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

Cabot Emerging Markets Investor 680

Emerging markets (EEM) stay in a confirmed uptrend with the support of generally upbeat earnings. Investors have piled about $86 billion into emerging-market stocks and bonds this year, more than in the last nine months of 2018 combined.

We have some earnings updates and a new recommendation that actually delivers the strong e-commerce growth—a leading consumer theme of emerging markets.

Cabot Emerging Markets Investor 680

[premium_html_toc post_id="172390"]

blank-featured-image.png
Clear

Cabot Emerging Markets Timer

cem680-china-timer-1024x1001.png

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 bullish, telling us the odds favor the next major move of the sector is likely up. During the past month, the iShares EM Fund (EEM) has mostly chopped around between 42 and 43.5, but that’s totally acceptable after the heady January advance—to this point, the fund has found support near its rising 25-day line and is well above its lower (50-day) line, so the intermediate-term trend is pointed up.

Of course, many individual stocks are doing their own thing, with some surging in recent weeks while a couple hit potholes. Thus, you still need to take things on a stock-by-stock basis, but overall, the wind remains at the back of EM stocks.

Clear
image-blank.png

Continuing to Clawing Back

Emerging market stocks remain in a confirmed uptrend with the support of generally upbeat earnings. Investors have piled about $86 billion into emerging market stocks and bonds already this year, more than in the last nine months of 2018 combined.

The chart below shows one broad measure of emerging market stocks rebounding pretty much in line with the S&P 500, including the fact that it’s back to where it was in September 2018. We’ll see if momentum carries on or if we face some resistance, but with the trend up, we’re still optimistic.

cem680-etf-300x196.png

India’s Potential
One interesting nugget we happened on is that India’s economy is now growing faster than China. You would think that investors might jump on this “catch-up” growth since India’s real GDP per head is only 40% of China’s. But while emerging markets from Indonesia to Thailand to China are snapping back from a weak second half in 2018, India shares are actually down so far in 2019.

The main reason is that, although India has tried to implement a market-oriented economy, it does not much like it. That shows in its failure to liberalize capital and labor markets, spend on infrastructure and education and build out a vibrant manufacturing and export base.

Still, there are pockets of excellence in that economy, and I’ll be looking for opportunities there in the coming weeks. And the parliamentary election in India is just one reason the 2019 calendar year is a busy one in Southeast and South Asia, with a general election in Thailand, presidential and parliamentary elections in Indonesia, and midterm elections in the Philippines.

You might think that elections don’t matter much but my experience is that many great bull markets often begin with elections of candidates with a strong mandate for market reforms.

The China “A”-Share Headlines
Switching gears, some of you have asked about the headlines that more China A-shares are being included in the MSCI index and ETF baskets.

A-shares are shares of Chinese companies that are only listed in either of China’s two stock exchanges (Shanghai and Shenzhen). These onshore China A-shares have nearly doubled the performance of the S&P 500 so far this year, rising more than 21% since the calendar flipped.

In June 2018, MSCI added A-Shares to its MSCI Emerging Markets Index (which is tracked by EEM) for the first time. That initial inclusion in June was largely symbolic, but last week, the MSCI announced that it is going to gradually increase its exposure to A-Shares in three phases until it reaches 3.3% of the index by November 2019.

In short, a nice tailwind but not that big a deal for us.

Finally, prior to the sharp downturn in emerging markets in late 2018, there were a lot of ideas that were on my target list. And now that the clouds are parting, I’m jumping onboard some of my fundamental favorites as their stocks have come alive. My latest recommendation is a great, easy-to-understand story out of China.

Featured Stock

New Recommendation: ZTO Express (ZTO)
A Cash Machine

China’s internet and e-commerce industries, both of which continue to show explosive growth and scalability, are quite amazing. According to the China Internet Network Information Center, China’s internet users breached 900 million in December and there are 610 million online shoppers, 592 million of whom use mobile phones to shop.

Obviously, when thinking of the Chinese Internet business, most minds go right to the big players like Alibaba or Tencent. But one of the key cogs in the industry’s continued boom is ZTO Express, which is a cash machine that’s grabbing market share from rivals and scaling up deliveries, revenues and earnings at a rapid clip.

Based in Shanghai, ZTO has grown its market share for China delivery services from 7% in 2011 to over 17% last year. During this same period, its parcel deliveries have grown at a compounded annual rate of 63%. And it’s reinvested heavily, building cash flow that has allowed it to build out a gigantic network of 83 hubs and 30,000 service outlets.

As the firm has gotten bigger, that growth has slowed a bit, but not much—in the third quarter (the most recent report available), the number of of parcel deliveries increased 37% to 8.5 billion.

ZTO’s unit costs are declining from deliveries to traditional merchants, e-commerce sites and online sellers through a proprietary tracking system, a state-of-the-art transportation management system and more than 5,000 trucks, as well as hundreds of business partners.

ZTO’s reach now covers more than 96% of China’s cities and is a key player in the success of the country’s e-commerce giants. And realizing how key ZTO is, some of those giants have stepped up to the plate—in the middle of last year, Alibaba led a consortium of firms that invested $1.4 billion in ZTO in exchange for a 10% stake.

Back to the overall industry, China’s online retail market was approximately $1.1 trillion last year. And according to Forrester, a leading market research firm, even with the country’s growth slowing, the value of that market will compound 8.5% a year over the next three years, hitting $1.8 trillion by 2022. Indeed, only 38% of China’s population currently shops online, yet tens of millions are joining the middle class each year.

