdings (VIPS) in a Special Bulletin on Tuesday and moved PagSeguro (PAGS) to a Hold rating. In the portfolio today, we’re selling Azul (AZUL) and moving our half position in 51 Job (JOBS) to a Hold rating.

Markets have been under pressure from one kind of threat or another for a few months now. Most recently, investors see a threat from rising interest rates that may increase the attractiveness of fixed-income investments, sucking money away from equities. The trend of stocks had been sideways with a tightening trading range since late January, but during the past week (before today) the sellers appeared. And while investors are still happy to jump on a quarterly earnings winner, the general trend is toward a risk-off stance.

The iShares EM Fund (EEM) took a hit last month on March 22 and 23 that dropped it below its 25- and 50-day moving averages. EEM found support at that point and traded sideways for a few weeks, but started another leg down last Thursday that pulled it below its 200-day moving average before today’s positive action gave it a little boost. If you have any doubt about the strength of move away from emerging market stocks, all you have to do is compare the chart of any given EM stock with the chart of EEM. You’ll likely see a close parallel between the performance of the ETF and the performance of individual EM stocks. It’s a good illustration of why we put so much emphasis on the power of the market to affect individual stocks.

eem chart

The markets were up today, with all three major indexes scoring solid gains. At the close, the Dow was up 238 points (1.00%), the S&P 500 was up 28 points (1.04%) and the Nasdaq gained 115 points (1.64%). The iShares MSCI Emerging Markets ETF (EEM) was up slightly, gaining 0.67 points (1.45%) to close at 46.97.

51Job (JOBS) moved out to an all-time high in the middle of last week, but hit a definite air pocket the very next day, skidding straight down to the mid-80s. We bought the stock at 88, so our loss is still within reasonable limits. On the other hand, this kind of free-fall, even when it’s in lockstep with the market, is alarming and needs to be taken seriously. Accordingly, we will move our half position in JOBS to a Hold rating. HOLD A HALF.

Alibaba (BABA) is one of the giants of the Chinese internet space, but that doesn’t insulate it from the widespread selloff in all emerging market stocks. BABA is now trading at the same price it showed in August 2017—our big profit in the stock has allowed us to hold on, but we need to see buyers appear soon or else we’ll be forced to move on. The decisive moment will probably come when Alibaba reports its March quarter and full fiscal year results on May 4 before the market opens. Estimates call for $9.27 billion in sales for the quarter, with earnings coming in at 86 cents per share. HOLD.

Autohome (ATHM) has been a nice pocket of strength in a tough market. The stock actually nicked 100 briefly last week and has held well atop its 25-day moving average. We’ll keep ATHM rated Buy, but in light of the shaky condition of the market, keep any initial investment small. BUY.

Azul S.A. (AZUL) hasn’t been the subject of any negative headlines, but its stock was hit by a steep, two-day correction on Tuesday and Wednesday that dropped it from 32 to 29. It wasn’t an especially high-volume move, but it took AZUL to within a hair of our mental stop at 29. The stock has shown a little resilience in today’s supportive market environment, but we’re still going to heed the message of the Cabot Emerging Markets Timer and sell AZUL. We will hold the cash. If the company’s earnings report on May 10 (before the open) proves constructive, we may consider buying back in. But for now, selling is the right move. SELL.

BeiGene (BGNE) is doing an outstanding job of ignoring the weakness of the broad market. BGNE has been trading sideways in a tight range since late March. We like the relative strength of the stock, the company’s strong pipeline of candidate drugs and its tie-up with Celgene. We will keep the Buy a Half rating, but you should be buying only if you have a sizable cash position. BUY A HALF.

GDS Holdings (GDS) is another stock that’s showing its strength by ignoring the general downtrend of the market and etching a long sideways move in a tightening range. This means that GDS is doing a good job of protecting our profit while we wait for the next catalyst, probably Q1 earnings that are likely to be released within three weeks. HOLD.

iQIYI, Inc. (IQ), a leader in the Chinese entertainment industry was featured in last week’s issue. We will continue to Watch until the market regains its footing. WATCH.

PagSeguro (PAGS) is still relatively wet behind the ears, having come public in late January. We put our half position on Hold in a Special Bulletin on Tuesday as the stock was being driven lower by widespread pressure on all emerging market ADRs. Given its relative youth, I want to give PAGS every chance to find support and get going again. A combination of the overall market and the company’s next quarterly report (no set date yet) will likely make the decision. HOLD A HALF.

At some point, the failure of Petrobras (PBR) to break out of its 13.5–14.5 trading range will be a red flag. After all, oil prices are strong and a company with the kind of reserves Petrobras controls should be climbing the charts along with other leaders in the industry. The extra layer of political risk from the long-running Brazilian corruption scandal is probably to blame. All told, though, the sideways move in recent weeks looks normal given the prior run-up. We’ll keep our half position in PBR rated Buy while we wait for the next catalyst. BUY A HALF.

TAL Education (TAL) reported its latest results this morning for the quarter that ended in February. The report was a strong one, with revenue of $504 million (up 59%) and earnings of 14 cents per share (up 75%). Analysts had been expecting revenue of $485 million and nine cents per share in earnings, so the beat on both top and bottom lines was substantial. Coming after New Oriental Education’s (EDU’s) solid earnings report on Tuesday, TAL Education’s great report is good news for the Chinese private education business. We will keep TAL rated Hold for now, as the pressure on Chinese stocks is still heavy, and we’d like to see the stock break out above its recent resistance at 38 before putting it back on the Buy list. HOLD A HALF.

Tencent Holdings (TCEHY) fell to its 200-day moving average on Wednesday and its 25- and 50-day moving averages are heading down. There’s no denying the company’s size or its revenue and earnings growth potential. But we won’t let a stock eat away at our profit forever. We sold our half position in TCEHY in last week’s issue and booked our substantial profit. SOLD.

Vipshop Holdings (VIPS) was sold in a Special Bulletin on Tuesday, as the stock tripped our 15% loss limit. The stock has continued to slip lower, so the sell looks like the right decision. As with many of the stocks we’ve jettisoned from the portfolio, the most important factor in our decision had nothing to do with the company’s growth or profitability. Keeping losses low is the ruling reason, especially when the trend is down. SOLD.

Weibo (WB) got a small boost today, which kept it above its 200-day moving average. The company has scheduled its Q1 earnings report for after the market closes on May 9, with analysts forecasting revenue of just over $342 million and earnings of 47 cents per share. Having sold half of our position at a slight profit, we feel comfortable waiting for the quarterly results as long as the stock doesn’t force our hand. HOLD A HALF.