Market Tone Positive on Back of Strong Earnings & U.S.-China Agreement to Walk Back Tariffs
Strategic Takeaways
Our emerging markets timer strengthened this week as the EEM climbed over 44 today, just short of its high for the year.
The catalyst? China’s Ministry of Commerce said the world’s two largest economies had agreed to remove duties on each other’s goods in phases.
“If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion,” declared spokesman Gao Feng.
After Chile had to back out of hosting the APEC (Asia-Pacific Economic Cooperation) meeting due to protests, President Trump and Xi Jinping had to postpone meeting on the first phase of the agreement until December.
Two key questions: Will this agreement hold and what are the next steps?
Vietnam may be the biggest winner of tenser U.S.-China relations. The U.S. remains Vietnam’s largest export market with a total export value of $50 billion (+26.6% year-over-year). Another bright spot in October for Vietnam was a surge of international visitor arrivals—1.6 million, up 34% thanks to a significant jump in Chinese visitors.
Meanwhile, as markets fixate on 5G networks, China is moving on to 6G.
Last week China launched commercial services for its superfast 5G mobile networks but the government has charged 37 experts at various universities and institutes to oversee the research of 6G.
While 5G is known to have data transmission speeds at least 10x greater than 4G—rolled out in 2009—it’s too early to tell what 6G could be or what technologies it would advance.
The Chinese government seems to be taking a new hard-line strategy on corporate debt: Let companies fail.
After years of subsidizing weak performers, Beijing is building a bankruptcy system to take on a significant pickup in corporate defaults. While on paper China has more than 90 U.S.-style specialized bankruptcy courts, politics and the need to expand jobs gets in the way.
PORTFOLIO CHANGES
ICICI BANK (IBN) from Hold a Half to Buy a Half.
YANDEX (YNDX) from Hold a Half to Sell.
PORTFOLIO UPDATE
Alibaba (BABA) vaulted from 178 to 186 this week on easing trade tensions and a strong quarterly financial report. Some key highlights from the report:
-Revenue was $16.7 billion, an increase of 40% year-over-year.
-Annual active consumers on the company’s China retail marketplaces reached 693 million, an increase of 19 million from the 12-month period ended June 30, 2019.
-Mobile monthly active users reached 785 million in September 2019, an increase of 30 million over June 2019.
-Income from operations was $2.8 billion, an increase of 51% year over year. Cloud revenue increased 64% year over year.
BABA still represents the best near-term and long-term quality play on the rise of China’s consumer class. It dominates China e-commerce and its stock is valued at only 11 times 2020 expected earnings. BUY.
DBS Bank (DBSDY) shares moved forward into the high 70s, which is a win for this high-quality conservative play on Singapore and Southeast Asia financial services.
DBS is the largest and highest quality bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.
Its tentacles reach out through 200 branches in 50 cities. DBS produces steady profit margins, revenue and earnings and is also increasing market share in consumer and corporate banking.
Despite all of these strengths, DBS is trading at only 11 times trailing earnings. Plus, it comes with a 4.8% dividend yield. I encourage you to buy at these levels for this great core holding. BUY A HALF POSITION.
Grupo Televisa (TV) shares were up 6% this past week.
A recent recommendation, TV is like having CBS, Comcast and 21st Century Fox tied together in one package. Executives stated last week that they were exploring stepping up buybacks.
The company owns an appealing group of businesses, including a dominant set of Mexican TV stations; a controlling stake in the country’s largest satellite TV business; and a 36% interest in Univision, the big U.S. Hispanic broadcaster.
It’s also Mexico’s top provider of cable TV services and has a profitable programming contract with Univision that is one of its most prized assets.
Mexico features very favorable demographics, with almost half of the country’s population what we would term working age.
Plus, 27% of Mexicans are under the age of 14. All of this is very positive for TV and I encourage you to begin with a half position. BUY A HALF POSITION.
Huya (HUYA) moved up a point this week in choppy trading ahead of the firm’s next earnings report, expected November 12.
Huya is China’s leading e-sports platform and game-streaming brand.
The company has a large, open pathway to grow beyond China in emerging markets. This is important since 72% of frequent e-sports viewers live outside of the U.S. and Europe and the company is expanding aggressively in Asia-Pacific and Latin America with the logistical support of Tencent.
