We’ve seen a bit of turbulence in international emerging markets with speculation about trade talks and the perceived slower growth in China and Europe.
Apparently, institutional investors are underweighting Europe so we go against the grain for our new recommendation. This is a great brand that offers a nice combination of high quality, value price of entry, strong growth in emerging markets and a 7.8% dividend yield.
Cabot Emerging Markets Investor 681
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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.
After a successful test in early March, our Emerging Markets Timer remains bullish, telling us the intermediate-term continues to point up. You can see in the chart how the iShares EM Fund (EEM) stalled out in February and then had a sharp dip earlier this month. But EEM found support right where it was supposed to—it’s rising, lower (50-day) moving average—and has bounced excellently since.
Of course, the fund still hasn’t quite kicked loose of its recent trading range, so further gyrations are possible. But with the trend pointed up, the odds favor higher prices down the road, which keeps us leaning bullish.
Going Against the Grain to Find Value
The Washington visit by Brazil’s new president may lead to stronger investment and trade ties but the expected bull market in Brazil has not materialized. I’ve noticed a former recommendation of ours, Brasil Foods (BRFS), has done pretty well this week. This was a turnaround story to which we shall return.
The White House roiled markets yesterday with remarks that the administration would likely keep tariffs on Chinese goods until they are certain Beijing is fully cooperating with the terms of a trade deal.
As I have mentioned before, this conflict will be a backdrop to markets for a long time with years of negotiation, acrimony and tariffs, given the nature of the changes being discussed. Any agreement between the U.S. and China on trade would be just the first step in a much longer negotiation process. Remember, NAFTA began as a proposal by Ronald Reagan in 1979 and was signed by President Bill Clinton fourteen years later.
Brexit confusion doesn’t help but to me is much less of a big deal. Chances are that it will just be delayed and may actually never happen at all. The big winner from this mess is clearly Ireland.
Finally, sometimes it helps to look at Asia and China trade from a different perspective. Take a look at the chart below based on World Bank data.
Japan, crafty as ever, actually manages to have a small trade surplus with China and South Korea has a whopping trade surplus.
Featured Stock
New Recommendation: Daimler AG (DDAIF)
Quality, Value, Upside, Income
When looking at a stock, don’t be fooled by the location of a company’s legal headquarters.
While the location tells you something about a company’s legal and disclosure standards, where the company gets its growth is equally important.
Sometimes you can find the best of both worlds.
Daimler is a high quality play on emerging markets because of where it gets its revenue and growth.
In 2018, Daimler sold 677,000 passenger cars in China - up from 618,000 the year before and double the number Daimler sold in the United States.
In terms of trucks, China was again the company’s second biggest market with India coming in at #5, Brazil, #6, Mexico #18 and Taiwan ranked #10.
In terms of markets for Daimler buses, Brazil is ranked #1 followed by Mexico, while Chile, India, Argentina and Peru all ranked in the top ten.
And since automakers across the world and Europe have been out of favor, this creates some attractive entry points for investors.
In short, Daimler offers investors a nice combination of quality, value, upside and income.
A Sterling Brand
Daimler is of course better known as Mercedes Benz.
The company was formed back in 1926 when Benz & Cie and Daimler Motoren Gesellschaft merged businesses.
Over the past 95 years, the company has gone from being a small German manufacturer to a global company ranked thirteenth across the world in terms of sales of cars.
In 2017, Daimler sold 3.3 million cars, which increased to 3.4 million in 2018.
In the American “Best Global Brands” ranking performed by Interbrands, Mercedes/Daimler has climbed up to 8th place, making it the only European company in the top 10.
Mercedes-Benz also occupies first place among worldwide premium automobile manufacturers in the current “Global 500 2018” ranking by the U.S. brand valuation company Brand Finance.
In trucks, Daimler is the largest manufacturer in the world.
Decidedly International
Daimler is a decidedly international company.
Here are just some of its partnerships.
89.29% Mitsubishi Fuso Truck and Bus Corporation of Japan
50.1% Automotive Fuel Cell Cooperation of Canada
50% Engine Holding, a joint venture with Rolls Royce
50% Denza (Shenzhen BYD Daimler New Technology Co., Ltd)
25% MV Agusta of Italy
12% Beijing Automotive Group (BAIC)
11% KAMAZ of Russia
5% Aston Martin
Joint venture with Renault-Nissan for engine/technology sharing
The Electric Vehicle (EV) Angle
Two years ago, Mercedes Benz announced its $11.8 billion electrification plan that included launching ten electric vehicles by 2022 and selling 130 electrified models by 2025.
Daimler purchased $23 billion in batteries and is now building and overhauling five plants around the world to make batteries and EVs.
Geely Automobiles wants to work with Daimler on the electric version of the Smart car, according to a German publication. Geely and Daimler are already in a ride-hailing partnership and the Chinese company owns a stake of about 10% in Daimler.
BMW and Daimler are in talks to cooperate in developing vehicle platforms for electric cars in a step that could save each carmaker at least 7 billion euros.
The two premium carmakers already have a joint procurement program and recently extended their alliance to include development of advanced driver assistance systems and mobility services.
An Attractive Risk-Reward Opportunity
Daimler stock is trading 35% off its 52-week high, at just 6.2 times forward earnings estimates, and 80% of book value.
