The recent bounce in emerging market stocks has raised hopes that the end might be near for the powerful correction that has hit EM stocks so hard. That may be the case, although the only sure way to tell is to watch the market’s action tomorrow and through the rest of earnings season and beyond. We’re certainly not going to do any predicting, just telling you what to do based on the action we see. The next few weeks will see quarterly reports from four of our stocks, and will also give us a sense of what the future leadership among emerging-market stocks will look like. In today’s issue, we have a South African company that’s becoming a global player in a software niche.
Cabot Emerging Markets Investor 671
[premium_html_toc post_id="163199"]
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 clearly negative, as the intermediate-term downtrend in EM stocks continues. As we said in the intro section, October was a doozy for all stocks, and our names were no exception—the iShares EM Fund (EEM) sank from around 43 to as low as 37.5 before bouncing back during the last two days of the month. That keeps the fund well below its moving averages, telling us the trend is down.
Given the evidence, we’re sticking with our defensive stance, but after many months of poor action, now’s not the time to stick your head in the sand—earnings season is likely to reveal some initial signs of new leadership for the next advance.
A Bounce of Hope
The correction in emerging market stocks has been going on since January, and October added substantially to the rate of decline in the iShares EM fund (EEM). EEM’s 25-, 50- and 200-day moving averages have been upside down (with the 200-day on top, etc.) since June and the ETF had fallen as much as 27% from its peak earlier this week.
The Golden Dragon ETF (PGJ) resisted the market’s turn away from emerging markets until the middle of June, but the reaction was much stronger when it came. From its June high to last week’s low, PGJ was off 38%.
As another illustration of the temper of the market, you only have to look at the different reactions to the quarterly reports from Baidu and iQIYI, both of whom released their results on Tuesday evening. Investors were disappointed with the results, and they took a hatchet to IQ, sending it down by more than 10%. (We sold the stock in a Special Hotline on Wednesday morning).
Baidu, on the other hand, beat on both top and bottom lines, but the reaction from investors was lukewarm. BIDU rose a relatively tame 3.6% on the day, not exactly a huge endorsement.
When investors are feeling threatened—in this case by the ongoing trade war between the U.S. and China, the extreme weakness of the Chinese currency and the rising interest rate environment in the U.S.—the tendency is to enthusiastically punish bad results while giving only tepid approval to good news. And that’s what we’re seeing today.
The sale of IQ on Wednesday left our portfolio with a very heavy 75% cash position, which is probably appropriate for these market conditions. I don’t feel the need to raise more cash just to raise cash; I’ll just manage the stocks in the portfolio as their charts tell me until the tone of the market improves and we can get back to some normal buying and selling.
On a different topic, the quarterly results calendar for the four stocks in the portfolio that haven’t reported is now complete. Here are the dates.
Alibaba November 2 after the close
Petrobras Nov. 6 before the open
Huya Nov. 12 after the close
Bilibili Nov. 20 after the close
Alibaba is the big story on this list. With Baidu having beaten expectations, good news from Alibaba might raise the credibility of claims that the bottom is in for Chinese tech giants. Analysts are setting the bar for the report at $12.43 billion in revenue and $1.06 per share in earnings. The timing of Alibaba’s report is perfect to take advantage of the market’s nascent recovery … if it continues.
On a personal note, I’ll have to admit that it’s nowhere near as much fun to write this advisory when markets are irritable and depressed. But I’m proud that I’ve kept increasing our cash position as investors’ appetite for EM stocks disappeared. I’m getting more hopeful by the day that the end of this bear phase in sight. When the charts confirm it, we should have plenty of bargains to choose from.
Featured Stock
Follow the Fleet
MiX Telematics (MIXT)
A stroll through the ADRs that make up the emerging markets universe is a little like walking through a pasture recently vacated by a herd of buffalo; there’s very little grass left and there’s a ton of “landmines” if you know what I mean.
