The back-and-forth between the US and China rattled markets early this week as our emerging market signal turned negative. But stocks have bounced back with investors taking advantage of some emerging market bargains. Nevertheless, our portfolio is in a conservative posture with sizable cash allocation. We put some of this to work in a high quality idea from the land of the rising sun.
Cabot Global Stocks Explorer 691
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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.
The tariff-induced selloff late last week and Monday was enough to turn our Emerging Markets Timer negative, telling us the intermediate-term trend has turned down. You can see that the iShares EM Fund (EEM) has plunged below its lower (50-day) moving average, and while the bounce of the past three days has been nice, it hasn’t come close to regaining its lost ground.
Despite the worrisome headlines and sharp decline, you shouldn’t stick your head in the sand—in fact, sentiment has quickly turned very negative, which is generally a good sign. But with the trend down, it’s best to be cautious until the buyers return.
U.S.-China Tension Leads Us to the Land of the Rising Sun
The sharp losses on Monday decisively sent our emerging markets signal (EEM) into a negative position. But the flip side of this is that some high-quality names are in bargain territory. The portfolio is in a defensive posture and below I’ve highlighted some changes outlined in an alert sent to members after the close on Monday.
One of the issues roiling markets is the rise of U.S.-China tensions.
China responded to the Trump Administration’s latest announcement of plans to soon impose 10% tariffs on a wider list of Chinese exports in two ways.
First, by allowing its currency to fall through a key psychological barrier of 7 yuan to the dollar, a weaker yuan would offset higher tariffs by making its exports more competitive in global markets.
In addition, rather than increase purchases of U.S. agricultural products, China is seemingly going the other way by decreasing or even halting the purchase of U.S. agricultural products by some of its large state-owned firms.
In response, the U.S. Treasury announced a determination that China was a “currency manipulator,” which while having no direct impact escalated tensions.
While our portfolio was already in a defensive posture with a 50% cash position, I sent out an alert after the close on Monday making the following changes to the portfolio:
1) Add a 10% position to EUM, which moves opposite the MSCI Emerging Market index (EEM)
2) Sell positions in NIO and REMX
3) Move ZTO, LX and LGORF from Buy to Hold
While markets have since recovered about half of Monday’s losses, we’ll stay conservative until some sort of uptrend is in place.
Since coming on board early this year, I’ve emphasized that the increase in tensions between America and China should not be seen as a “trade war” that can be ended with a “trade deal.”
My point is that we need to accept this new age of U.S.-China rivalry and find ways to both protect the portfolio and find companies that will thrive despite this backdrop of heightened competition.
We all know that competition pushes some companies to great efforts and accomplishments but also creates some losers as well.
But don’t give in to the handwringers. There are still plenty of moneymaking strategies and ideas out there no matter where the twists and turns of big power competition take us.
For example, one side effect of the protracted protests in Hong Kong is to highlight Singapore as a Pacific financial and investment gateway.
The U.S.-China back and forth will also lead some investors to other high-quality markets and currencies, and today, this takes us to Japan.
Featured Stock
Rakuten (RKUNY)
The Amazon of Japan - Plus Much More
With markets a bit on edge as U.S.-China tensions rise, it makes sense to move to a high-quality, conservative play that is in an uptrend with plenty of upside potential.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan that has plenty of running room for international expansion.
Many of you may not have heard of Rakuten but I assure you that very few Japanese are not part of its ecosystem in multiple ways.
Its loyalty membership program is more than 100 million strong and it is Japan’s #1 internet bank, #1 credit card and one of the country’s leading travel platforms.
Rakuten’s core business is as an internet sales platform akin to Amazon.
The company’s market share in Japan is about 25%—roughly equal to Amazon’s market share. Next comes Yahoo Japan at around 15%.
Recently, Rakuten’s early investment in Lyft (13% of shares) has bolstered earnings, and it has a strategic alliance with Wal-Mart.
Rakuten already has a large number of e-commerce cloud sites built with high-speed fiber connections in Japan. This offers RKUNY natural expansion capabilities into virtual mobile networks and 5G. If successful, this investment will put RKUNY in a strong position in Japanese telecoms.
Building a 5G network would typically involve huge investments. Luckily, RKUNY can bypass this because of its existing infrastructure in Japan.
Rakuten is a growth conglomerate with multiple drivers and a sterling balance sheet with cash and short-term investments worth roughly $12.5 billion. And the stock is trading at just 10 times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 30% return on equity. BUY A HALF POSITION.
Rakuten, Inc. (RKUNY)
Rakuten Crimson House
1-14-1 Tamagawa Setagaya-ku
Tokyo 158-0094
Japan
81 50 5581 6910
http://global.rakuten.com
Model Portfolio
Updates
Alibaba (BABA) shares are up nicely this year, much better than emerging markets in general and about 10 points better than the S&P 500. This is also five times better than the iShares China Large-Cap ETF (FXI).
