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Cabot Emerging Markets Investor Bi-weekly Update

The Emerging Markets Timer is still pointed up, despite the market’s recent consolidation. Our two moves tonight are buying a half position in Alibaba (BABA) and shifting our position in Anglogold Ashanti (AU) to a Hold rating.

WHAT TO DO NOW: The Emerging Markets Timer is still pointed up, despite the market’s recent consolidation. Our two moves tonight are buying a half position in Alibaba (BABA) and shifting our position in Anglogold Ashanti (AU) to a Hold rating.

Market Environment

After the excellent hat trick of reaching new all-time highs in the three major market indexes on Monday, U.S. markets have been quiet. Despite the new highs, U.S. markets have actually been trading mostly sideways since the middle of July.

iShares MSCI Emerging Markets ETF (EEM) has been in an uptrend since January 2016 (with corrections in May and June to keep us on our toes) and in a strong rally since late June. EEM is now at its highest level in more than a year. That puts our Cabot Emerging Markets Timer firmly in the bullish camp.

We have also had some good luck this earnings season, with many of our stocks benefiting from the prevailing pessimism about the Chinese economy and the resulting timid estimates by analysts. While results have been objectively good, investors like to make their own decisions, and we have had a couple of stocks take small dips in the wake of their reports. There’s nothing really unusual about the action, but we are watching closely to see where additional profit taking is necessary (we sold a third of our position in Weibo in our August 10 issue). We won’t retreat from our heavily invested position, however, as most of our stocks are behaving beautifully.

The markets played with red ink for part of the day, but rallied to end with modest gains for the day. At the close, the Dow gained 24 points (0.13%), the S&P popped up five points (0.22%) and the Nasdaq rose 11 points (0.22%). The iShares MSCI Emerging Markets ETF (EEM) gained 0.35 points (0.93%) to finish at 37.81.

Recommended Stocks

Alibaba (BABA 97) quieted many of its skeptics with a smashing earnings report that featured a 48% jump in revenue and good news on growth in the crucial mobile platform battlefield. BABA responded with a strong rally on rising volume. The stock has now been trading for days under the top of its August 12 top, and we think it’s time to wade into the action. We recommend taking a half position in BABA here or (preferably) on any weakness. A dip to 95 would be ideal, but there’s a lot of investor interest right now, so you may have to just bite the bullet. We will take a half position tomorrow. BUY A HALF.

AngloGold Ashanti (AU 20) dipped to its 50-day moving average yesterday and stuck close to it today. The action in AU is a little enigmatic; the company’s quarterly earnings report on August 15 seemed strong, with management speculating about resuming the company’s dividend in 2017 as cash flow rises. And the price of gold has been steady since its small dip on August 5. We will put our half position on Hold until it shows renewed strength. HOLD A HALF.

China Lodging Group (HTHT 43) experienced a big up day on Monday, jumping from 39 to 43 the day before its quarterly report. The report itself was fine, with a 6% bump in revenue leading to a tidy 71% increase in earnings and an after-tax profit margin (20%) that’s twice as large as any previous level. (All those figures were in U.S. dollars; local currency growth was even larger.) HTHT has shown some unusual volatility in the subsequent three sessions, but the trend is still in place. We’ll stay on Buy. BUY.

MercadoLibre (MELI 167) enjoyed a huge earnings beat on August 4, and the stock vaulted from 152 to 173 on the news. Since that high-volume rocket shot, MELI has been consolidating, giving back five points in calm trading. We will keep our recommendation to Buy a Half position for now, but will be looking for evidence that MELI is ready to resume its advance to possibly fill out our position. BUY A HALF.

NetEase (NTES 208) was down big at today’s open, even though its quarterly report beat the consensus numbers. There have been whispers that some of the outperformance came courtesy of lower tax rates or currency fluctuations. NTES dipped to 199 this morning (from Wednesday’s close at 213), but fought back all day, recovering more than half of its early retreat and getting back atop its 25-day moving average. We will watch closely, but there’s nothing particularly alarming about this action. We will stay on Buy. BUY.