My bi-weekly review of EM stocks uncovered some potential bargains: Brazilian bank Banco Bradesco (BBD) is trading at a 3 P/E and offers a dividend that yields 2.8%. But the stock (which we’ve had in the portfolio in the past) is range-bound and analysts see earnings down 78% this year. Telefonica Brasil (VIV) is profitable, its stock is trading at an 8 P/E and its dividend yield is an impressive 8.2% yield. But corporate sponsorship has been declining since Q1 2017 and revenue has been flat or declined in five of the last six quarters.
The bottom line is that I still insist on getting a full package of attractive Story, strong Numbers and a supportive Chart (the SNaC approach) before I recommend a stock for buying. And while there are lots of emerging market stocks whose charts are improving, there are few showing real strength.
So my featured stock this week is MiX Telematics (MIXT), a South African software designer that’s making a global mark in software that lets companies manage their truck and car fleets and other mobile assets like buses, vans and trailers. The company’s services can track vehicles to control fuel costs, help with regulatory compliance and recover stolen assets. The company, which was founded in 1996, has customers in more than 120 countries on six continents and its software tracks more than 700,000 mobile assets.
The addressable market for fleet management software is enormous, with a global fleet base of 192 million vehicles, of which only 14% is currently using such software. MiX Telematics charges a reasonable monthly rate of $35 per vehicle ($420 per year), which makes the value of the addressable market $81 billion.
MiX Telematics has been consistently profitable, but really started to gain traction in fiscal 2017 (its fiscal year ends in March) when revenue grew by 6% and 2018, when it was up by 22%. Earnings growth also improved sharply in calendar Q3 2016 and has averaged over 100% per quarter over the past eight quarters. After-tax profit margins has also improved to double digits in the two most-recent quarters. As is common for the industry, the company’s usual subscription basis for its software and hardware keeps recurring revenue high.
Corporate sponsorship is still low at 67, but that’s up from 27 in the same quarter last year.
MiX Telematics just reported its fiscal Q2 results this morning (November 1) and investors liked the 18.4% growth in subscription revenue and the 22,000 net subscriber additions, pushing the company’s total base above 714,000.
MIXT reacted very positively to the good numbers, jumping above 17 on increased volume. MIXT isn’t a heavily traded issue, so it’s good to see both the six-day rally that has booted the stock from 13.5 to 17 and the steadily rising trading volume.
MIXT was trading at 21 in May 2018, capping a rally that had shot it from 5.6 in May 2017. Then came a jumpy correction that brought the stock back to 13 in early October and formed a brief bottom at 13 in the week or so before the pre-earnings rally.
MIXT still has significant overhead from its May/June sojourn around 20. But today’s action has taken a significant bite out of that overhead. I’ll put the stock on the Watch list and will be watching for both an improvement in the momentum of emerging market stocks in general and evidence that investors are serious about MIXT in the form of some sideways trading with support at 17. WATCH.
MiX Telematics (MIXT)
Matrix Corner
Howick Close Waterfall Park
Midrand 1686
South Africa
www.mixtelematics.co.za
Model Portfolio
Invested 25% Cash 75%
Updates
Down, down, down … the action in emerging market stocks remains rough, with EM stocks joining the rest of the world on the downside in October. While it’s not sexy to talk about, we’re glad to have remained defensive for much of the past few months, avoiding the worst of the damage. And, of course, that cash is going to come in very handy once the bulls retake control.
Obviously, we’re trend followers, so until the trend turns up, we’re content to sit mostly on the sideline. But we’re also students of the market, and we’re actually growing increasingly intrigued as this decline continues, knowing that most investors view EM stocks (and China in particular) as lepers. That means it’s likely most of the weak hands are out and some smart money might start nibbling.
Said another way, while most are throwing up their hands, we’re keeping our eyes on the ball so we know not just when the market turns up, but which EM stocks are likely to lead the advance.