Alibaba’s business is in good health and though the back-and-forth between the U.S. has hurt its share price, its business is mostly insulated from its impact.
Reported revenue during its last quarter was up 51% or 39% excluding acquired businesses. The volume of merchandise moved on its platform was up 20% and Alibaba’s mobile monthly active users was up almost 18%
The company’s e-commerce business lends itself well to a natural monopoly as BABA has over a 50% market share. Alibaba’s cloud infrastructure business also benefits from its scale and lower costs.
BABA remains a great core China holding trading at an attractive valuation.
I encourage you to buy this stock if you have not done so. BUY A FULL POSITION.
ICICI Bank (IBN) shares held up very well this week in a tough market. This is a good sign for India’s second-largest private lender that last week reported a quarterly profit compared with a loss a year earlier, helped by lower provisions and higher retail loan growth.
Net profit for the fiscal first quarter was $277 million.
The bank’s corporate loan book grew at a pace of 13% in the quarter, while its retail loan book grew 22% and net non-performing assets (NPA) at the end of the June quarter were down 51%.
IBN is a solid India play and there are still 191 million Indians without a bank account, which means a lot of potential new customers. This is a quality bank in a promising growth market. BUY A HALF.
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.
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.
This is an excellent time to begin building a position in this high-quality stock. BUY A HALF POSITION.
LexinFintech (LX) shares bounced back nicely today, up 5%, and the company is expected to report its next earnings on August 22.
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. Given all these positives, LX has not done well on a relative basis so I’m moving it to a hold pending upcoming earnings. MOVE FROM BUY A FULL POSITION TO HOLD A FULL POSITION.
Luckin Coffee (LK) shares are up 6% today and are back up over $24.
Some big hitters have accumulated substantial ownership of LK.
The American Funds mutual fund company Capital Group has a 15.6% stake, followed by Singapore’s sovereign wealth fund GIC with 13% and Qatar’s Investment Authority at 8.8%.
The company expects to announce its next quarter’s earnings on August 15th.
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.
Luckin is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.
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 up to a half position with a 20% trailing stop loss in place. BUY A HALF.
MakeMyTrip Limited (MMYT), a play on India’s travel industry as well as digital payments and marketing, was hit pretty hard on Monday and is making a modest comeback today.
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 Indian stock at the heart of a growth sector. BUY A HALF.
Sea Limited (SE) lost a little ground this week but is still up 150% since we recommended it in April.
Its ‘Free Fire’ survival game is a star performer in Asia. The company plans to announce its second-quarter 2019 earnings on August 20.
Sea’s e-commerce platform is doing well as JPMorgan 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 a key driver and another is e-commerce, which is equally robust.
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.
Tencent (TCEHY) is in talks to buy a 10% stake in Universal Music Group. As one of the largest tech companies in the world it’s primarily known for its app called WeChat. WeChat is used for basically everything: communicating with friends and family, ordering a cab, doing payments.
Its operating revenue comes primarily from gaming and its social networks. More and more, however, the company has been investing in other tech companies and is evolving into a diversified tech fund.
This is a strong and dominant company. I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) This ETF offers a basket of highly valuable and strategic rare metal and rare earth stocks. But given that it is off 14% and that this is a long-term story requiring great patience, I have decided to sell this position and replace it with today’s recommendation. MOVE FROM BUY A HALF TO SELL.
ZTO Express (ZTO) shares are trading right where we got in earlier this year. Given its strong fundamentals, this is disappointing but we will give this one some more time.
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. 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.
Given the ratcheting up of trade related disputes this week, I’m moving this to a hold but any visible progress on U.S.-China trade talks should lead to this stock moving upward. MOVE FROM BUY A HALF TO HOLD A HALF.
Speculative Portfolio Recommendation
Largo Resources (LGORF) shares were flat this week and while we have some profits, we need some positive news on the vanadium front to push this stock higher. The company recently announced that it is now debt free after paying over its convertible bonds. Shares now trade 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. MOVE FROM BUY A HALF TO HOLD A HALF.
NIO (NIO) shares were added to the portfolio at $2.53 and moved to over $3.70 in a short time before drifting below our 20% trailing stop loss. MOVE FROM BUY SMALL POSITION TO SELL.
Watch List
Baidu (BIDU) shares are now at 99 and are trading at less than 8 times forward earnings. Baidu’s net cash as well as stakes in iQIYI and Ctrip.com represent more than half its market capitalization. We will wait for an uptrend before doing anything with this stock
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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.
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