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Cabot Global Stocks Explorer 690

Our emerging market signal stays in positive territory. With our new global mandate in place, we move beyond emerging markets to a European quality play on technology. We also explore what the new Fortune Global 500 rankings can tell us about the changing landscape of investment opportunities.

Cabot Global Stocks Explorer 690

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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.


The Emerging Markets Timer is still positive, telling us the intermediate-term trend is pointed up. While the iShares EM Fund (EEM) has stalled out a bit over the past couple of weeks, but this comes after a strong recovery in June. Overall, the index is still well above its lower (50-day), rising moving average, so the odds favor higher prices ahead.

Of course, with our expanded focus, we’re not just going to be dabbling in emerging market stocks. But even so, this indicator tells us if the environment is risk-on or risk-off—today, the buyers are still active, so you should stick with a constructive stance.

Clear
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Fortune Global 500 Rankings—
A Window to the World

Our emerging market indicator is positive, which is encouraging, though the U.S.-China tensions and other headwinds are why we still have a conservative stance with the portfolio’s cash position at 40% after today’s new recommendation.

Some of this cash will be put to work in the coming weeks.

The new Fortune Global 500, which annually ranks the largest 500 companies in the world by revenue, is hitting the headlines.

I have been tracking this list for years with particular interest as to how China and other emerging markets were doing.

So it is no surprise to me that China and America are now at rough parity in terms of the number of companies making the list - 121 for America and 119 for China. Taiwan had ten firms.

Of the 119 Chinese firms on the list, 82 of them are state-owned firms.

Other Asian and emerging markets countries on the list include South Korea with 16 companies, Brazil, Mexico and Russia with eight each, India with seven, and Malaysia, Thailand and Indonesia with one each.

Japan has an impressive 52 companies, Canada has 13 companies, and European multinationals largely make up the balance of the rankings.

We move there now with a new buy recommendation.

Featured Stock

Infineon Technologies AG (IFNNY)

Europe’s Leading Chipmaker
German Precision and Quality – Undervalued and in Uptrend

Oftentimes, events in one part of the world create opportunities in another.

Questions about a potential economic slowdown in China and the on-again off-again crackdown on Huawei have roiled markets.

Today’s recommendation, which presents both a value entry point and a strong uptrend, is one of these cases.

Infineon sells a significant amount to China and therefore its share price has pulled back creating an opportunity for investors.

Infineon Technologies (IFNNY) is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors.

Infineon was founded when the company was divided from its Siemens parent in 1999.

Infineon Technologies now contains four reportable business segments.

Automotive provides products for use in powertrains, comfort electronics and safety related to the automotive sector. This includes microcontrollers and sensors.

Industrial Power Control provides chips and modules for generation, transmission, and consumption of electrical energy. This includes things like electrical drives for industrial applications, consumer electronics, renewable energy modules, conversion and transmission products.

Power Management & Multimarket supplies components for efficient power management or high-frequency electrical applications, including lighting management, LED, power supplies for everything from commercial servers to PC’s, medical technology, microphones and other high-frequency products.

Digital Security Solutions gives the market microcontrollers for cell phone SIMs, payment cards, security chips, passports, ID-cards and other documents.

Infineon’s automotive chip business (which was over 40% in fiscal 2018) benefits from intangible assets around proprietary chip designs as well as high switching costs once its products are designed into automotive programs.

Automotive, industrial, and communications infrastructure customers, in particular, are unlikely to choose an inferior chip in order to save $0.30 on the cost of a piece of equipment worth tens of thousands of dollars.

While the company has spun off its low-margin wireless baseband chip business to Intel, Infineon is in the process of acquiring Cypress Semiconductor (CY) with plenty of cross-selling opportunities for these complementary companies.

Infineon has produced consistent revenue and profits and in fiscal 2018 revenue increased 8% with a 36% increase in net income.

