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Cabot Emerging Markets Investor 679

We’ve had an up and down week for emerging markets with a big day yesterday followed by weakness today. Our EEM signal stays positive so we are adding a half position today and moving one stock from buy to hold.

Cabot Emerging Markets Investor 679

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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 is still solidly in the bull camp, with the recent pullback being modest compared to the year-to-date upmove. You can see in the chart that the iShares EM Fund (EEM) has dipped to its rising 25-day line, which is completely normal action following its 5.5-point advance since the start of the year. With EEM well above its lower (50-day) line, the intermediate-term trend is pointed solidly up.

While there’s always a chance the rally will fail, the key to investing is to go with the evidence that’s in front of you. Right now, that means using this dip as a chance to add exposure to high-potential emerging market names.

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Moving Forward After an Up and Down Week

Despite today’s weak performance, emerging markets (EEM) gained a point during the week despite the ongoing uncertainty surrounding the U.S.-China trade talks.

AngloGold Ashanti’s shares surged on great earnings and NIO moved nicely while Brasil Foods was lackluster.

It’s becoming increasing clear that the March 1 deadline for a deal or imposition of tariff on Chinese imports is fading fast. I could be wrong but I think the Chinese see that the U.S. side seems unwilling to pull the trigger and so Beijing is running out the clock. I expect a deal with some Chinese purchases of agricultural goods and broad outlines of reform and continued talks. Both sides will claim victory.

Our Emerging Markets Signal (EEM) remains positive and constructive so we are adding a half position today and moving one stock from buy to hold.

How much of the positive performance so far in 2019 is a bounce from a very weak second half of 2018 is still unclear. But a key driver for institutional flows into emerging markets remains that they trade at a significant discount to developed markets. EEM trades at a forward price-to-earnings of 11.4, which is about a 40% discount to the S&P 500.

Featured Stock

New Recommendation: Baozun, Inc. (BZUN)

Baozun offers end-to-end e-commerce solutions, including IT infrastructure setup and integration, online store design and setup, store operations, visual merchandizing and marketing campaigns, customer services, warehousing and order fulfillment.

Baozun was founded in 2006 and was listed on the NASDAQ in 2015. Based in Shanghai, it has offices in Hangzhou, Beijing, Hong Kong, Taiwan, Japan, Korea and America. It is one of the best plays to invest in the China e-commerce growth without being tied to any sector or brand.

Here is an overview of the Baozun business:

It’s the go-to platform for blue chip international brands

Foreign companies aiming to sell products and services online into China face a host of challenges because they are not familiar with local digital platforms, customer behaviors and logistics.

Brands look to Baozun as a trusted partner with local knowledge and industry expertise to execute and integrate e-commerce strategies without the investment associated with establishing and maintaining local infrastructure and capabilities on their own.

It has a growing and broad-based client base

The number of Baozun’s brand partners grew from 122 in 2016 to 146 in 2017 to 178 brands at the end of 2018.

Rather than focusing on one sector, the company serves brand partners in the apparel, appliances, electronics, home and furnishings, food and health products, cosmetics, fast moving consumer goods, insurance, automobile, and mother and baby categories. This shotgun approach lowers risk. In addition, Baozun’s brand partners occupy leading positions in their respective industries, such as Philips, Nike, Microsoft and Haagen-Dazs.

It has the leading market share in China

According to a Brand E-commerce Service Industry Report, Baozun has gained a market share of 25%, ranking first in the whole industry with a size nearly three times larger than the company ranking second.

It focuses on steadily improving logistics and technology

Technology is key to Baozun’s success and quick expansion as it leverages its proprietary and scalable technology infrastructure that synchronize marketing campaigns, centralize management of inventory, order fulfillment and customer service, and collect and analyze real-time consumer behavior and transaction data across internet, mobile and offline channels.

The company is able to achieve next-day delivery in 95 cities across China and operates seven warehouses with an aggregate gross floor area of 180,000 square meters that can handle 1,100,000 daily orders and 600,000 daily pieces.

It has a long runway for growth

Baozun still has a long runway for growth. Goldman Sachs research projects an annual growth rate of 25% for online sales and believes that this market could reach $2 trillion by the end of 2020.

Given China’s urban density of 156 cities with populations of more than one million, online retail is one area that should be in high growth mode for a long time. China’s logistics and technology capabilities are already going full tilt, with 140 million parcels delivered each day. And the total cost of delivery per parcel in China is only $1, compared to $5 in the U.S.

The stock is on an upward trend in 2019 but well off its 2018 high

Baozun stock traded as high as $67 per share last summer before coming down sharply during the second half of the year. So far in 2019 shares have regained momentum but are still a long way from their 2018 high. BUY A HALF.

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Baozun Inc. (BZUN)
Building B
No. 1268 Wanrong Road Jingan District
Shanghai 200436
China
86 21 8026 6000
http://www.baozun.com

Model Portfolio

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Updates

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Alibaba (BABA) is up 22% so far in 2019 continuing its momentum during the past week to reach $170. Affiliate company Ant Financial has agreed to acquire British payments group WorldFirst for around $700M, marking the biggest push yet by the financial services giant into Western markets. BUY A HALF.

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AngloGold Ashanti (AU) shares surged 14% during the past week after reporting earnings of 53 U.S. cents per share, compared to 6 U.S. cents per share in 2017. AngloGold generated free cash flow of $67 million in 2018 compared with only $1 million generated in 2017. Debt decreased by 17%. BUY A HALF.

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Brasil Foods (BRFS) shares appear stalled after getting off to a decent start a few weeks ago. The stock represents good value in a favored market but I’m moving it to hold. The company recalled almost 500 tons of fresh chicken products due to contamination worries, in a move affecting several key export markets in Asia, Africa and the Middle East. MOVE FROM BUY A HALF TO HOLD.

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Nio (NIO) jumped nicely this past week and will announce 4th quarter results on March 5th. Sales of electric cars are growing fast in China, the world’s biggest auto market, with deliveries of Electric Vehicles (EVs) more than doubling to 85,000 units in January while total passenger car sales decreased 18%. BUY A HALF.

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Sea Limited (SE) - the digital entertainment, e-commerce and digital financial service businesses in the Greater Southeast Asia will report earnings on February 26. Our most recent recommendation, Sea has moved only incrementally and if you haven’t taken any action yet, I’m fine with you buying a half position here. BUY A HALF.

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TAL Education (TAL) incrementally gained ground during the past week and I like that shares outperformed today as emerging markets pulled back. The company announced that it acquired Boston-Tel Aviv startup company Ready4. This adds on-demand and live online courses and assessment science to its portfolio of products. The company recently reported quarterly results saw earnings increase by 167%.

You can buy a half position here or on any pullbacks if you don’t own any already. BUY A HALF.

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Tencent (TCEHY) started this past week strong and then gave everything and then a bit more back over the last three days.

Concerns about Tencent’s recently announced investment in Reddit seem overblown given that the $150 million from Tencent would only give it a small stake of around 5% in Reddit. Tencent has made a habit of taking small stakes in many different tech firms such as Tesla, Snap and Epic Games as a way of keeping up with the latest technologies. BUY A HALF.

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Van Eck Rare Earths/Strategic Metals (REMX) a resource, tech metals play and a hedge on U.S.-China tensions, was up 2.5% during the past week and remains well above its prior low. BUY A HALF.


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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 March 7, 2019

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 2019. 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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