WHAT TO DO NOW: Emerging market stocks have been attempting to bounce after a sharp selloff in late June, but haven’t been able to hold up to investors’ fears of a trade war between the U.S. and China. We have two moves in the portfolio this week: We’re selling 51Job (JOBS), which has kept drifting lower and we’re lowering our half position in ZTO Express (ZTO) to a Hold rating.
U.S. markets have perked up, with the major indexes all enjoying decent advances in July and sitting above their 25- and 50-day moving averages. Fears of an escalating trade war between the U.S. and China continue to cause concern, but not enough to keep U.S. stocks from powering ahead.
The situation with emerging market stocks is much darker, with both the iShares EM Fund (EEM) and the China-centric Golden Dragon ETF (PGJ) solidly below their 25- and 50-day moving averages and most stocks feeling the heat. EEM made a little run at its lower (25-day) moving average this week, but the Fund’s moving averages are trending down (it’s been trending down since late January, so it will take a while to get the uptrend we need to improve our rating of the market.
Earnings season will likely swamp all other market influences in its wake for the next month or so. The portfolio had its first report of results from the June quarter, and it was a little odd. WNS Holdings (WNS) released its report this morning before the market opened, and the reaction was decidedly negative, then improved all day. Fortunately, WNS is on our Watch list, so there was no exposure. The only other firm report date I have is for ZTO Express (ZTO) on August 8 before the open. I’ll let you know about future reports as they are announced.
The markets dithered in the red all day before slumping in the last two hours. At the close, the Dow was down up 134 points (0.53%), the S&P 500 lost 11 points (0.39%) and the Nasdaq off 29 points (0.37%). The iShares MSCI Emerging Markets ETF (EEM) was down a substantial 0.54 (1.23%) to close at 43.34.
51Job (JOBS) is a puzzle. The stock, which got great breakout moves in early March and early May, has been in a downtrend since early June, falling from a high of 115 to below 90. There is no news in the form of downgrades or bad business news to explain the persistence of this downtrend. We have been extremely patient with the stock, especially because the portfolio is already heavy with cash. But with JOBS right at our breakeven point, there’s no excuse for waiting to sell until we get a loss. We will sell our half position in JOBS and hold the cash for now. SELL.
Alibaba (BABA) remains one of the biggest business success stories in China, but investors don’t like the idea of being in China right now, and BABA has been hacking around in a range between 170 and 210 since November 2017. The stock caught a downgrade from a Gabelli analyst on July 11, but the real problem here is the potentially damaging trade war between China and the U.S. Alibaba isn’t especially vulnerable to damage from such a conflict, but the possibility is keeping the whales from seeking exposure to Chinese stocks in general. We’re happy to sit with our substantial profit until BABA gets back on track, but it’s still frustrating. HOLD.
Autohome (ATHM) traded up to just under 120 in June, but was hit by a five-day selloff on rising volume late in the month. ATHM has recovered well, building a sideways pattern with a core around 100. It’s the same story as many of our Chinese holdings; Autohome is a Chinese domestic business, and it would take either a big hiccup by the economy or a sizable miss on quarterly results to dent the stock. We’ll keep the stock rated Hold. HOLD.
BeiGene (BGNE) went over the falls in June, but found support at 150 and has acted well in July. BGNE has now tightened up into a narrow range at around 165, which looks like a good start to a new base. We’re fine with a Hold rating for our half position. HOLD A HALF.
GDS Holdings (GDS) has gained back every point of its June correction and is hanging around its resistance at 45. There hasn’t been any news, so it’s likely that the stock will trade mostly sideways until earnings come out, probably in early August. You can buy a little ahead of earnings, but look for normal pullbacks to get started. BUY.
iQIYI (IQ) has been building a well-shaped cup formation since it found a bottom around 30 in mid June. The company may be suffering from a little guilt by association based on the disappointing results from Netflix. (When you’re nicknamed “the Netflix of China,” bad news for NFLX is also bad news for IQ, whether that makes logical sense of not.) We will continue to hold our half position, but if the stock can recover to around 40 and we get any kind of support from the market at all, there may be an opportunity here. HOLD A HALF.
JD.com (JD) continues to languish below its 25- and 50-day moving averages. Investors are spooked about Chinese stocks right now, but when things calm down a bit, JD will be near the top of our watch list. WATCH.
WNS Holdings (WNS) reported its quarterly results this morning, and the results looked good, with solid beats on both revenue (around $200 million vs. analysts’ estimate of $194 million) and EPS (59 cents vs. analysts’ consensus of 51 cents). From the stock’s big dip at the open, it looked like the market had turned thumbs down on WNS. But the stock found buyers most of the day before trailing off in the last hour, recovering all but two points of its price to close the day only down slightly. This kind of swing may be a sign that investors took a second look and liked that they saw. If the rebound continues, we will act accordingly. WATCH.
ZTO Express (ZTO) will be reporting its latest quarterly results on August 8 before the market opens. Analysts are expecting a hair under $653 million in revenue and 23 cents per share in earnings per share. The stock has been unusually volatile recently, with a nearly 9% jump higher on July 16 that pushed it to new highs and a big dip this morning that pulled it right back down to our buy price. This is a very sound company in business terms, and I expect it to do well when investors’ attitude toward China improves, but the big volatility is too risky for buying right now. I’ll switch our half position to a Hold rating. HOLD A HALF.