This is an excellent time to begin building a position in this stock given its recent uptrend during the last month after a sharp pullback over the last quarter. BUY A HALF POSITION.

cem690-ifnny

Infineon Technologies AG (IFNNY)
Am Campeon 1-12
Neubiberg
Munich 85579
Germany
http://www.infineon.com

Model Portfolio

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prices are as of 2:30 p.m.

Updates

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Alibaba (BABA) is slowly opening some of its e-commerce platforms to non-China suppliers – something that is way overdue.

It can be a bit confusing but important to know that BABA has a number of different platforms. Below is a quick rundown.

Alibaba.com is a 3P (third party) B2B (Business To Business) e-commerce marketplace. It’s geared toward selling goods globally, in batches, mostly straight out of the producer. This is what’s now being opened to U.S. sellers.

TaoBao is a 3P B2C (Business To Consumer) and 3P C2C (Consumer to Consumer) e-commerce marketplace. TaoBao is geared for small to medium sellers selling products to other consumers in China.

Tmall is a 3P B2C e-commerce marketplace. Tmall is geared for large sellers selling branded products to consumers in China.

AliExpress is a 3P B2C e-commerce marketplace. AliExpress is geared for a global consumer audience.

U.S. cloud software company Salesforce also announced a partnership with Alibaba as it seeks to gain a larger piece of China’s booming $12 billion cloud computing industry.

BABA remains a great core China holding trading at an attractive valuation. BUY A FULL POSITION.

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ICICI Bank (IBN) is a solid India play in the wake of President Narendra Modi’s re-election and reform agenda. There are still 191 million Indians without a bank account, which means a lot of potential new customers.

ICICI is capitalizing on this emerging growth trend with a blend of 60% retail and 40% corporate business. Its last quarter highlights its strength as retail loans were up 22% and core operating profit surged 26%. The bank has a healthy net interest margin of 3.72% and non-performing loans were down 50%.

This is a quality bank in a promising growth market. BUY A HALF.

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LexinFintech (LX) shares are flat over the last month and should be performing better based on the company’s strong fundamentals.

The company owns and operates a thriving online shopping mall that also offers installment loans. LX acquired nearly 705,000 new active users in its last quarter while keeping its 90-day delinquency ratio at an ultra-low 1.42%.

The company has signed strategic cooperation agreements with more than 100 more national banks, insurance companies and consumer finance companies. Earnings per share soared 228% on a 95% increase in revenue in the most recent quarter.

LX enjoys a sizable 42% profit margin with a 72% return on equity. This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and I encourage you to build a position if you have not yet done so. BUY A FULL POSITION.

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Luckin Coffee (LK) shares moved 18% higher over the last week and the company expects to announce next quarter’s earnings on August 15.

The company has launched more than 10 tea products as it challenges Starbucks’ dominance of China’s coffee market with a leaner and faster strategy. It aims to attract the average millennial as opposed to Starbucks’ more-affluent upper middle class—with cheaper prices, heavy promotions, quick delivery and mobile ordering.

Since it was founded in 2017, the company has been expanding rapidly. As of March, Luckin had about 2,370 stores in 28 Chinese cities and is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.

Just this week, Luckin announced that it would partner with the Kuwait-based company The Americana Group to launch its coffee business in the Middle East and India. Americana runs 1,900 franchises across the Middle East for several fast food brands, including KFC, Red Lobster, Olive Garden, Krispy Kreme and Starbucks’ UK rival Costa Coffee.

If you have not invested in Luckin, which is an aggressive idea that won’t be posting profits for some time, I encourage you to do so starting small, with up to a half position with a 20% trailing stop loss in place. BUY A HALF.

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MakeMyTrip Limited (MMYT) is a play on India’s travel industry as well as digital payments and marketing. It is expected to report earnings on July 30.

Founded in 2000 to serve the travel needs of the U.S.-based Indian community, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services.

MakeMyTrip has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group.

