The Emerging Markets Timer held and slightly improved its position and is sitting right at its 50-day moving average, which is both constructive and bullish.
We would like to see a stronger uptrend before moving ahead to put much more cash to work but we do have a new recommendation from Brazil—a market that has moved up 20% in the last month.
Cabot Emerging Markets Investor 677
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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 positive, as the buyers are slowly wresting control from the sellers. The iShares EM Fund (EEM) has participated in this year’s nascent rally, briefly pushing to its highest level since early October before a little giveback this week. With EEM well over its lower (now 50-day) moving average, the intermediate-term trend is up.
Of course, we still think some caution is in order; the longer-term trend is still iffy and there remains the risk of sudden moves based on news and rumors of trade negotiations. Still, overall, the evidence has improved, and we’ve been slowly putting money to work.
Global Stocks Are Turning Up
This was an up and down week for emerging markets stocks, with some early-week retrenchment after a good run since the start of the year, along with some intraday wobbles and rallies depending on the rumors/reports from U.S.-China trade negotiations. Still, net-net, most emerging market stocks are flat to higher on the week, which we take as a good sign given their prior upmove.
As for the Emerging Markets Timer, the iShares EM Fund (EEM) is in the same boat, holding its gains from earlier in January. It remains comfortably above its moving averages, which keeps the intermediate-term trend pointed up. And that fact keeps us leaning bullish.
That said, we’re also not leaving our brains at the door, either. After such a rough 2018 (especially with the fourth-quarter plunge), there’s plenty of overhead to chew through when looking at most EM stocks or individual markets. (Overhead simply refers to potential selling from investors who bought a security at higher prices and could look to lighten up—or get out completely—as a stock approaches breakeven.)
For example, EEM, despite its intermediate-term uptrend, is still sitting a bit below (by a couple of percent) its longer-term 200-day line. And Chinese stocks are even worse, with the Golden Dragon Fund (PGJ) about 12% below its own downtrending 200-day line.
None of this is to say you should discount the signal from our Emerging Markets Timer; as trend followers we never do that. But it’s best to step your way back into the market piece by piece, and realize some potholes are likely here and there even if the rally continues.
There is one country, though, that’s an outlier compared to its EM peers. We’re talking about Brazil, which, while taking a hit in the first half of last year, actually bottomed in September and has put on a good show since. And the encouraging action has continued since the worldwide Christmas Eve bottom, with Brazil surging to 10-month highs this week!
We think there’s more in store, and so we turned to that country for this week’s recommendation.
Featured Stock
New Recommendation: Brasil Foods (BRFS)
A Classic Turnaround Opportunity in a Nice Uptrend
Tom Jobim is famous for having written the “Girl from Ipanema,” as well as for the maxim, “Brazil is not for amateurs.” This is especially true for investors.
I hope it changes but for now Brazil represents a boom-to-bust trading opportunity for many reasons—culture, geography, and the lack of infrastructure and a vibrant manufacturing base all make for sharp ups and sharp downs in their economic path.
Another factor playing into the volatile trend is that Brazil is very new to the international community. It was only in the early 1980s that civilian rule was reinstated; it was only 1988 when the Constitution was adopted; it’s currency came into being only in 1994.
Brazil needs strong leadership that is willing to break from traditions. And that might be happening soon—Jair Bolsonaro, the newly elected controversial and pro-business president of Brazil, gave a speech earlier this week at Davos where he invited the elite audience to visit the “new Brazil” where his team of technocrats will cut taxes, root out corruption, and “better integrate Brazil into the world.”
As mentioned above, investors seem to be buying in. The iShares Brazil Fund (symbol EWZ) has surged 30% since anticipating his election since September 2018. As opposed to some other countries like China, which are seeing slowing growth, Brazil is on a different cycle—it’s actually coming out of a recession and looks like an enticing turnaround story going forward.
My recommendation this week should benefit from these macro trends, and it has its own catalysts to boot.
Brasil Foods (Nasdaq: BRFS) is the largest exporter of poultry in the world and supplies food products to McDonalds, Pizza Hut and Burger King. The company is also Brazil’s largest maker of frozen microwave dinners and meats.
