While it’s pretty clear that the world isn’t going to calm down or stop giving investors heart attacks every week or so, it’s also clear that investors are ready and willing to put money into growth stocks. That’s what’s driving the buy signal from the Cabot Emerging Markets Timer and the performance of our portfolio.
Cabot Emerging Markets Investor 634
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Cabot Emerging Markets Timer
The Emerging Markets Timer is our disciplined method for staying on the right side of the emerging markets. The Timer is bullish when the index is above the lower of its two moving averages and that moving average is trending up.
Our Emerging Markets Timer remains on its buy signal from early January, having come through the selloff from two weeks ago in fine fashion. The iShares EM Fund (EEM) dipped to its 25-day moving average during the recent selloff, but snapped right back to its prior highs before backing off this week. With the fund above its lower (50-day) line, the intermediate-term trend remains up.
From here, we’ll simply take our cue from the market itself. Renewed selling pressure and an EEM drop below the 50-day would have us quickly raising some cash. But right now, the trend is up and most of our stocks are acting well, so you should remain bullish.
Steady ... Steady ...
The monthly release of the Chinese Purchasing Managers Index (PMI) doesn’t rate up there with the upcoming season of Game of Thrones, but it has its appeal. The May numbers were released on Wednesday, and the news was good.
The key word is “good,” not “spectacular” or “awesome.” The PMI for May came in at 51.2 (anything above 50 indicates growth), which was the same reading as in April. Analysts had expected a small dip to 51.0, so the unexpectedly steady growth was a nice surprise.
Growth of the steady variety is particularly welcome in China, where the government has been wrestling with the tendency of certain sectors (housing, finance) to form bubbles as stimulus programs send money sloshing through the economy.
The Chinese government has been cracking down on the country’s financial sector, targeting increasing debt and risky lending, and economists had expected that action to take a toll on some companies. But it didn’t happen, which means that regulators may have hit the sweet spot where excesses are squeezed out without going too far.
The strength in the PMI reading was supported by strength in the steel sector, as construction levels remained strong. This is also good news for China because it means domestic steel production hasn’t been dented by U.S. sanctions on Chinese steel exports.
A full PMI report is a feast for those who enjoy poking around in the engine and transmission of an economy. For instance, the PMI for the services sector—a partial measure of China’s progress toward an economy powered by services and internal consumption, rather than exports—was a robust 54.5, as retail and railway transportation enjoyed rising demand.
Economic data is like a bowl of peanuts on the bar; if you enjoy them, it seems you can just keep eating and never get filled up. So I’ll stop there, just noting that the Chinese economy grew at a 6.9% rate in the first quarter. That’s a good growth rate, given that the government’s financial tightening is expected to slow things down a bit as the year wears on. 6.9% growth gives the government a little room to clamp down and still hit its 6.5% growth target for 2017.
Economic indicators aside, investor sentiment among emerging markets is showing remarkable resilience toward China. It has absorbed worries about excessive Chinese debt, the country’s actions (or inaction) toward North Korea, the militarization of the South China Sea and longer-running concerns like human rights, the status of Tibet and the country’s “communism.”
The bottom line, as many stock market gurus note, is the bottom line. China has a small-but-significant number of companies that are growing fast and appear to have room for more of the same in the future. A stock that goes up has its own kind of international appeal.
Featured Stock
Zoom! Zoom!
Autohome (ATHM)
The Chinese auto industry is massive, with auto sales setting new records every year for 26 years. Sales in 2016, driven by government tax incentives for buyers of cars with smaller engines, were well over 21 million passenger vehicles. China is now the top market for General Motors and Volkswagen. And while growth may slow in 2017 as the government has reduced its tax breaks, analysts still expect sales to increase by 5%.
And in China, when interested automobile shoppers go online to look for information about a car, to find a dealer or just to look at car pictures, chances are good that they will wind up on the site of Autohome (ATHM).
This is no accident. Autohome has worked hard to become the top choice for automobile consumers that collect information online. Just as the U.S. real estate site Zillow does for home buyers and renters, Autohome offers a treasure trove of free information to interested auto browsers, then makes its money by selling advertising space to auto manufacturers, dealers, financers, insurers and sellers of aftermarket gear, and selling data analysis and marketing services to dealers. Its “Autohome Mall” is a virtual extension of dealers’ showrooms.
It’s a powerful business model, and it drove Autohome’s revenue up by more than 70% per year from 2009 through 2014. 2015 revenue growth cooled to a still-robust 59%, then strengthened to 62% in 2016. Revenue is driven by massive online traffic that, in the first quarter, reached 10.1 million average daily unique visitors to its mobile websites and 8.2 million to its mobile apps.
Earnings per share have grown every year since 2008 (the year the company was incorporated) and are projected to grow by 12% in 2017 and 19% in 2018. The company has no long-term debt and has total cash of around $900 million.
Autohome has generated headlines in the past year or so for reasons other than growth. Since 2008, 71.5% of the company’s stock has been owned by Telstra, an Australian telecom. But in April 2016, Telstra sold a 48% stake to China’s largest insurance company, Ping An Insurance. Then, just a few days after the Ping An deal, Autohome’s CEO and a consortium of private equity companies launched a bid to buy Telstra’s remaining stake and take Autohome private.
That bid didn’t succeed, probably because it would have needed Ping An’s approval, and Autohome’s stock, which had been in a long, bouncy correction since its 2015 high at 57, finally found a bottom at 19 in July 2016. Since ATHM began its rebound, it has been quite volatile, with three significant corrections during 2016 and one in March and April 2017 that kicked us out of our previous position. But a few days after the great earnings report on May 10, ATHM jumped from 29 to 43 with only two slight ripples of selling.
