New Name, No Portfolio Changes
Cabot Emerging Markets Investor is now Cabot Global Stocks Explorer or Cabot Explorer for short.
Our focus will continue to be emerging markets but we will have wider latitude to recommend stocks anywhere in the world - especially when emerging market stocks are in a downturn.
Our emerging markets (EEM) signal continues to be positive and right on top of its 20-day moving average as China and other emerging markets are bumping along and lacking a decisive uptrend.
The US-China economic conflict no doubt is a significant headwind that is impacting markets as well as raising uncertainty.
But it is important to keep in mind that the fundamentals that attract us to emerging and some international markets are still in place. Right off the bat is strong growth. China delivers what the pundits describe as subpar 6% growth but this number is very impressive given China’s annual economic output of $14 trillion.
India, with a population approaching 1.4 billion, is delivering a 7% economic growth rate pulling many millions out of poverty each year.
On the other extreme, it is launching one of the world’s most ambitious space programs.
The US-China rivalry will put competition for resources at center stage and this will bring companies in South America, Canada and Australia to our attention.
Douyu IPO (DOYU)
DouYu’s much talked about IPO this week was a bit of a disappointment. Priced at the low end of the range, it is flat as a pancake so far.
DouYu has higher growth figures along with more users versus rival HUYA.
DouYu offers both desktop and mobile apps, and counts China’s Huya and Amazon’s Twitch among its peers. Interestingly, Tencent has a stake in both Douyu and Huya.
Portfolio Update
Alibaba (BABA) shareholders have overwhelmingly approved an 8-for-1 split of the company’s U.S.-listed stock and the company is planning a secondary listing of its shares in Hong Kong, an effort that may raise as much as $20B.
BABA remains a great core China holding trading at an attractive valuation. BUY A FULL POSITION.
ICICI Bank (IBN) is a solid India play in the wake of President Narendra Modi’s re-election and reform agenda. There are still 191 million Indians without a bank account, which means a lot of potential new customers.
ICICI is capitalizing on this emerging growth trend with a blend of 60% retail and 40% corporate business. Its last quarter highlights its strength as retail loans were up 22% and core-operating profit surged 26%. The bank has a healthy net interest margin of 3.72% and non-performing loans were down 50%.
This is a solid bank in a promising growth market. BUY A HALF.
LexinFintech (LX) shares are flat over the last month and should be performing better based on its strong fundamentals.
The company owns and operates a thriving online shopping mall that also offers installment loans. LX acquired nearly 705,000 new active users in its last quarter while keeping its 90-day delinquency ratio at an ultra-low 1.42%.
The company has signed strategic cooperation agreements with more than 100 more national banks, insurance companies and consumer finance companies. Earnings per share soared 228% on a 95% increase in revenue in the most recent quarter.
LX enjoys a sizable 42% profit margin with a 72% return on equity. This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and I don’t think it will stay at these levels for long. BUY A FULL POSITION.
Luckin Coffee (LK) has launched more than ten tea products in several categories including cheese foam tea, fresh tea and milk tea.
LK is challenging Starbucks’ dominance of China’s coffee market with a leaner and faster strategy. It aims to attract the average millennial as opposed to Starbucks’ more-affluent upper middle class-with cheaper prices, heavy promotions, quick delivery, and mobile ordering.
Since it was founded in 2017, the company has been expanding rapidly. As of March, Luckin had about 2,370 stores in 28 Chinese cities and is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.
Starbucks has countered by opening its first express coffee shop “Starbucks Now” while Barron’s had a positive profile of LK this week, highlighting continued prospects for high growth.
If you have not invested in Luckin, which is an aggressive idea that won’t be posting profits for some time, I encourage you to do so starting small up to a half position with a 20% trailing stop loss in place. BUY A HALF.
MakeMyTrip Limited (MMYT), our most recent recommendation, is a play on India’s travel industry as well as digital payments and marketing.
Founded in 2000 to serve the travel needs of the US-based Indian community, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel and travel-related services.
