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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 only move tonight is shifting our position in TAL Education (XRS) to a Hold rating.

WHAT TO DO NOW: The Emerging Markets Timer is still pointed up, despite the market’s recent consolidation. Our only move tonight is shifting our position in TAL Education (XRS) to a Hold rating.

Market Environment

U.S. markets have taken a break over the past couple of weeks, with the S&P 500 trading flat and the Dow trending mildly down. But the Nasdaq, except for a hiccup on Tuesday, has actually been climbing higher, which may indicate that growth stocks are finding favor with more investors.

As usual, earnings season has provided plenty of drama, both winners and losers, in the broad market. In our portfolio, we haven’t had a stock either tank or take off at this point. New Oriental Education (EDU) got a boost from its July 20 report, but has stumbled since then. Silicon Motion (SIMO), reacted negatively to its July 21 report, but quickly found support and has been on the rise in August. TAL Education (XRS) had a negative reaction following its July 26 report, but is firming up around its 50-day moving average.

The next couple of weeks are the heart of quarterly earnings season for emerging markets stocks. Among our portfolio holdings, three companies have already released their results, and seven will be reporting between now and August 17. (Only Telkom Indonesia has yet to give a firm date for its earnings release.)

While we have profit cushions in many of our holdings, quarterly earnings reports (especially ones that disappoint investors) can erase gains quickly. You might consider booking some profits ahead of earnings. We will monitor charts closely following earnings and send out Special Hotlines if any urgent action becomes necessary.

The markets were in and out of negative territory all day, and finished narrowly mixed, with the Dow down 3 points (0.02%), the S&P up less than a half point (0.02%). The Nasdaq managed to tack on 7 points (0.13%). The iShares MSCI Emerging Markets ETF (EEM) gained 0.2 points (0.56%) to finish at 36.20.

Recommended Stocks

AngloGold Ashanti (AU 23) took a couple of weeks off in July, but climbed steadily higher during the broad market’s recent correction. AU is acting as a good diversifier, appreciating when markets dip. But the price of gold is still the major determinant of the stock’s direction, at least until the company reports its latest quarterly results before the market opens on August 15. The uptrend in gold prices that began in January isn’t showing signs of weakening, so we will continue to recommend buying half a position. Then we’ll correct our course if necessary after the report. BUY A HALF.

China Lodging Group (HTHT 37) rallied strongly from mid-June to mid-July, and has been consolidating that rally ever since. The company’s interim report on Q2’s new locations, occupancy rates and room rates are certainly constructive, making the actual report on August 16 a little less tense. We’ll stay on Buy. BUY.

Credicorp (BAP 159) is still trading sideways after nicking 163 in July 27. In the last couple of days, the stock has ridden its 25-day moving average higher, but hasn’t shown much interest from investors in topping that July high. It may be that earnings on July 8 will supply the spark, but until that happens, we’ll keep our half position on Hold. HOLD A HALF.

MercadoLibre (MELI 152) will be releasing its Q2 results tonight, with analysts expecting revenue of $181 million and earnings of 59 cents per share. But it’s wise to keep in mind that investors’ reactions to earnings aren’t just a matter of “beating the numbers.” Investors can sometimes find something to object to in guidance for the next quarter or year, or in profit margins or stray remarks about trends and strategy. It’s more important to watch the reaction than to track the numbers. The chart will tell us what to do. WATCH.

NetEase (NTES 198) stepped down for five straight sessions from July 28 to August 3. This orderly pullback looks like profit-taking after a big run that kicked off in late April. The stock is now just above its rising 25-day moving average. With earnings not out until the market closes on August 17, we’ll stay with our Buy rating, believing that this correction offers a good buy point. BUY.

New Oriental Education (EDU 42) has given back about two-thirds of its earnings bounce, and is now sitting between its 25-and 50-day moving averages. We will keep the stock’s recommendation to Buy a Half, but will watch closely to see whether the private education theme has lost favor with investors. EDU is a little better-positioned than XRS, but both have been under pressure. For now, we’ll keep our Buy a Half rating. BUY A HALF .

Silicon Motion (SIMO 54) dipped for a couple of sessions after its July 21 earnings report, but it found support quickly and has started to rebound. The stock has been riding its 25-day moving average higher since the beginning of the week and looks to be in good shape. This looks like a buyable correction. BUY.

TAL Education (XRS 58) ran up against resistance at 58 in April and May, and the stock is using that as support right now. The aftereffects of the company’s earnings miss on July 26 have weighed on the stock, which has actually dipped below its 50-day moving average. We will shift the stock’s rating to Hold, and draw a line in the sand at 58; if the stock slips below that, we will likely take our profit and exit. HOLD.

Telkom Indonesia (TLK 67) gapped up on Monday, but gave back most of that gain in the two subsequent trading sessions. There’s no news yet about the company’s quarterly report, but the stock itself is staying well within its upward trading channel. It’s also not especially extended from its 25-day moving average, now just above 64. We’ll keep monitoring news about TLK, but for now, buying a half position seems prudent. BUY A HALF.

Tencent Holdings (TCEHY 24) is thinly traded, which shows up in its daily chart as a choppy pattern with lots of gaps up and down. But the trend is clearly higher, and with earnings approaching on August 17, the stock is in good shape. The short pullback that caused TCEHY to dip to its 25-day moving average looks like a good buy point. BUY.

Weibo (WB 34) has been trading sideways for a few weeks, but has mostly ignored the weakness in the broad market. You can still buy, but with earnings out on Monday, you should keep any positions small. BUY.

Yirendai (YRD 25) was a high-volume rocket on July 28 and 29 and August 1, leaping from 22 to a high of 31 on August 2 before the sellers moved in for a couple of sessions. The stock is up today on modest volume and we expect a little space of calm ahead of the company’s Tuesday earnings report. We will keep our recommendation to Buy a Half position, but you might want to dial that back a bit this close to earnings (and after a run from 3 in February to 25 today. BUY A HALF.

AngloGold Ashanti (AU)7/1/16202320%Buy a Half
China Lodging Group (HTHT) 3/28/1636374%Buy
Credicorp (BAP)3/11/1612915923%Hold a Half
Mercado Libre (MELI) 152Watch
NetEase (NTES)6/8/16 17519814%Buy
New Oriental Education (EDU)7/22/16 4442 -5%Buy a Half
Silicon Motion (SIMO) 4/22/16405434%Buy
TAL Education (XRS) 12/18/15 485820%Hold
Telcom Indonesia (TLK)7/1/16 62678%Buy a Half
Tencent Holdings (TCEHY) 6/24/16 22 246%Buy
Weibo (WB)4/8/16 213463%Buy
Yirendai (YRD)7/15/16 202527%Buy a Half