If you have not yet done so, I encourage you to take a half position in this India growth stock. BUY A HALF.

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Sea Limited (SE) again advanced this past week as the stock has more than tripled so far in 2019. Its ‘Free Fire’ survival game is a star performer in Asia.

Sea’s e-commerce platform is doing well as JP Morgan reports that some of their Shopee Mall’s platforms have raised their seller commissions from 1% to 5%.

SE benefits from high-growth target markets outside of China in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets. Its gaming segment is the key driver and the other is e-commerce, which is equally robust.

Revenue for the most recent quarter was almost triple that of the same quarter last year as its gaming platform, driven by a partnership with Tencent, had revenue growth 169% year on year.

Depending on your entry point, feel free to take some profits off the table and longer-term investors should continue to buy. BUY A HALF.

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Tencent (TCEHY) is one of the largest tech companies in the world, primarily known for its app WeChat. WeChat is used for basically everything: communicating with friends and family, ordering a cab, doing payments.

But Tencent’s operating revenue comes primarily from gaming and its social networks. More and more, however, the company has been investing into other tech companies and is evolving into a diversified tech fund.

Tencent announced this week an alliance with Pokemon to jointly develop games.

This is a strong and dominant company, whose shares are up double-digits this year. I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.

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Van Eck Rare Earths/Strategic Metals (REMX) was treading water this week. A basket of rare metal and rare earth stocks, this ETF offers us an 11% plus dividend yield and a hedge on U.S.-China tensions.

China’s dominance of these strategic materials is again headline news and this position is worth buying up to 20. BUY A HALF.

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ZTO Express (ZTO) has not done much for us lately though it’s up 15% since early June. I urge some patience as we await earnings.

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, a state-of-the-art transportation management system, and more than 4,500 trucks, as well as hundreds of business partners.

China is also the world’s largest exporter, of course. And ZTO serves foreign customers through partnerships with many international express delivery companies.

Finally, revenue was up significantly year over year, to $682 million and ZTO maintains a leading 17% market position in China. Any visible progress on U.S.-China trade talks should lead to this stock moving upward. BUY A HALF.

Speculative Portfolio Recommendation

Largo Resources (LGORF) is now debt-free after paying over its convertible bonds and the stock gained a little ground during the past week. It now trades at less than five times earnings.

Rare metals are once again in the media spotlight as China threatens to keep more of these key materials at home and potentially deny access to international companies.

Please keep in mind that this is a speculative play on vanadium, which is used to strengthen steel, and is a key ingredient for large-scale grid electrical energy storage batteries. BUY A HALF.

NIO (NIO) moved nicely over the past week though Tesla’s disappointing earnings is impacting the stock today.

NIO is a speculative, aggressive recommendation and traders should feel free to take some profits off the table.

Automobile sales in China rose 4.9% in June, according to preliminary figures from the China Passenger Car Association. The monthly gain broke a streak of 12 straight months of lower auto sales in the nation.

NIO seems to have all the negatives on the table. It is a speculative stock and will likely be a bit volatile but I sense an upside as well given that the Chinese government is firmly behind electric vehicles. BUY A SMALL POSITION.

Watch List

Baidu (BIDU) hit a five-year low last month and seems to be building a bottom in the $112- $115 range and is trading at less than 12 times forward earnings. Baidu’s net cash as well as stakes in iQIYI and Ctrip.com represent more than half its market capitalization.

While its revenue rose 15% annually during the quarter, most of that growth came from its streaming unit iQiyi (NASDAQ: IQ) instead of its core advertising business, which increased only 3% in the last reported quarter.


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Send questions or comments to carl@cabotwealth.com.
Cabot Global Stocks Explorer • 176 North Street, Salem, MA 01970 • www.cabotwealth.com

All Cabot Global Stocks Explorer 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 GLOBAL STOCKS EXPLORER ISSUE IS SCHEDULED FOR August 8, 2019

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Cabot Global Stocks Explorer 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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