ATHM has been trading in a very tight range with support at 42 and resistance at 43 since May 19. Now trading at 43, with its rising 25-day moving average just under 39, ATHM is building a tidy, flat base that looks like a good buying opportunity. We recommend taking a full position. BUY.
Autohome Inc. (ATHM 43)
CEC Plaza, Tower B
10th Floor
Beijing 100080
China
http://ir.autohome.com.cn
Model Portfolio
Invested 100% Cash 0%
Updates
The rebound from the sharp selloff of two weeks ago has kept the intermediate-term uptrend for emerging markets stocks intact. Thus, we remain mostly bullish and are aiming to give our strong stocks a chance to keep running, while looking to buy on pullbacks or consolidations.
That said, it’s important to keep your eyes open, too. The trend is up and most stocks are acting well, but there’s no question the overall market is very divergent and we’ve seen some (very) early signs of rotation into some lagging areas. That doesn’t predict anything, but it’s important to stay unbiased and simply follow the action of the market and your stocks.
Speaking of our stocks, tonight we’re mostly standing put, but we are restoring our Buy rating on Melco Crown (MLCO).
Alibaba (BABA) has consolidated nicely in the low- to mid-120s during the past couple of weeks. Further wiggles could easily come, but we view BABA as a liquid leader, and its recent push to new all-time highs above 120 is bullish. Hold on if you own some, and if you don’t, you can buy some here or on dips toward 120. BUY.
Baozun (BZUN) is a wild child, but after a huge advance in the first half of May, shares are beginning to calm down. That’s encouraging because it represents the stock’s first pause since breaking out of a 30-week base, a pattern that’s usually buyable. You can buy a half position around here, or on dips toward 19. Analysts see earnings more than doubling this year and continuing to ratchet higher after that. BUY A HALF.
China Lodging Group (HTHT) has had a huge run, so its churning action two weeks ago caught our eye. (Churning = lots of volume and movement, but no net progress after a big run, which often signifies that the bulls and bears are fighting it out). But the stock has remained resilient, staying above its 25-day line as its swings have lessened. Fundamentally, this cookie-cutter story has a long runway of growth (analysts see earnings up 36% this year and 21% next), so we’re comfortable staying on Buy. BUY.
JD.com (JD) looks great, having calmly consolidated during the past three weeks in the 39 to 42 area. We wouldn’t rule out a more prolonged consolidation given the stock’s persistent run since the start of the year, but with little signs of distribution and big sales and earnings growth ahead, we’ll stay on Buy. BUY.
We placed Melco Resorts (MLCO) on Hold a couple of weeks ago when the market sold off and the stock was lagging some of its Chinese stock peers. But from today’s perspective, the stock’s May consolidation looks normal, and this morning’s news of another great month in Macau (gaming revenue rose nearly 24%, well ahead of estimates for 16.5% growth) helped attract some buyers. With the overall market looking healthy and MLCO strengthening, we’ll switch our rating back to Buy. BUY.
We sold half our shares in Momo (MOMO) last week after the stock took a multi-day, big volume hit following its earnings report. Yes, the numbers were great (revenues up 421% and earnings up 633%!) and generally topped expectations, but it’s the reaction to the news that counts most. Right now, MOMO is hanging around its 50-day line, so we’re content to give our remaining shares a little room to breathe, especially given the firm’s explosive growth. If you own some, hold your remaining shares. HOLD A HALF.
No one is going to claim Pampa Energia’s (PAM) story is as sexy as other growth-oriented emerging market stocks. But that hasn’t stopped the stock from kiting higher in recent months, including a solid-volume move to new highs on May 25. The one analyst who follows the stock sees the bottom line rebounding to $3.64 per share this year and lifting another 50% in 2018. Try to buy on dips of a point or two. BUY.
TAL Education (TAL) is another stock we took partial profits in last week, selling half our position after it showed a lot of churning following a big run. The stock has since pulled back to its 50-day line, and we’re eager to see if big investors use the dip as a chance to add shares. Right now, having taken a nice profit off the table, we’ll be patient and hold our remaining half position. HOLD A HALF.
Tencent Holdings (TCEHY) finally pulled back a couple of points, offering up a decent entry point. Some international luxury fashion brands are testing flash sales and other promotions through Tencent’s WeChat messaging platform, which could add a new avenue of growth. BUY.
Vedanta (VEDL) continues to chop around, testing our patience. However, we’re willing to give the stock a chance as long as it holds in its trading range. If there is a rotation into some beaten-down commodity stocks, VEDL would likely benefit. WATCH.
Weibo (WB) has been pulling back steadily during the past two weeks after its gigantic earnings gap. At this point, the retreat is completely normal, as volume has been reasonable and the stock remains well above even its 25-day moving average (now at 67.2 and rising). Sit tight if you own some, but if you don’t, you could buy a half position on this retreat. BUY A HALF.
Yum China (YUMC) is going bonkers! The stock has been soaring since its brief three-week consolidation in early May. We think YUMC has a very bright future because of its long runway of growth and because, as a recent spin-off, it’ll take time for big investors to accumulate positions. We’ll keep our Buy A Half rating, but look for dips of a couple of points to get started. BUY A HALF.
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Send questions or comments to paul@cabotwealth.com.
Cabot Emerging Markets Investor • 176 North Street, Salem, MA 01970 • www.cabotwealth.com
All Cabot Emerging Markets Investor buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT EMERGING MARKETS INVESTOR IS SCHEDULED FOR JUNE 15, 2017
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Cabot Emerging Markets Investor is published by Cabot Wealth Network, an independent publisher of investment advice since 1970. Neither Cabot Wealth Network, nor our employees, are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. © Cabot Wealth Network 2017. Copying and/or electronic transmission of this report is a violation of the copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, visit www.cabotwealth.com, write to support@cabotwealth.com or call 978-745-5532.
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