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Cabot Emerging Markets Investor 645

Emerging market stocks in general strengthened this week, keeping our Cabot Emerging Markets Timer firmly on the positive side. Our new stock is an express delivery company with a China-wide network that covers 96% of China cities and towns. We have ratings changes on two of our stocks.

Cabot Emerging Markets Investor 645

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Cabot Emerging Markets Timer

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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 clearly bullish, telling us the intermediate-term uptrend for the sector continues to point up. The iShares EM Fund (EEM) has had two sharp pullbacks recently (one in August, one in September), and it’s possible today’s action could be the start of another multi-day dip. But with EEM still solidly above its lower (50-day) moving average, the trend remains up and the odds favor higher prices in the weeks ahead.

Of course, earnings season for our stocks is set to rev up in a week or two, and that almost always leads to added volatility. But given the uptrend, you should just follow the plan—hold your strong stocks, keep all losses small and look for new buys, preferably on normal dips.

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The Q3 Roll of the Dice
Sometimes in the world of sports, especially after an underdog team upsets a prohibitive favorite, you’ll hear someone say, “Well, that’s why they play the games.”

And the satisfying beats and disappointing misses are why companies roll the dice four times every year and why growth investors both look forward to and dread quarterly earnings reports. No matter how good (or bad) a report is, what matters is whether the report lives up to expectations, usually represented by the “consensus number,” which is the average estimates of all analysts covering a stock.

Quarterly reports can shake a stock out of a slumber and into a rally or trip up a fast runner. Three of the companies in our portfolio have reported their third quarter results, and I’d have to say that the results haven’t been great so far. All three of the reports (for Baidu, HDFC Bank and TAL Education) were met with negative responses, although all three stocks have stabilized at their gap-down lows and two have made modest rebounds. (TAL Education is the one that hasn’t been able to bounce.)

All but one company in the portfolio (China Lodging, HTHT) have set firm earnings dates. Here’s a table with the day and whether the report will come pre (before the market opens) or post (after it closes).

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The two moments of greatest risk for any stocks are: 1) immediately after you buy them and have no profit cushion to give you a margin of safety, and 2) just after a quarterly earnings report. Earnings reports can be especially tricky because the initial reaction to how the results compared with consensus estimates can be either reinforced or negated by management’s commentary and guidance during the following conference call.

I don’t make a habit of either buying or selling in anticipation of quarterly reports. Companies are very careful these days not to drop hints about their results, so there’s virtually no evidence to use to make an informed bet on the outcome; it’s like playing red or black at the roulette table.

The one piece of advice I can give when an earnings date for one of your stocks looms is: know your stops. I generally favor what Cabot calls “mental stops,” rather than hard stops entered in your trading program. A mental stop is a number in your head (or on your Post-It Note) that formalizes your maximum loss limit.

But there are a couple of conditions that you need to attach to your stop numbers. The first is that you shouldn’t react to intraday moves in a stock. It’s very easy for a stock (especially a volatile emerging markets issue) to swing lower during the day and trip your stop, then recover to finish the day somewhere higher. I like to remind myself that institutional investors, the ones who can inflate a stock like a Macy’s parade balloon or crush it like a grape, often do their research during the day and their actual trading during the last couple of hours of the session.

Plus, there’s a ton of anecdotal evidence—maybe BS and maybe not—that institutional investors can actually see your stop and will sometimes sell enough of the stock to trigger it. For the whales, it’s just a form of bargain shopping. But for you, it means you have lost the stock.

Yes, a hard stop can also save you from taking a larger loss. But waiting to see how the stock finishes the day and basing your sell decisions on its closing price can keep you from being stopped out and having your caution work against you.

Featured Stock

Delivering
ZTO Express (ZTO)

When Alibaba reported its Q3 results this morning, investors were treated to the sight of a mega-cap company (Alibaba’s market cap is over $483 billion) growing revenue by 47% and earnings by 63%. Those are the kinds of numbers you expect to get from a hot startup that’s building off a low base.

Alibaba’s results also point out that online commerce is the biggest story in China right now, which is good for us, since we have Alibaba in the portfolio.

But, like Amazon in the U.S., Alibaba’s dominance in Chinese online commerce has sapped interest in most of its competitors. (JD.com can’t seem to catch a break with investors despite having its own great numbers.)

