Investors and the Genuinely Horrible Day
Math, Not Politics
A Chinese Stock That’s Besting the Market
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Investors and the Genuinely Horrible Day
There’s nothing like a genuinely horrible day to get the attention of equity investors.
Financial websites and online brokerage accounts must have registered a spike in visitors this morning as the investors who suffered through Monday’s storm tried to figure out which way the market’s winds might blow on Tuesday.
Greek ETFs have been flattened like a groundhog on the Interstate, with one—Global X FTSE Greece 20 (GREK)—down 20% in just the Monday trading session! Greek banks are closed for a “Bank Holiday” to prevent panic withdrawals.
“Math, Not Politics”
And, just to prevent investors from getting too comfortable with the idea of a Greek debt default, the Shanghai Exchange in China has technically entered bear market territory with a 20% correction and the governor of Puerto Rico has announced that his country can’t make the payments on its national debt. (Governor Padilla had a good line, though. He said, “This is not politics, this is math.”)
If you’re one of the many investors who watched their portfolio balance dip on Monday, I don’t mean to be insensitive, but I would say that the situation isn’t all bad.
Why? Well, first because the major U.S. indexes have been in an uptrend since March 2009, which is a long bull market by any standard. Since 2009, except for May–September 2011, we haven’t had a correction in the S&P 500 Index that lasted longer than two months. Bull markets don’t last forever, and some analysts have admitted that a pullback of 10% or 15% or so would shake out a lot of weak hands and reset the indexes for further advances.
Second, a correction wouldn’t be bad because markets have been trading sideways since March, cycling up and down like the tides and making money only for the nimblest of traders. The action on June 29 pulled the S&P back to its November 2014 levels. But that stagnated trading from the beginning of March is largely a direct result of investors worrying about what might happen in Greece. And don’t forget the Fed’s long-awaited interest-rate tightening program that will start sometime later this year. (Yes, China’s slowing economy and stock market played a part, but even China’s growth woes are partly a result of the disruption Greece has caused in the European economy.)
There is a lot of sentiment out there that wants the markets to move one way or the other and get on with something like normal life. It’s like what happens when the weather has been cloudy for a long time and people start hoping for a big storm to clear the air.
My sense that a decisive break lower in the market might be welcome has one big caveat: A downturn (if it comes) can only do you good if you’re prepared to handle it.
During yesterday’s meltdown, subscribers to Cabot growth advisories (Cabot Growth Investor, Cabot China & Emerging Markets Report and Cabot Top Ten Trader) received messages from our analysts (like me) telling them which stocks to sell and how to reduce their exposure to the market.
A growth investor who doesn’t know how to sell losers, raise cash and control exposure to the market is like a person standing on the railroad tracks who refuses to step five feet to one side when a train is coming.
An investor who knows how to gauge the market’s momentum and how to adapt to major moves is more like someone who knows how to carry an umbrella, or, even more important, when to come inside out of the rain. Cabot is big on getting out of the rain.
For growth investors, the key to handling the market when it’s in a bad mood is reducing losses and going to cash. If there was ever a situation when “a penny saved is a penny earned,” it’s in the stock market. Avoiding big drawdowns allows your handful of big winners to make your profits for the year. And adjusting the aggressiveness of your buying and selling to the main direction of the market raises your odds of finding those winners and avoiding low-probability setups.
Bottom line: Run with the bulls, get out of the way of the bears, and learn to see the occasional storm as a useful occurrence.
A Chinese Stock That’s Besting the Market
Most of the hottest Chinese companies in recent months have been fighting it out online, either in e-commerce or in online gaming or education, but my stock pick for today is a company that’s providing human plasma products for Chinese medical patients.
The company is China Biologic Products (CBPO), and it’s a Beijing-based producer of plasma and related products. In addition to human albumin, which is used to treat shock in trauma or burn victims, the company refines and sells hepatitis B immunoglobulin for the prevention of measles and contagious hepatitis. China Biologic also sells other blood products for the prevention and treatment of rabies, tetanus, clotting difficulties and other conditions.
The company operates its own string of blood donation centers and quality control is a primary concern. Annual revenue percentage growth has been in double digits for five years and earnings are forecast to increase 15% this year and 23% in 2016. Results from the company’s latest quarterly report featured a 25% jump in revenue and 29% earnings growth, with a strong 35.5% after tax profit margin.
CBPO is a thinly traded issue, but the stock has been in an uptrend since 2012 when it was trading at 10 on virtually flat volume. More and more institutional investors are signing on, although with a float of just 12 million shares and a market cap of just over $3 billion, the stock doesn’t have the capacity to absorb a lot of interest from the whales. I like that the stock has been stable during the recent over-the-falls action in the U.S. and China.
If you’d like to hear more about unusually strong Chinese stocks that are holding up well in the face of the market’s challenging behavior, you can check out the Cabot China & Emerging Markets Report.
Sincerely,
Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report and Editor of Cabot Wealth Advisory
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