Please ensure Javascript is enabled for purposes of website accessibility
Explorer
The World’s Best Stocks

Cabot Emerging Markets Investor 664

While the market mourns the misfortunes of poor Mark Zuckerberg, we actually have a little ray of light in emerging markets, as the Cabot Emerging Markets Timer is showing a very new green light. New buy signals are pretty delicate, but we’re taking this one seriously, doing a little new buying and shifting another stock from a Hold to a Buy rating. As the artillery of the trade war rumbles, it’s nice to have something to celebrate. Read on for details.

Cabot Emerging Markets Investor 664

[premium_html_toc post_id="154875"]

image-blank.png

Cabot Emerging Markets Timer

cem664-china-timer-1024x933.jpg

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.


A ray of light! Despite all the negative news out there, our Emerging Markets Timer has just flashed a green light, with the iShares EM Fund (EEM) above its lower (25-day) moving average, and that 25-day line has begun to turn up. It’s a good sign that the intermediate-term trend is starting to turn.

Of course, there remain plenty of yellow flags, too—Chinese stocks (as represented by the Golden Dragon Fund, PGJ) are still stuck in the mud, and even EEM’s rally is new and fragile. Thus, it’s not a time to jump in with both feet, but beginning to put some money to work makes sense.

image-blank.png
image-blank.png

The Sharp End of the Stick

It’s never fun to be singled out for harsh treatment, but that’s what’s happening right now with Chinese stocks.

The major U.S. stock indexes are doing just fine, although only the Nasdaq is actually pushing out to new all-time highs. The S&P 500, which made several visits to its 200-day moving average from early February through early May, is now sailing along above its 25- and 50-day moving averages, boosted by a spate of earnings beats and tax-cut related good news.

Meanwhile, the Chinese American Depositary Receipts (ADRs) that are tracked by the Golden Dragon ETF (PGJ) have been hacking along sideways since the same late-January dip that knee-capped the S&P. But PGJ hasn’t been able to hold onto gains despite three attempted rallies.

PGJ has been the victim of investors’ skepticism about the possible outcomes if the trade war between the U.S. and China (which has already seen the outbreak of actual tariff hostilities) escalates in line with the accompanying rhetoric from Washington, D.C. and Beijing.

The war and its possibilities have sunk the Chinese currency to its lowest level in 13 months. On the one hand, the yuan’s decline has gone a long way toward cancelling out the effects of the first round of U.S. tariffs. But on the other hand, much more weakness will likely lead to capital outflows from China and possibly higher inflation.

A quick search through the charts of every emerging market ADR on the market shows that the damage has been widespread. But while some markets have bounced nicely—especially previously beaten down Argentina and Brazil—Chinese ADRs haven’t been able to get any traction at all.

In the long run, patience will do a great deal of our work for us. I will keep the portfolio’s cash level high to limit our potential liability and the market will continue to reflect the current anxieties and pessimistic estimates of all emerging markets investors.

Eventually, that will mean the rotation out of China will give way to a rotation back into China. While the current correction hasn’t produced the kind of declines that attract bargain hunters, there will be some great setups and attractive growth stories to sort through when the trade wars play themselves out. Always remember: The market is a discounting mechanism, so don’t let the news and rumors get you down. Stocks are likely to push higher before it’s obvious that the trade back-and-forth is officially over.

In the meantime, I’d like to put in a plug for the Cabot Wealth Summit that will be held this year on August 15 through August 17 right here in beautiful Salem, Massachusetts.

Salem in August has a lot to offer to any tourists with an appetite for lobster, history, sea-faring lore and scenery.

But the biggest attraction for anyone interested in stock investing must surely be the chance to meet, talk with and listen to a group of Cabot analysts whose collective market experience is close to 200 years. The Wealth Summit is short, intensive and highly interactive, with plenty of chances to ask questions about your stocks, your buying and selling rules and portfolio construction. It’s one of my favorite events of the year, and I hope you will attend. You can find out more and sign up by clicking here.

