WHAT TO DO NOW: We are continuing to fly a caution flag from the Cabot Emerging Markets Timer. We remain in a defensive stance as we wait for some good news to turn investors’ sentiment around. In today’s update, we are moving our half position in Beigene (BGNE) back to a Buy rating and selling our half position in JD.com (JD).
Both iShares EM Fund (EEM) and the Golden Dragon ETF (PGJ) fell to a correction low on August 15 and began a significant bounce. EEM led the way, pushing above its 25- and 50-day moving averages for the first three days of the week before dipping back below today. The simple conclusion is that investors just aren’t comfortable with emerging market stocks in general and Chinese stocks in particular.
In combination with the new highs being achieved by the major U.S. stock indexes, this swerve away from emerging market stocks is a little frustrating. Our heavy cash position has kept our losses contained, but risk avoidance isn’t anywhere near as much fun as chasing leaders in a bull market. The fact that there’s a clear reason for the decline—the trade war in its various manifestations—is actually slightly comforting, as bad specific news can be countered by good specific news. Stay tuned.
One recent bright spot is the announcement that NIO, a Chinese electric car company, will be coming public in the U.S., probably pricing its initial offering of 160 million ADR shares between $6.25 and $8.25 each. NIO, Inc. is said to have Tesla in its sights and enjoys backing from Chinese internet giant Tencent Holdings and the Chinese government, which sees electric cars as a key part of a solution to the country’s pollution problem. The company started its roadshow yesterday in Hong Kong, and shares are expected to price on September 11.
With the quarterly reports from RYB Education and Bilibili on Monday, we have now officially completed earnings season for our portfolio. We got dinged a couple of times, but generally came through pretty well. Stocks’ short-term movements will now depend on headlines, economic data and corporate news.
The markets were down slightly, although the Nasdaq made a run for daylight in the middle of the day. At the close, the Dow was off 137 points (0.53%), the S&P 500 fell 13 points (0.44%) and the Nasdaq ticked down 21 points (0.26%). The iShares MSCI Emerging Markets ETF (EEM) scored another down day, losing 1.15 points (2.61%) to finish at 42.95.
Everything we said about Alibaba (BABA) last week is still true. Despite trading as low as 166 and as high as 212 over the past year, BABA is still hovering at the same price as in August 2017. The company reported 65% revenue growth in its latest quarterly report, although earnings growth was an anemic 3%. Analysts are looking for 14% earnings growth this year and 33% next year. When Chinese stocks come back into favor, BABA should do well. Patience. HOLD.
BeiGene (BGNE) has rebounded well from its June meltdown, including a retest of its June lows earlier this month. The stock got a little boost from news on August 27 that the China Drug Administration had accepted a new drug application for zanubrutinib, a treatment for patients with relapsed/refractory mantle cell lymphoma. Having a stock that isn’t directly coupled to the Chinese economy and the trade war is a good thing. I will move our half position in BGNE back to a Buy rating. BUY A HALF.
Bilibili (BILI) reported earnings on Monday (August 27) and the news was better than expected. Investors had been worried about the removal of the company’s app from distribution after a review of short-form videos turned up unapproved content. With Bilibili’s app once again available for downloading onto the cellphones of anime, comics and games fans, things are looking up. BILI gapped up from 11.5 to 13 on good volume after the report and nudged ahead to 14 before today’s wet blanket. There’s been a good run of news about Bilibili, and you may want to consider taking a nibble here, but we will officially keep the stock rated Watch until we see a better setup and/or improved market conditions. WATCH.
Huya Inc. (HUYA) hasn’t been leaping higher over the past couple of weeks, but it has recovered some of its 21% post-earnings dip. The stock recovered to as high as 30 on Tuesday, but has given back a couple of points. Probably the best thing about HUYA is that its revenue trends are very strong and its transition to profitability has analysts predicting 56% EPS growth this year and 143% in 2019. The longer HUYA trades sideways, the sounder the base when the market turns around. We’ll keep HUYA on the Watch list. WATCH.
iQIYI (IQ) has taken part in the little rally in emerging market stocks since the collective August 15 low. With the stock up from 24.5 then to around 30 today, it’s easy to recommend a Hold on our half position. In early August, IQ was downgraded to neutral by a couple of analysts, but the news on Monday about a deal with Ctrip.com (iQIYI’s highest-level members will get access to Ctrip perks) sparked a healthy one-day rally on good volume. When investors are ready to return to Chinese stocks, IQ should do well. HOLD A HALF.
We have finally run out of patience with JD.com (JD). The stock has been in a downtrend since its June high at 45 and the selling volume on August 14, 15 and 16 was enormous. The stock tried to put in a bottom at 32, but dipped to 31 today, tripping the 15% loss limit on our half position. Part of the trouble is the general aversion to Chinese stocks, and part is the downtrend in 2018 earnings. Analysts see earnings rising by 94% in 2019, so there’s every chance we will get another crack at JD. But for now, selling is the right decision. SELL.
Since its late-June/early July correction, RYB Education (RYB) has been trading in a tightening range, with support at 19 and a series of lower highs. The stock got a burst of energy from its quarterly report on Monday, but that hasn’t been enough to fight the pressure on Chinese stocks. Given the good earnings reaction, I’ll keep RYB rated Buy a Half. BUY A HALF.
WNS Holdings (WNS) has been trading between 50 and 52 all month, and is now at 51, right between its 25- and 50-day moving averages. The company’s earnings report on July 19 looked like a beat on both revenue and earnings and featured revised full-year guidance, but the reaction from investors was disappointing. We will keep WNS on the Watch list, with an eye on that resistance at 52 as a possible breakout indicator. WATCH.