Huya, now trading at 23, could break out above its March 2019 high of 30. This is an aggressive, high-growth China idea so I advise putting in place a 20% trailing stop loss and starting with a half position. BUY A HALF POSITION.
ICICI (IBN) shares moved marginally this week to break 13 as investors digested last week’s rather mixed second-quarter financial report.
While net interest income, revenue and loans and deposits all increased, earnings per share, while positive, declined relative to last year due to higher expenses.
Net interest income jumped 26% year over year and the net interest margin was a healthy 3.64%.
The bank posted robust 22% loan growth in the retail segment, with deposits rising 25% as credit quality improved.
IBN is a solid India play and there are still 191 million Indians without a bank account, which means a lot of potential new customers. This is a good entry point to take a stake in IBN if you have not yet done so. MOVE FROM HOLD A HALF TO BUY A HALF.
Luckin Coffee (LK) shares lost some ground this week as the Chinese coffee company approaches reporting its next quarterly numbers on November 11.
But the company continues to open new coffee shops at a breathtaking rate in China. Furthermore, its CFO has publicly stated it plans to be at breakeven by the end of next year, and Luckin believes there is room for more than just Starbucks in a market of 300 million-plus middle class consumers.
Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half of Starbucks’. Most of its shops are set up for takeaway and delivery.
Luckin is an aggressive stock that just went public so I prefer to see next week’s quarterly numbers before moving this to a buy. HOLD A HALF POSITION.
Marvell Technology Group (MRVL) shares moved up a couple of points this week to breach 27.
Marvell is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware to talk to each other.
Most of Marvell’s customers are located in Asia. Sales to customers with operations in Asia accounted for 85% of Marvell’s net revenue in fiscal year 2019.
Marvell is headquartered in Bermuda with operations in the U.S., China, Taiwan, Japan, India, South Korea, Vietnam and several other countries.
The company offers products under two broad groups, storage and networking, with the former accounting for 52% of 2018 revenue and the latter 40%.
New markets are emerging in which Marvell has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics. I have high expectations for this stock and encourage you to start with a half position if you have not yet done so. BUY A HALF POSITION.
NovoCure (NVCR) moved from 72 to 79 in its first week in the portfolio on the back of an encouraging third-quarter report, though it has since pulled back to 76.
NVCR is a unique company in the biotech space marketing what is actually a device, Optune, to treat cancer by way of mechanically disrupting cancer cell division.
Earnings were positive at 2 cents per share while the company posted its best sales quarter to date. Optune sales reached 492 million units, aided by the company gaining Medicare coverage in September.
Gross margins were firm at 75% and the balance sheet is strong with $313 million in cash and $143 million in long-term debt. BUY A HALF POSITION.
Rakuten (RKUNY) shares increased 7% in the last two days despite the company coming off a disappointing recent quarter that coupled strong operating numbers with a hefty write-down of its 11% stake in Lyft.
Rakuten, the “Amazon of Japan,” is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank, #1 credit card and one of the country’s leading travel platforms.
The company has started its own mobile business, saying it has radically cut the cost of building its network by using cloud-based software rather than expensive hardware and plans to have 3,000 base stations built by year-end.
Rakuten’s operating profit came in at 1.1 billion yen in the third quarter. While shares are up 45% this year, they have lost almost 18% since June.
The company’s core business is as an internet sales platform akin to Amazon’s, with its market share in Japan at about 25%.
On top of it all, RKUNY stock is trading at just 10 times trailing earnings. BUY A HALF POSITION.
Sea Limited (SE) shares moved from 29 to 31 this week but while up well over 100% for 2019, they are still down from a high of 38 two months ago.
Sea is expected to report earnings on November 12.
Sea is a more aggressive e-commerce and gaming play than Alibaba and is focused specifically on Southeast Asian markets representing 650 million consumers.
Sea goes head to head with Alibaba in e-commerce and comes out on top, and its gaming group is also quite strong in Southeast Asia.
Over the past two weeks it has developed a nice uptrend so I encourage you to buy ahead of the earnings report. BUY A HALF POSITION.
Yandex’s (YNDX) shares moved up this week but are still short of our entry price. Since regulatory risk remains quite high, I’m moving this stock from a hold to a sell.
We will put the proceeds to work in our next recommendation, out next week. MOVE FROM HOLD A HALF TO SELL.
Stock prices are as of 2:00 p.m. November 7, 2019