New Oriental Education (EDU 42) has been trading effectively flat since late May. The stock has recovered from its bad day on June 8 and has given back more than half of its July 20 spike higher that looked like it would give the stock a new burst of energy. We still have high hopes for our Chinese private-education stocks, but EDU has lost momentum. For now, we’ll keep our Buy a Half rating. BUY A HALF.

Silicon Motion (SIMO 55) took a little spill after its July 21 earnings report, but needed only a week of consolidation before it got back to its steady advance The stock continues to ride its 25-day moving average higher, so we’ll keep our Buy rating. BUY.

TAL Education (XRS 64) took a tumble after its July 26 earnings report, falling from 66 to 58 on slightly elevated volume. But unlike EDU, XRS has found its way back into investors’ good books and has now rallied back to 64. We won’t put the stock back on Buy quite yet, but we like this action. Resistance at 64 looks like the next hurdle, and if XRS gets past that, we will likely upgrade it. For now, Hold is the right stance. HOLD.

Telkom Indonesia (TLK 64) staged a four-session correction after hitting a high of 69 on August 1, including a tumble last week and this Monday from 67 to 63. This may have been the shakeout the stock needed, because it has shown signs of firming up right at its 50-day moving average. We will keep a close eye on TLK, and if it shows further signs of weakness, we will take action. But for now, the stock’s action seems normal, so we will stick with our recommendation to buy a half position. BUY A HALF.

Tencent Holdings (TCEHY 26) reported its quarterly results on Wednesday morning and the reaction from investors was excellent. TCEHY, which had already enjoyed a couple of days of gains, added to its momentum on good volume. The stock is continuing to soar. With the 25-day moving average back at 24.2, TCEHY may be a trifle extended, so look for a consolidation to provide a lower-risk entry point. If that doesn’t happen, consider taking a smaller-than-usual position to get started. BUY.

Weibo (WB 45) leapt from 34 to 44 in just five trading sessions (August 4 to August 10) and has been holding on staunchly to those gains. The first two days of the rally were just a lead-in to the earnings-fueled jump on August 9, which came on huge volume. Investors were obviously pleased with the results of the report. Long-term, we still think WB can head materially higher, but the recent move has pushed the stock out of trend on the upside. We sold one-third of our shares last week and are holding on tightly to the rest. HOLD.

Yirendai (YRD 38) has been behaving well in August, despite a couple of high-volume hiccups. The bottom line is that YRD, which started the month trading at 27, is now up at 37 and showing no signs of slowing down. All the usual warnings about stocks that have made big runs apply to YRD. We expect the stock to take a break some time. But there aren’t many stronger stocks out there right now, and we need to respect that. As soon as the stock takes a little break, dipping by a point or two, we will increase our recommendation to a full Buy. For now, YRD is pretty hot. So we will continue to recommend a half position for those who don’t own it yet and will let you know when to fill the position. BUY A HALF.

Alibaba (BABA) New 97Buy a Half
AngloGold Ashanti (AU)7/1/1620205%Hold a Half
China Lodging Group (HTHT) 3/28/16364321%Buy
Credicorp (BAP)3/11/16129Sold
MercadoLibre (MELI)167-2%Buy a Half
NetEase (NTES)6/8/16 17520819%Buy
New Oriental Education (EDU)7/22/16 4442 -5%Buy a Half
Silicon Motion (SIMO) 4/22/16405537%Buy
TAL Education (XRS) 12/18/15 486432%Hold
Telcom Indonesia (TLK)7/1/16 62644%Buy a Half
Tencent Holdings (TCEHY) 6/24/16 222618%Buy
Weibo (WB)4/8/16 2145118%Hold
Yirendai (YRD)7/15/16 203890%Buy a Half