Thoughts From a Cross-Country Drive
A Tale of Two Chinese Quarterly Reports
Nam Tai Electronics (NTE) and Mindray Medical (MR), two Chinese stocks
My wife and I just got back from a road trip that took us (and our rental truck) from Tulsa, Oklahoma to Dover, New Hampshire. The truck was loaded with interesting goods and family treasures from the estate of my father-in-law, who left behind him a very neat house, but one whose every closet, cupboard, drawer and shelf was filled with stuff.
My wife, who took on the primary job of going through every box, bag, nook and cranny, found amazing family documents dating back to the first part of the 20th century. These letters, certificates, photos and mementos painted a very full picture of two families, one in Kansas and one in Arkansas, who were making their way through the century in pursuit of the American dream. And they found it.
They labored in the Army and on small farms, dealing with wars and droughts, illness and age. And they worked their way up, sending their children to college, buying houses and celebrating their holidays and triumphs. They died with their debts settled and were honored by their friends and communities.
So now, my wife and I are faced with what to do with this stuff.
Most of it will go into an estate sale in Tulsa. The people we have interviewed assure us that they can sell anything down to and including the box of cleaning rags and old clothes. There will be plenty of interesting, collectible pots, pitchers, knick-knacks, books and an enormous array of tools and enough nuts, bolts, rivets, screws, connectors and fixtures to stock a small hardware store.
More than anything, the experience has reminded us that our own attic, basement, closets and drawers are quite full and that something will eventually have to be done with all of it. It may be that we will have to do this ourselves if we decide to up stakes for warmer climes (or just head down the road to the Nice Old Persons’ Home).
But getting back to the road trip, I would say that there are worse ways of taking the temperature of America than driving our highways and back roads (we didn’t always hit our exits off the Interstate just right) in the days leading up to a national election. The yard signs, billboards, t-shirts and campaign buttons alone are an entire course in political communication.
What we saw on our travels through Oklahoma, Illinois, Iowa, Pennsylvania, New York, Vermont and New Hampshire was evidence of a political struggle with high emotional stakes for many people. People are passionate on both sides of the political divide.
But we also saw farms that will be planted in the Spring and harvested next Fall and businesses that will continue to look for customers no matter who wins.
In a way, it’s the same story that we saw in the family records as we were cleaning out my in-laws’ house. Families mostly fly under the radar of politics; they raise their kids and do their jobs and try to get ahead as best they can.
My favorite piece of political satire of recent years is a fake form to be filled out by people who are moving to Canada to escape the aftermath of the U.S. election. It asks political asylum seekers to certify that they can’t tolerate living under a [Republican/Democrat] administration and would rather emigrate north of the border than stay in the U.S.
A declaration of intent to move to Canada to escape from political insanity has been a commonplace of political conversations for as long as I can remember. And yet I don’t know a single person who has actually made good on the threat.
Tomorrow, most of us will go back to doing what we do, some of us griping and moaning all the way and some with smiles on our faces. And things will get back to normal.
A Tale of Two Reports
Monday brought two quarterly reports from companies that I’ve been recommending in Cabot China & Emerging Markets Report, and the differing responses make them a textbook case in how to deal with earnings season.
The first company is Nam Tai Electronics (NTE), a Chinese company with a market cap of about $663 million that is apparently supplying LCD panels and other components for Apple iPads and iPhones. (I say apparently because Apple doesn’t like to say where it gets its components from, even when it’s an open secret.)
NTE made a nice runup in June and July, then blasted off in August, ripping from 6.5 to over 10 in just two weeks. It then settled into one of the tightest sideways trading patterns I have ever seen, barely pushing its nose below 10 or above 11 through all of September and October.
So when the revenue and earnings news were good—the company raised its quarterly dividend to 15 cents per share, an increase of 114%! NTE had a great base already built up, and investors responded by pushing the stock up nearly 40% in one day!
This, of course, makes me look very smart.
The other company is Mindray Medical (MR), a Chinese manufacturer of medical imaging, monitoring and analysis equipment with a market cap of about $3.8 billion. Not only does Mindray have one of my favorite company names of all time, it has made a global name for itself, designing and refining medical equipment that can be sold more cheaply than the big international brands.
MR had staged an enormous jump in early August, popping from 30 to 36 in a week when its earnings came in ahead of expectation. The stock then spent August, September and October giving up small amounts of that huge advance, but staying above support at 33. The company’s earnings release after the market closed yesterday missed slightly on both revenue and earnings and the stock responded with a significant drop, falling from its Monday close above 34 to below 32.
Strangely, though, the correction in MR was relatively mild, and the stock bounced back from an intraday low near 31 to above 32, where it seems to be stable.
Mindray’s miss lowers my perceived IQ, but its relative calm demeanor leaves the issue of what to do with it in doubt.
So, here are two stocks that went into earnings season with long, relatively flat bases. One beat on earnings and jumped big. The other missed and dropped only about 6%. Which is the good buy now?
Typically, an earnings beat gives a stock an energy boost, and eventually leads to higher prices. This makes Nam Tai Electronics looks like the better pick.
But fundamentals also matter, and Mindray’s strong product line and generally sound numbers are obviously leading some investors to see its correction as a buying opportunity.
We already had Mindray rated as a hold as its earnings date approached, partly as a response to its gradual decline from its August highs. If it holds up above 32, it will likely be able to repair its damage and eventually get back on the upward track. But as a growth investor, I would have to see evidence of the recovery before I actually did any buying.
Overall, I’d say that these two stocks illustrate the potential strengths of Chinese stocks, a group that has been in the doldrums for longer than I care to think about.
But this undervalued group is showing signs of life, and I personally believe that this is the perfect time to start following emerging markets stocks again. The signs are there for the vigilant, and those who get back in before the neon signs go up will reap the benefits.
Editor of Cabot China & Emerging Markets Report