So today, we’re going to take a run at Chinese commerce via ZTO Express, an express delivery company with a China-wide network that covers over 96% of China cities and rural areas. The company does both pickup and delivery and uses a centralized system with 75 sorting hubs, 25,000 pickup and deliver outlets and 4,200 trucks to maximize efficiency. The company also uses network partners to leverage its services and operates its own proprietary waybill tracking and transportation management software to keep unit costs per parcel low.

The future of shipping in China looks bright, as retail sales are forecast to rise from $609 billion in 2015 to $1.46 trillion in 2020. The number of parcels shipped should rise even faster, nearly tripling from 20.7 billion in 2015 to 60 billion in 2020.

ZTO counts both Alibaba and JD.com as key customers. (While JD.com has its own warehousing and distribution system, it still uses ZTO Express for last-mile services.) And while there are plenty of competitors, ZTO leads the pack in size, efficiency and international connections.

Revenue growth has been excellent, with 53% growth in 2015, 52% in 2016 and 25% and 27% in Q1 and Q2, respectively. After-tax profit margins have topped 20% in five of the last seven quarters, hitting an all-time high of 24.6% in Q2.

ZTO was incorporated in 2015 and came public in October 2016 at 18, and went immediately into a post-IPO correction, falling to 11 in March 2017. ZTO recovered to 16 in July, but dipped back to 13 in August. The stock’s volatility since that August low has been considerable, but the main trend has clearly been up. A four-day rally that started on October 10 marched the stock higher on progressively higher trading volume. And the stock popped higher on November 1 after the stock was initiated with a Buy rating by Daiwa Capital.

The company has announced that it will report Q3 results on November 20, after the close. Analysts are expecting revenue of $454 million and earnings of 15 cents per share.

With a pretty reasonable 28 P/E and a stock price that’s still below its IPO level, ZTO looks like a good buy right here. We’re always a little leery of buying ahead of earnings, but we have more than two full weeks before the company reports, and that can be enough time for a stock like ZTO to move significantly. We will add ZTO to the portfolio tomorrow with a recommendation to buy a half position until we see how investors react to Q3 results. BUY A HALF.
ZTO Express (ZTO 17)
Building One
No. 1685 Huazhi Road
Shanghai 201708 China
86 21 5980 4508
zto.investorroom.com

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Model Portfolio

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Invested 90% Cash 10%

Updates

Emerging market stocks have rallied with the rest of the market in recent days, keeping their uptrend intact. However, as we mentioned on page 1, the situation has become trickier, with some stocks hitting potholes (including many Chinese names), others doing fine, and earnings season likely to bring more hectic action in the weeks ahead.

After a long run, though, such action isn’t unusual; investors usually end up focusing on fewer names as an advance matures. Our job is to simply go with the flow, holding our top performers, letting go of stocks that crack their uptrends and looking for new, low-risk entry points in emerging leaders.

Tonight, be sure to put the reporting dates for your stocks onto your calendar. We will send out a Special Hotline if anything happens that needs quick attention ahead of next Thursday’s regularly scheduled update, but you should also be paying attention. Tonight, we have ratings changes for two of our stocks: We’re shifting Alibaba (BABA) back to a Buy rating after a resounding beat on earnings and we’re putting Baidu (BIDU) on Hold, as the stocks reaction to the company’s quarterly report last Thursday was disappointing and the bounce has been mild.

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Alibaba (BABA) reported a fantastic quarter this morning that blew away estimates—revenues soared 61% (well ahead of the 51% estimate), while earnings of $1.29 per share topped by 26 cents (though some of that beat may have been due to a lower tax rate). Better yet, faster growth was seen in the firm’s core commerce (up 63%) business, while its emerging cloud computing segment (up 99%) remains on a hot streak. The stock had been red hot in recent days, surging from a low near 169 to north of 190 in the pre-market this morning. The stock’s lukewarm reaction to earnings isn’t all that odd, given that the stock’s rally from the start of 2017 began at 89. We think this is just profit-taking, and that this small pullback is a buying opportunity. We will shift the stock’s rating to Buy. BUY.

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Autohome (ATHM) was sold in last week’s update as the stock continued to lose ground in the wake of resignations from its top brass. If shares stabilize and stage a decisive breakout in the future, we could always consider getting back in. But right now, ATHM is struggling and there are stronger stocks to own. SOLD.