And this isn’t just a China story either, as ZTO also serves foreign customers through partnerships with many international express delivery companies.

In the third quarter, ZTO posted a 48% increase in earnings on a 35% increase in sales. And ZTO’s board has also authorized a new $500 million share repurchase program that will run through early 2020. Analysts see U.S.-dollar based earnings up around 20% both this year and next.

Despite these impressive growth and profit numbers, ZTO stock currently trades at only 19 times trailing earnings, or roughly in line with the S&P 500. In fact, the stock currently isn’t much above its IPO price from back in October 2017.

Recently, though, ZTO stock is showing signs of life, rallying back toward its mid-2018 high on solid volume. The next big update will come out next Tuesday, March 12, when Q4 earnings results will be released.

In short, ZTO is a well-managed, fast-growing transportation company set to generate huge profits despite China’s slowdown. With shares undervalued, expect the stock to edge up and then move higher when a formal trade agreement with the U.S. is announced. BUY A HALF.

cem680-zto

ZTO Express (ZTO)
Building One
No. 1685 Huazhi Road
Qingpu District
Shanghai 201708 China
http://www.zto.cn

Model Portfolio

cem680-portfolio-1024x277.jpg

Updates

cem680-baba-200x116.png

Alibaba (BABA) pulled back sharply today with most global equities, but this isn’t unexpected after the prior two months of up action; in fact, BABA is still well above even its 25-day moving average (now around 174.5). Like iQIYI (IQ), the company is making sizable investments in original content as its digital media segment is proving to be a big contributor to the company’s growth. This week Alibaba announced a partnership with Office Depot, giving it access to small- mid-sized businesses, as well as a whopping 10 million customers and 1,800 sales agents. BUY A HALF.

cem680-au-200x120.png

AngloGold Ashanti (AU) shares have been losing some ground since February 20 even after reporting impressive earnings of U.S. $0.53 per share, compared to U.S. $0.06 per share in 2017 with debt down 17% as well. In addition, AngloGold ranks as one of the cheapest South African listed gold companies. Despite the recent weakness, the stock has been demonstrating relative strength—outperforming South Africa’s stock market, which is down 7% so far in 2019. HOLD A HALF.

cem680-bzun-200x116.png

Baozun (BZUN), the leading brand e-commerce service partner in China, announced fourth-quarter results yesterday that were just a bit below expectations. The market hasn’t taken kindly to the numbers, pushing the stock down a few points over the past couple of sessions.

In the quarter, revenues increased 40.7% and income from operations increased 30.8% year over year. Net income increased 28.4% year over year. No doubt the easing of trade tensions helped Baozun the same way it’s helped so many foreign brands with their online operations in China. with support in this area, you can take advantage of weakness today to buy a half-position if you’re not yet in. BUY A HALF.

cem680-nio-200x119.png

Nio (NIO), our recent speculative idea for the China electric vehicle market, has had two bad days in a row following earnings. While Nio reported positive sales numbers in the fourth quarter, management offered the market some negative news regarding a softer economy and uncertainty about subsidies, both of which brought out the sellers.

Total revenues for the quarter were $492 million, an increase of 133.8% from the third quarter of 2018, with positive gross margins. Production of the ES8 totaled 8,069 in the fourth quarter, compared with 4,206 vehicles produced in the third quarter. Production of the ES8 reached 12,775 for full-year 2018. Deliveries of the ES8 reached 7,980 in the fourth quarter, compared with 3,268 vehicles delivered in the third quarter. Deliveries of the ES8 reached 11,348 for full-year 2018. The company also scrapped plans for a factory in Shanghai. Instead, the company will continue to rely on its existing relationship with Jianghuai Automobile Group.

I looked over the earnings conference call transcript, and I noticed that 2019 expectations have not changed. On the heels of my advice last week to sell part of our position in Nio, I’m going to stick with the remainder of the position, as the stock is back in its prior base (support) and because I still have a positive view of China’s electric vehicle market. HOLD.

cem680-se-200x116.png

Sea Limited (SE), a digital entertainment, e-commerce and financial service company focused on Southeast Asia, priced its follow-on offering at $22.50 per American Depositary Share (ADS), valuing it at $1.35 billion with principal shareholder Tencent Holdings indicating an interest in purchasing $50 million of the offering.

The stock took a modest hit yesterday and is already finding support today even though the general market is lower.

Even so, after a significant double-digit move last week, I’m going to take partial profits today and try to ride the remainder for a bigger gain—we’re selling half our stake for a good profit tonight, and using a 20%-ish trailing stop for the rest. SELL HALF, HOLD THE REST.

cem680-tal-200x116.png

TAL Education (TAL) shares remain in a firm uptrend. In fact, we think today’s pullback marks a decent opportunity—you can buy a half position here or on further dips. BUY A HALF.

cem680-tcehy-200x116.png

Tencent (TCEHY) made a run at new recovery highs before being yanked back down today; like most Chinese stocks, though, the overall trend is still pointed up. The company made some news this week by requiring parental permission for minors to play some of its online games. This move will be helpful in getting Beijing to release its hold on new online games. BUY A HALF.

cem680-remx-200x120.png

Van Eck Rare Earths/Strategic Metals (REMX) shares were up marginally, and tech metals as a resource are a nice hedge against U.S.-China tensions, REMX will be relatively quiet until some spike in tensions fuel an upsurge. 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 March 21, 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.

[/premium_html_footer]

Save

Save

Save

Save

Save

Save