Featured Stock

Never Too Young to Learn
RYB Education (RYB)

IRYB Education, with a market cap of $635 million, is a player in the crowded field of for-profit education companies in China. But it isn’t trying to take on giants like TAL Education and New Oriental Education in a head-to-head battle for tutoring and test-preparation services. Rather, RYB, which opened its first education center in 1998, is essentially a kindergarten company, providing age-appropriate services for kids from infancy through six years old. The company operates nearly 1,000 franchised play-and-learn centers and 212 kindergartens in over 210 Chinese cities and towns.

RYB’s play-and-learn centers for kids from birth to two years are unique among Chinese educational offerings in that they involve both the child and the family. As the name implies, the idea is to promote interaction among the whole family that will benefit the child when more structured learning begins.

Kindergarten operations offer that more structured learning, giving young pupils the skills to succeed when actual school instruction begins. Kindergartens supply more than 70% of RYB Education’s revenue via tuition fees, with 13% coming from the sale of educational merchandise, 10% from franchise fees and the balance from the sale of school uniforms and other products.

RYB Education turned profitable in 2015 and increased revenues by 30% in both 2016 and 2017. The company’s Q1 earnings report was full of information about plans to improve the training and compensation of staff at its directly operated kindergartens as well as enhancing security and safety standards. Despite the late timing of the Chinese New Year and terrible weather just before Chinese New Year, revenue in the first quarter increased 8%.

Management expects increased spending on training and operational support as likely to slow franchise revenue in 2018, but that will only be temporary. And analysts are estimating that the company’s earnings will increase by 65% in 2018 and by a whopping 152% in 2019 when training and support spending diminishes.

RYB came public at 18.5 in September 2017, and traded in the high 20s with peaks over 30 until a disappointing earnings report on November 29 sank it back into the teens. But the stock’s action at that point indicated that investors viewed the stock positively, as RYB built a nice base over the next six months, including two months of tight, flat trading at 17 in April and May, usually a sign that no more supply is coming to market. The stock burst up to 23 in June, then got caught in the general market weakness late in the month and dipped to 19, but has shown some power in getting back above 22.

Ultimately, the attraction of RYB is in the size of opportunity for growth via both franchising and organic growth. The total number of the company’s kindergartens and play-and-learn centers has grown from 627 in 2014 to over 1,200 today. In the second quarter, the company acquired an 80% equity interest in four of its franchised kindergartens in Shandong province for $6.2 million and purchased two additional kindergarten facilities that are ready to be used. The company’s stringent selection, training and certification process for inclusion in the RYB network will keep quality high and enrollment figures growing.

cem664-ryb-copy.png

With the Cabot Emerging Markets Timer flashing a brand-new buy signal, it’s time to start gradually increasing our exposure to the market. Accordingly, we will add a half position in RYB to the portfolio. Just be aware that RYB is thinly traded, so expect choppiness on a day-to-day basis. BUY A HALF.
RYB Education (RYB)
No. 29 Building, 4th Floor Fangguyuan
Section 1, Fangzhuang, Fengtai District
Beijing 100078, China
Ir.rybbaby.com

image-blank.png

Model Portfolio

cem664-portfoliob-1024x340.jpg


Invested 55% Cash 45%

Updates

We’re not breaking out the champagne at all, but the new green light from the Emerging Markets Timer is the first ray of light we’ve seen during the past few weeks (and longer for non-Chinese stocks). The fact that it comes amid plenty of uncertainties and worries is also a plus, as the market tends to look ahead.

That said, we’re not pounding the bullish table here. Chinese stocks are still struggling, and even the iShares EM Fund (EEM) has plenty of overhead to chew through. Thus, it’s more about putting a little of our good-sized cash hoard back to work and then seeing how it goes—further strength will likely have us extending our line, but a quick reversal of our buy signal will have us returning to shore.