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Baidu (BIDU) supposedly reported a mixed bag of a quarter last week—sales (up 29%) and earnings (up a huge 162%) looked great, though Q4 guidance was a bit soft. We say supposedly because at least one analyst claimed the guidance was in-line with consensus figures, and many are arguing back and forth about that. We’ll leave it up to others to figure out—we’re more interested in the overall story and growth path (which we believe is solid) and what big investors think of the stock. BIDU sold off hard for a couple of days following earnings, but has since bounced a few points. To respect the weakness, we’ll move to a Hold rating, but our thought going forward is simple: If everything is OK, big investors will likely support the stock near 235 (give or take) and push BIDU higher relatively soon. Thus, if BIDU holds up, we’re content to hang on, but renewed weakness will likely have us moving on. HOLD.

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China Lodging Group (HTHT) remains in an uptrend, but we are noticing a little funky action, including some high-volume selling and (for the first time in months) a dip below the shorter-term 25-day line. Some of that is probably due to last week’s $425 convertible bond offering (which is dilutive), but it’s worth keeping an eye on. A “real” pullback after such a big run (the stock was at 77 back in July) is certainly possible—but it’s also possible the firm’s terrific business trends (earnings expected to rise 52% in Q3 and another 36% in 2018) will keep buyers interested. Right now, the stock is still in good shape, so we’re OK picking up some shares on this dip if you’re not yet in. BUY.

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Groupo Supervielle (SUPV) is still in a firm uptrend, with pullbacks lasting just a few days before shares resume their rise. Earnings for this small-ish Argentinian financial outfit are out on November 8; we’ll be interested in hearing whether they have any early look into 2018 (analysts are currently expecting 32% bottom line growth). We’ll stay on Buy, but keep new positions small ahead of earnings. BUY.

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HDFC Bank (HDB) was sold last week after a decisive breakdown on big volume. It’s since bounced back some, but with a lot of overhead in the 94 to 100 area, we think the rally is sellable. SOLD.

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Jupai Holdings (JP) corrected sharply last week, but has begun to quiet down near its 25-day line (which is around 21). We bought a half position on October 20 (our buy prices are always the average of the next day’s high and low following an issue), so the stock is close to our maximum loss limit. But the stock’s history as a heavily traded issue dates only to August, which makes this a virtual recent IPO, which explains some of its volatility. We want to hold on if we can. HOLD A HALF.

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Sina.com (SINA) looked worse for wear last week when Weibo, the company’s partially-owned subsidiary, priced a good-sized $800 million convertible note offering, which drove both SINA and WB below their 50-day lines. (Funds will often sell stock to hedge against their buys of a new convertible bond, leading to short-term pressure on the stock.) But now, after a few down days, SINA has snapped back on good volume, partially due to continued growth at Weibo—when it priced its offering, Weibo said third-quarter revenues were likely up about 80% from a year ago, continuing an accelerating growth trend, while earnings were likely up around 90%. Full details for Q3 (and an outlook for Q4) will be released next Tuesday (November 7). We’ll stay on Hold until then. HOLD.

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Sociedad Quimica y Minera (SQM) tried to push to new highs yesterday but was reeled back in. Even so, we continue to like the stock’s overall action as it holds above its 25-day line and has recouped most of its big late-September shakeout. We’ll stay on Hold; earnings are due out November 22. HOLD A HALF.

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TAL Education (TAL) has broken its intermediate-term uptrend, so if you have no profit or a loss, you should keep shares on a tight leash. (And if you have a full-sized position, you can consider trimming.) However, if you’re like us—with a half position and a good profit—we think gritting your teeth here and giving TAL a little rope makes sense, as the long-term trend is up and next year’s earnings estimates (up 72%) look great. A break below the 24 area would call into question TAL’s major uptrend, but right here, we’ll sit tight and give the stock a chance to right itself. HOLD A HALF.

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Most Chinese stocks have hit air pockets in recent weeks, but not Tencent Holdings (TCEHY), which had been trading tightly near 45 before popping to new highs. Earnings are out on November 15, so keep any new positions small ahead of that. BUY.

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YY Inc. (YY) is certainly volatile (it moves around 3.5 points per day from high to low, on average), but we think its recent dip looks buyable—YY has retreated as many as 13 points off its high, but has held its 50-day line and selling volume was light. As with many emerging market stocks, though, the trick is that earnings are coming relatively soon (November 14). Thus, you can buy some here, but consider buying a half-sized position if you don’t own any. If you’re already in, just sit tight. BUY.
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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 ISSUE IS SCHEDULED FOR November 16, 2017

We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/chinasurvey
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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