The way the markets have been acting, it won’t be a chore to say goodbye to 2018. We’ve avoided the worst of the declines of the second half of the year, but the bears have definitely had the upper hand for months. That’s why I’m featuring an unaccustomed defensive stock in today’s issue.
Cabot Emerging Markets Investor 675
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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 in the bear camp, telling us to stick to the defensive stance we’ve been in for most of the past few months. That said, the action of late hasn’t been all bad—the iShares EM Fund (EEM) is below its moving averages even after yesterday’s big rally , but has held above its October low, which is a rarity in this environment. It’s a ray of light.
That action (along with the panic selling seen recently in U.S. names) could be setting up a more sustained low, but as always, we’ll just take it as it comes. We’re keeping our eyes open, but with the intermediate-term trend of most stocks and indexes still pointed down, you should continue to hold plenty of cash.
No Real Surprises
The uptick in the major market indexes on Wednesday may mean something and it may not. After steep declines in six of the previous eight days, the stage was certainly set for a rebound. Bargain hunting is a strong influence on index prices, especially when so many big-name stocks on institutional investors’ wish lists fall to attractive valuation levels.
In U.S. large-cap stocks, the S&P 500 (just for example) has been drooping since early October. The two failed rally attempts in November set a putative support level at 2,600, but that was breached in December 17, and it’s been all downhill from there.
Emerging market stocks, by contrast, have been able to hold above their late-October low around 38. The iShares EM Fund (EEM) rallied to 42 in early November and again in early December before the uncertainties surrounding the U.S./China trade war drained those gains. But unlike U.S. stocks, EM stocks look like they are in base-building mode, with EEM still within shouting distance of its declining 25- and 50-day moving averages. Chinese ADRs have actually dipped below their late-October lows, but their relative proximity to their moving averages is similar.
The important lesson that Cabot’s growth disciplines have taught again and again is that being in step with the main trend of the market is the single most important thing a growth investor can do. That’s why the portfolio of Cabot Emerging Markets Investor has been so heavy in cash for months.
And it’s that heavy cash position that will allow you to enter the New Year with much of your capital intact and ready to take advantage of whatever 2019 presents in terms of bargains and improved momentum. When the tide of the market is against you, the dollars you don’t lose increase your earning capacity for when the sun shines again.
I don’t have a timetable for when the tone of markets might improve. The ability of leadership in Washington, D.C. to disrupt diplomatic and trade relations around the world seems to have no end. And when investors can’t make educated guesses about the health of economies and markets in six months or a year, they keep their chips on the edge of the table.
The best I can do for a comforting New Year’s message is to repeat the Cabot growth promise that we have stuck with through a couple of historic market corrections and many smaller downmoves: I will guarantee that you never miss a major bull market and that you will never stay heavily invested during a major correction. The Cabot trend-following growth discipline will keep your emerging market portfolio in step with the market, no matter what it’s doing.
So cover your ears when you hear some market commentators saying either “it can’t get any worse,” or “it can’t get any better.” Those statements reflect unfounded optimism and groundless pessimism, both of which are dangerous. The market will do what it wants to, and your best New Year’s resolution is to listen to what it’s saying.
So, to return to the first sentence, the Wednesday spike higher may be the start of something big and it may be just a temporary blip. I’ll let you know.
Featured Stock
Never Say Never
AngloGold Ashanti (AU)
In normal times (remember those?), there are investing decisions that just don’t make any sense. You don’t buy defensive stocks during bull markets and you don’t go all-in when the bears are in charge.
Ordinarily, I’m not much of a fan of investing in gold. If there’s something about the market that scares you, the right thing to do is to go to cash, not into a commodity with limited utility. People go into gold because they’re fearful, and whether it’s a normal kind of fear (which is quite appropriate right now) or the abnormal kind (like worrying that civilization is going to collapse), there’s something comforting about a really heavy metal.
My opinion is that it’s usually better to go to cash when the market is keeping you up at night.
But right now, after a complete survey of every emerging market stock that trades on U.S. exchanges, I’m going to make an exception.
At first glance, the list of American Depositary Receipts (ADRs) is a picture of chaos. Decliners outnumber gainers by an enormous margin and about a dozen ADRs have been demoted to over-the-counter status because they couldn’t keep their stock prices above 1.
Then there’s AngloGold Ashanti (AU), a South African mining company that’s medium sized (market cap is $5.1 billion), profitable (the last two semi-annual reports have featured earnings gains of 1,300% (Q1 and Q2 of 2017) and 209% (the first six months of 2018)), and environmentally responsible (it’s a top performer in the FTSE/JSE Responsible Investment Index).
The company gets 60% of its production from Continental Africa (46%) and South Africa (14%) with the balance coming from South America (23%) and Australia (17%). Management has forecast steady year-over-year performance, with a significant uptick in production in the fourth quarter.
Management is committed to controlling costs, especially in exploration; drilling meters are estimated to be up 63% in 2018, while costs are down 28%. The top brass have also affirmed that the company is on track to meet its full-year guidance.
But the real appeal of AngloGold Ashanti is the performance of its stock, AU. (Nice nod to the periodic table with that name.) AU peaked at 23 in August 2016, then dipped steeply to 9 later that year. And since that big correction, the stock has been in a general downtrend, finally hitting bottom at 7 in August 2018.