Tonight, we don’t have many changes, but besides adding a half position of our new recommendation, and buying a new half position in JD and placing IQ back on Buy a Half for those that don’t own any shares.

cem664-jobs-copy-200x118.png

51Job (JOBS) was sold in last week’s update. The stock has bounced since, but it’s got a ton of overhead to chew through at this point, and we think there will be greener pastures to graze on going forward. SOLD.

cem664-baba-copy-200x119.png

Alibaba (BABA) took a hit today in concert with Facebook, which imploded after reporting earnings last night. Still, the stock has actually been holding up decently despite the mess among Chinese stocks—after its late-June plunge to the 185 area (and the 200-day line), the stock has held firm and even bounced decently before today’s giveback. A decisive breakdown on earnings (likely out the second week of August) below the mid 160s would call into the question the stock’s longer-term uptrend. But we still think the odds favor the next big move is up, so we’re content to wait patiently for the buyers to return. HOLD.

cem664-athm-copy-200x118.png

Autohome (ATHM) has both good and bad in its chart. On the positive side, we like the reasonable correction after a good run and the stock’s recent calm trading despite all the trade war hoopla. On the negative side, ATHM hasn’t really bounced much during the past couple of weeks, even as most names have. The risk is that China’s economy is slowing, which means fewer car sale and a decline in growth for Autohome in the quarters ahead. But we don’t see any clear signs of that—we’re staying on Hold here, thinking a drop below 94 or so (on the sell side) or a push above 107 (on the buy side) will have us changing our stance. HOLD.

cem664-bgne-copy-200x116.png

BeiGene (BGNE) has rebounded decently in recent weeks, pushing back to its (flat-ish 50-day line). The company released a flurry of news a few days ago, announcing that one of its potential treatments got Fast Track designation (approval possible in the first half of 2019), positive Phase II clinical trial results for another (will file a license to sell it in China later this year) and announced the start of a Phase III trial of another. It’s still speculative, but we like the action. A bit more strength (and improvement from the market) could have us adding a few more shares. Hold for now. HOLD A HALF.

cem664-gds-copy-200x117.png

GDS Holdings (GDS) looks like a lot of growth stocks, with a big run into June, a sharp correction to the 50-day line, a nice rebound to its old high, and now some more selling. Overall, GDS has been between 36 and 46 during the past five weeks, and is still holding near its 50-day line, which is acceptable. Further weakness could have us moving to Hold, but we’re aiming to be patient with our position, thinking the stock has lots of upside left as its fantastic growth story plays out. If you don’t own any, you can buy some around here. BUY.

cem664-iq-copy-200x119.png

iQIYI (IQ) is an interesting situation—it’s now nearly six weeks into its base-building phase, and compared to some other hot IPOs, it’s been holding up relatively well, bottom in early July and, even during this dip, finding a little support at its 50-day line (now at 31.5 and rising). It’s temping to buy another half position here, but the issue is that the firm will report results next Monday (July 31). Still, if you don’t own any and are OK with some risk, we’re OK buying a half position here. If you already own some, just hang on. BUY A HALF.

cem664-jd-copy-200x117.png

JD.com (JD) isn’t the type of chart we usually target, but given the action of most emerging market stocks, we’re intrigued. JD has repeatedly found support in the 34 to 35 area both recently (three times since mid-April) and even going back to last year (two more times last fall). And the stock posted a couple of great weeks of accumulation in June after the Google tie-up (GOOGL is investing $550 million in JD and both are teaming up in online commerce) before the market pulled it back down. Earnings are likely out in a couple of weeks, but with the new market timing Buy signal, we think the risk/reward situation here is enticing. We’re going to Buy a Half position in JD here and use a relatively tight stop in the low 30s. BUY A HALF.

cem664-wns-copy-200x120.png

WNS Holdings (WNS) is trying to hold up following its post-earnings dip. Nothing in the report makes us think that the growth story is over, but we’ll need to see shares round out a bit before thinking of a buy rating. WATCH.

cem664-zto-copy-200x120.png

ZTO Express (ZTO) is a stock we’d like to buy more of, but the recent failed breakout (it leapt to new highs above 21 before backing off) is a short-term negative. That said, it’s not that negative—we still think it’s OK to buy a half position and see how it goes. Earnings, due out August 8, will probably tell the stock’s intermediate-term tale. Longer-term, we still think this story is big and the stock is early in its overall run. BUY A HALF.
[premium_html_footer]

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 August 9, 2018

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 2018. 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.

[/premium_html_footer]

Save

Save

Save

Save

Save

Save