Alibaba (BABA) has actually shown some early signs of resiliency—after sinking as low as 135 in early October, the stock has held above that level for all but one day since (a shakeout on Monday), even as the market for growth stocks (more generally) and Chinese stocks (in particular) was imploding. It’s a small first step. More important, of course, will be the firm’s reaction to quarterly results (due out tomorrow morning, November 2)—a solid gap up would add to the evidence that big investors are supporting shares. We’ll see what comes. HOLD A HALF.
As mentioned earlier, Baidu’s (BIDU) quarterly report topped expectations, with a 16% revenue gain and 41% earnings jump helped by its core Internet search business as well as some newer apps (including its namesake app, which saw users grow 19% from the prior year, and some other feed apps, such as Haokan, a short-video app). And also reported progress on its AI (DuerOS now has an installed base of 141 million) and auto technologies (fully autonomous Apolong minibuses are now running in 10 locations). Management did offer some cautious words about the future based on the Chinese economy, though, which resulted in just a modest bounce. We’re fine keeping BIDU on the watch list to see if it can gain any upside momentum post-earnings. WATCH.
Bilibili (BILI) will report its own quarterly results on November 20, but it’s clear investors are thinking the best is yet to come, as the stock remains very resilient, and actually scored an excellent-volume up day on Wednesday. The reason: A new deal with GREE, a leading mobile Internet firm in Japan, to jointly develop mobile games which continues BILI’s international expansion. This one should remain near the top of your watch list. WATCH.
Ecopetrol (EC) has seen its normal pullback to start October slip into a deeper correction, with the stock falling again today after what looked like a positive quarterly report released last night, with local currency sales rising 34% and cash flow lifting 37%, though those figures likely were shy of what analysts had been expecting. If we were craving cash, we might dump EC and move on, but we’re not, as the stock has support in this area from its prior base and the 200-day line (now near 21.2 and rising). We’ll hold our half position here and see what comes. HOLD A HALF.
Huya Inc. (HUYA) has skidded all the way back toward its IPO price, with a steep fall during the past two weeks paralleling the overall market. Despite the action, we still think the stock has good potential if management pulls the right levers—we want to see the firm’s results (and the stock’s reaction) to earnings on November 12. WATCH.
iQIYI (IQ) was sold on our Special Bulletin yesterday, as the stock’s earnings report led to another leg down. Shares did bounce back a bit today, and if the stock sets up properly down the road, we could always take another swing at it. But it’s not looking likely to be a leader early in the next upturn. SOLD.
Petrobras (PBR) continues to dance to its own drummer, as this special situation (with the help of a tailwind for most Brazilian stocks) attracts buyers. One report suggested that the company could divest another $20 billion in assets through next year, and it has delivered on some of that—the company agreed today to sell its 50% stake in a Nigerian venture to Vitol for $1.53 billion. There’s still potential for the overall market (or falling energy prices) to take a bite out of the stock, but the longer PBR resists those factors, the greater the chance that the stock can continue higher as it progresses on its turnaround. We’re OK buying a half-sized position here or on dips of a point or so. BUY A HALF.
RYB Education (RYB) has bounced a bit in recent days, but remains buried below a ton of resistance above 19. We sold last week and are holding the cash. SOLD.
Fears of a worsening China slowdown have dented some base metal prices, but despite volatility, Vale (VALE) is holding up well, remaining north of its 50-day line thanks to a solid three-day rally starting Tuesday. While the firm’s Q3 report was just so-so, analysts see earnings up 26% in 2019 as demand for its premium iron ore and pellets remain strong. It doesn’t hurt that, after a ton of debt reduction in recent quarters (net debt is now at its lowest level since 2009), management also pointed toward likely increasing shareholder returns through higher dividends and buybacks. We’ll stay on Buy, though a dip back below 14.2 or so would be a yellow flag. BUY.
WNS Holdings (WNS) has been easing generally lower for a few months, which is acceptable action given the market, and we’re pleased to see it show some relative strength since early October (the low was 46, but it’s been above that level ever since). It’s not going to be a rocket, but given its steady business, WNS could be a good foot-in-the-door stock once the market’s trend improves. WATCH.
[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 November 15, 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]