But with a new CEO aboard and investor uncertainty increasing, AU began to run in mid-August, climbing to 10 in October and spending seven weeks consolidating at that level. The stock took off again in early December and soared to 12.5 just before Christmas. Gold miners are the hottest sector in the market right now, and AngloGold Ashanti is a leader in the group. The stock also pays a small dividend, with a forward yield of about a half-percent.
AU isn’t going to run forever. Gold is an emotional investment and when investors start to feel better about the U.S./China trade war, Brexit and other global irritants, it could cool off quickly. But there’s also no denying the stock’s positive momentum. And finding a stock that can add a little alpha to your portfolio when times are dismal can be a great help in weathering a negative market. If you have a ton of cash on the sidelines, you can take a small position anywhere below 12.5. BUY A HALF.
AngloGold Ashanti (AU)
76 Rahima Moosa Street
Newtown
Johannesburg 2001
South Africa
http://www.anglogoldashanti.com/investors/
Model Portfolio
Invested 45% Cash 55%
Updates
On a relative basis, Emerging Markets stocks have shown some relative strength this month—yes, the iShares EM Fund (and many individual stocks) has taken some hits, but compared the ravages seen in other corners of the world, it hasn’t been all bad.
Whether it’s the overall market or EM stocks, though, we’ve seen plenty of extreme readings of late, readings that tend to occur near market low points. That’s a good sign that stocks could begin to build a bottom in the weeks ahead.
But, while it’s good to be aware of scenarios, it’s usually best to just stick with the trend. Today, with the intermediate-term trend still pointed down, we’re still holding plenty of cash—though, as always, we have our eyes open should a sustained turn come.
In tonight’s issue, our only move is to move BILI from Buy to Hold. Contrarily, TCEHY is probably our best-looking name and is in pole position to be a liquid leader when the market finally turns positive.
Alibaba (BABA) fell back to its October low this week, which is much better than the broad market. So far it’s held that level, too, though we’ll see what happens in the days ahead. If you still own a half position in BABA, we advise continuing to stick with it. Fundamentally, the firm continues to extend its reach—its payment subsidiary Ant Financial is in advanced talks to buy a British currency exchange outfit named World First for 500 million pounds. BUY A HALF.
Autohome (ATHM) got off to a poor start for us, but we like the fact that it’s putting up a fight near its 50-day line, which is much better than most stocks out there. (Coming into Wednesday, for instance, just six stocks in the S&P 500 were above their 50-day lines. Six out of 500!) We still think the odds favor this stock having reached its ultimate low. HOLD A HALF.
Baidu (BIDU) remains something of a Chinese blue chip, but the stock acts like the dog’s dinner—the latest market leg down took the stock down another 25 points to new lows. A bounce could occur, of course, but its weakness doesn’t bode well for it being a leader of any advance that gets going. We’ll drop it from coverage. DROPPED.
Bilibili (BILI) ) got a brief pop last week on news that it’s collaborating with Alibaba to better connect content creators from BILI to users on Alibaba’s Taobao marketplace. However, this news broke when the market was in free fall, and the end result was that the stock broke below its 50-day line on big volume. Overall, the chart isn’t bad at all—it’s one of the few Chinese names well above where it was this summer—but given the near-term action, we’ll switch to a Hold rating and see how it goes. HOLD.
MiX Telematics (MIXT) succumbed to the selling pressures, falling out of its tight consolidation area. But it’s still well above its October low and we believe the steady business and growth will keep the stock afloat. We advise sticking with your half position. HOLD A HALF.
NIO Inc. (NIO) looks like a bunch of other Chinese stocks. Has it been dented in recent weeks? Yes. But has it broken down? No, as the stock has again tested (and so far held) support near 6. Net-net, this is still a decent IPO base worth watching. Of course, it’s more than the chart—NIO launched its ES6 SUV model on December 15, selling for pre-subsidy price of around U.S.$50,000. And analysts continue to see revenues booming toward $2.5 billion next year, though an early read on sales in the weeks ahead could move the stock. WATCH.
Petrobras (PBR) just couldn’t resist the implosion in oil prices recently, and we sold last week. We still are intrigued by the firm’s overall turnaround story, but outside forces are overwhelming that today. SOLD.
Tencent (TCEHY) ) looks best positioned to be the liquid growth leader of any new advance that gets going in Chinese stocks, as it has hit a series of higher lows and really hasn’t been hit at all this month, remaining above its 50-day line the entire time. Helping the cause is the fact that the Chinese government is beginning to approve new games for the first time since March, which should open up some avenues for growth. We’re OK buying a small position if you’re not yet in BUY A HALF.
Vale (VALE) has been holding its recent lows despite the carnage in most commodity-related sectors, so we’re still holding onto our shares. Management said its iron ore output should total 390 metric tons this year and grow a bit to 400 million next year, with a continued focus on higher quality, lower impurity pellets. We have our position on a tight leash, but the longer VALE can hold up, the greater the chance it can at least make a run higher. HOLD.
WNS Holdings (WNS) ) fell off a cliff in recent days, which takes it off our watch list. Some weakness is obviously acceptable, but the stock dove about 15% below its prior low—not exactly a sign investors were hesitating to get out. DROPPED.
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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 January 10, 2019
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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 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.
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