In Brasil Foods’ case, the parent company traces its roots back to the 1950s, but it was a merger with two other Brazilian firms, Perdigao SA in 2008, and Sadia in 2009, that put Brasil Foods on the map. While the company supplies markets in Asia, Europe, the Middle East and North America, two-thirds of its revenue comes from home market Brazil.
But it hasn’t been all peaches and cream. In the last year, Brasil Food’s stock fell from a high just under $12 a share to a September 2018 low of $4.65. Why? Just about everything went wrong. The company has gone through a damaging food safety scandal and became entangled in trade disputes with China, the Saudis and the European Union, leading to some awful quarters that led to uncomfortable debt levels.
Major investors demanded change and put in place a new CEO. Pedro Parente is a turnaround expert armed with a solid plan to boost sales, reduce costs by 30% in 2019 and pay down debt.
Sure enough, since September 2018, the stock has moved steadily upward through its 50-day moving average and has risen 36% against the backdrop of a strong Brazilian market.
Bottom line: Expectations are relatively low—and so, we think, is downside risk. Thus, the slightest bit of encouraging news will keep this stock moving forward with the tailwind of stronger economic growth and fresh institutional money flows into Brazil’s market. Already there are signs of a deal with China and the EU, as well as some indications of regulatory relief from the new administration.
Here is the clincher. Studies show that as incomes rise in emerging markets, diets change rapidly, with less rice and vegetables and more meat and dairy. This is a growth sweet spot and Brasil Foods is at the bullseye.
The world wants its products—it just has to deliver, and we think this turnaround play has plenty of upside. You can go ahead and buy a position here. BUY.
Brasil Foods (BRFS)
475, Rua Jorge Tzachel
Itajaí, SC
Brazil
http://www.brf-global.com
Model Portfolio
Invested 55% Cash 45%
Updates
As we wrote on page 1, our Emerging Markets Timer remains positive, so we continue to lean bullish, but we’re not advising plowing into a bunch of names here given the longer-term resistance stocks will have to work through. By all means, do some buying, but also continue to hold some cash. It will be interesting to see how EM stocks handle themselves after the recent rally.
Alibaba (BABA) has a firm double bottom in place, now it’s a matter of seeing if buyers can really flex their muscles. Earnings, due out January 30, could tell the tale. HOLD A HALF.
AngloGold Ashanti (AU) was especially strong on Tuesday when markets were a sea of red. Next earnings are expected on February 19, though the stock will probably trade much more closely with the price of gold than any modest fundamental changes. We’re not likely to be in AU for a long-term hold, especially if the market gets going and better growth-oriented opportunities present themselves. But right here, the uptrend looks good, so you can start with a half position if you’re not yet in. BUY A HALF.
Nio (NIO) is a $7.9 billion Shanghai-based electric vehicle company added to the watch list last month. NIO lost some ground in the last week and appears locked in a trading range. WATCH.
TAL Education (TAL) reported third quarter numbers today, and they were solid. Earnings rocketed by 167% to 24 cents per share, while revenue climbed 35% to $586 million. And total student enrollments increased by 68% year-over-year, all of which beat estimates. (The firm opened 16 new learning centers, ending with 666 learning centers in 54 cities.) TAL Education took a hit today, but overall, the chart is still fine. We’re OK buying this dip if you don’t own any. BUY A HALF.
By the way, here is link to a good TAL investor presentation released this morning: https://seekingalpha.com/article/4235263-tal-education-group-2019-q3-results-earnings-call-slides?dr=1
Tencent (TCEHY) Beijing finally granted a couple of gaming licenses for Tencent and the company stands to benefit from a highly-anticipated game from Perfect World, to which Tencent has exclusive publishing rights. You can grab a half-sized position here. BUY A HALF.
Vale (VALE) has been underperforming the rally in Brazil stocks since mid-October, but it’s been strong over the past week. We will give it a bit more time as it approaches its old highs at 16. HOLD.
Van Eck Rare Earths/Strategic Metals (REMX) is a resource, tech metals play and a hedge on U.S.-China tensions. The stock has pulled back a bit in recent days but remains well above its prior low. BUY A HALF.
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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 February 7, 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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