MakeMyTrip has made key acquisitions and strategic partnerships and its strong balance sheet should allow it to continue expanding its dominant market share. One key alliance is with Ctrip, China’s largest online travel group.
The company has a 43% compound annual growth in gross merchandise value processed during the past few years but is not yet profitable.
If you have not yet done so, I encourage you to take a half position in this India growth stock. BUY A HALF.
Sea Limited (SE) pulled back a bit due to profit taking with the stock more than tripling so far in 2019. Its ‘Free Fire’ survival game is a star performer in Asia.
SE benefits from high-growth target markets outside of China in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets. Its gaming segment is the key driver and is projected by Morgan Stanley to expand 140% in 2019. The second driver is e-commerce, which is equally robust.
Revenue for the most recent quarter was almost triple that of the same quarter last year as its gaming platform, driven by a partnership with Tencent, had revenue growth 169% year on year.
Depending on your entry point, feel free to take some profits off the table and longer-term investors should continue to buy. BUY A HALF.
Tencent (TCEHY) shares are up double digits this year. As one of the largest tech companies in the world primarily known for its app called WeChat. WeChat is used for basically everything: communicating with friends and family, ordering a cab, doing payments.
Its operating revenue comes primarily from gaming and its social networks. More and more, however, the company has been investing into other tech companies and is evolving into a diversified tech fund.
This is a strong and dominant company. I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) was treading water this week. A basket of rare metal and rare earth stocks, this ETF offers us a 11% plus dividend yield and a hedge on U.S.-China tensions, as indications that China may withhold these critical materials from U.S. companies.
China’s dominance of these strategic materials is again headline news and this position is worth buying up to 20. BUY A HALF.
ZTO Express (ZTO) is up 15% from its early June low but has not done much for us lately. I urge some patience as we await earnings.
Based in Shanghai, ZTO is one of the largest express delivery companies, not just in China but globally.
It offers services to millions of traditional merchants, e-commerce sites, and online sellers using a proprietary tracking system, a state-of-the-art transportation management system, and more than 4,500 trucks, as well as hundreds of business partners.
China is also the world’s largest exporter, of course. And ZTO serves foreign customers through partnerships with many international express delivery companies.
Finally, revenue was up significantly year over year, to $682 million and ZTO maintains a leading 17% market position in China. Any visible progress on US-China trade talks should lead to this stock moving upward. BUY A HALF.
Speculative Recommendations
Largo Resources (LGORF) is now debt free after paying over its convertible bonds. The stock moved up incrementally during the past week and now trades at less than five times earnings. Rare metals are once again in the media spotlight as China threatens to keep more of these key materials at home and potentially deny access to international companies.
Please keep in mind that this is a speculative play on vanadium, which is used to strengthen steel, and is a key ingredient for large-scale grid electrical energy storage batteries. BUY A HALF.
NIO (NIO) shares, after a sharp surge the first ten days of July, have been in a holding pattern. NIO is a speculative, aggressive recommendation and traders should feel free to take some profits off the table.
Automobile sales in China rose 4.9% in June, according to preliminary figures from the China Passenger Car Association. The monthly gain broke a streak of 12 straight months of lower auto sales in the nation.
NIO seems to have all the negatives on the table. It is a speculative stock and will likely be a bit volatile but I sense an upside as well given that the Chinese government is firmly behind electric vehicles. BUY SMALL POSITION.
Watch List
Baidu (BIDU) seems to be building a bottom in the 112 - 115 range and is trading at less than 11 times forward earnings. Baidu’s net cash as well as stakes in iQIYI and Ctrip.com represent more than half its market capitalization.
While its revenue rose 15% annually during the quarter, most of that growth came from its streaming unit iQiyi (IQ) instead of its core advertising business.
Baidu’s total operating expenses surged 53% annually, due to higher content acquisition costs for IQ, and investments in artificial intelligence and autonomous driving.
Stock prices are as of 12:30 p.m. on July 18.