Why? Brexit, and concern over China’s and Europe’s economies have all weighed on shares but the upside is definitely substantial for this premium brand and leading company with a strong balance sheet.
In addition, the stock offers a 7.8% dividend yield while we wait a bit. Not bad.
Daimler offers us a high quality, conservative play on emerging markets. BUY A HALF POSITION.
Daimler AG (DDAIF)
Mercedesstrasse 137
Stuttgart 70327
Germany
www.daimler.com
Model Portfolio
Updates
Alibaba (BABA) shares were flat this week but have surged 39% since mid-December 2018. It’s no surprise that shares are taking a rest.
While it remains the dominant player, Alibaba faces stiff competition in China’s domestic market, as e-commerce penetration is high in top-tier cities such as Beijing and Shanghai.
Hence the firm’s somewhat costly efforts to expand into the lower-tier cities and rural areas where online shopping is less common, which is paying off. In its most recent quarterly report, Alibaba said about 70% of new e-commerce users came from the lower-tier cities.
Notably, Foxconn Ventures sold $398.4 million in Alibaba shares in a block trade in the open market with Goldman Sachs.
We have no problem with you selling some BABA shares if you were fortunate enough to enjoy the 39% rebound over the past four months. For new investors, we recommend only buying a small position at this time. BUY A HALF.
Baozun (BZUN) is showing some strength over the last few days after a period of weakness at odds with its strong fundamentals.
Top-line revenue growth is very strong and there was acceleration in new brands in the fourth quarter that is likely to be sustained in 2019.
Baozun’s investments in its platform and new cross-selling opportunities will improve product mix and revenue. On the valuation side, the company expects $1 billion in revenue for 2019 yet has a market value of only $2.2 billion. In comparison, Shopify expects revenue of $1.5 billion yet trades at a market value of $20.7 billion even though Baozun has higher margins and earnings.
If you have not yet taken a position, this would be a good time to begin. BUY A HALF.
NIO (NIO) is our recent speculative idea for the China electric vehicle (EV) market. NIO surged right after our recommendation thanks to exposure on 60 Minutes and we took some profits off the table and held the rest.
The balance of our shares have taken a beating due to a slump in sales early this year along with some cautionary comments from management. However, 2019 revenue expectations by management have not changed.
Shares seem to have stabilized so for aggressive investors, I’m moving NIO back to a buy and recommending a 20% trailing stop loss. One action that could move the stock would be clarification by Beijing on electric vehicle subsidies for 2019. MOVE FROM HOLD A HALF TO BUY A HALF.
Sea Limited (SE) continues to move upward, tacking on another 5% gain this past week. Shares were up 53% in February as the company’s digital entertainment segment saw revenues climb roughly 63% to reach $241.3 million in the last quarter. Growth for the company’s online retail business was even more impressive.
If you bought on our recommendation and have already taken some profits, you can hold the rest. If you have not yet invested in Sea, I’m OK with starting a small position but wait for a pullback for more aggressive buying. HOLD A HALF.
TAL Education (TAL) demonstrated some significant relative strength rising 10% during the last week. The valuation on a price-to-earnings basis is getting up there and that is something we need to keep an eye on.
TAL offers comprehensive tutoring services to students from pre-school to the twelfth grade, personalized premium services, and online courses; its learning center network currently covers over 50 key cities in China. If you’re not yet in, you can buy a half position here or on any dips. BUY A HALF.
Tencent (TCEHY) reported its fourth quarter and 2018 financials this morning with net profit for the quarter down 32% year over year. The decline was attributed in part to a one-off $313 million charge related to Tencent Music and weaker market conditions.
The stock is pulling back a bit today on the headline news but it’s important to have some perspective since the fourth quarter and 2018 was a success on many fronts.
Smartphone game revenue grew 12% for the quarter year over year. Nine new games were approved in the quarter following a months-long Chinese license freeze due to a regulatory crackdown. That’s a big deal, since a long delay in issuing such approvals was hurting the whole industry.
Social and other advertising revenue was up 55% over 2017. Digital content subscriptions rose 50%, total revenue increased 32%, and Tencent remains the #1 platform globally by users and revenue. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) is a nice hedge against U.S.-China tensions and given that, this issue is likely to be with us for a while.
REMX is likely to be relatively quiet until a spike in tensions sparks an upsurge. Commodities have in general pulled back from late third-quarter 2018 highs, which doesn’t help. We still like REMX and we recommend holding on to your position. HOLD.
ZTO Express (ZTO) continues to demonstrate that sometimes a gap can occur between a company’s performance and share price. Last week, I highlighted its strong fourth quarter numbers; today I’ll just highlight growth potential.
Based in Shanghai, ZTO is one of the largest express delivery companies, not just in China but globally. It offers services to millions of traditional merchants, e-commerce sites, and online sellers using a proprietary tracking system covering more than 96% of China’s cities and counties.
China’s online retail market was approximately $1.1 trillion last year and according to Forrester, the value of that market will hit $1.8 trillion by 2022.
And ZTO serves foreign customers through partnerships with many international express delivery companies. Finally, ZTO’s board has authorized a new $500 million share repurchase program to be spread throughout 2019.
If you are not yet on board, I encourage you to buy a half position here. 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 April 4, 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 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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