A Fed rate cut was offset by Mideast uncertainty but our portfolio soldiered on having another positive week. The Emerging Market Signal is just short of turning positive due to the lack of a clear uptrend but we have a new recommendation at the heart of “The Internet of Things”.
Cabot Global Stocks Explorer 694
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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 Emerging Markets Timer is now clearly positive, as the strength in the broad market since late August has turned the intermediate-term trend back up. You can see that the iShares EM Fund (EEM) found support multiple times in the 39 area during August, and now the buyers are back in control—the fund is trading well above its lower (25-day) moving average, which is now trending clearly up.
Of course, there’s still overhead (potential selling) to chew through, and there are still lots of uncertainties out there, so there’s likely to be plenty of volatility. But after a couple of big legs down since April, the trend is pointed up and the odds favor higher prices down the road.
5G and the “Internet of Things”
The drone strikes in Saudi Arabia upset energy markets and raised uncertainty in international markets while a small rate cut by the Fed fell short of expectations.
Still, markets continued to show their resiliency and our portfolio moved ahead marginally. Our Emerging Markets Timer is now clearly positive.
Our two India stocks are not showing much relative strength so I’m moving both to a hold and I’m also removing Baidu from the watch list. We surely can do better with some other Chinese stocks—and today’s new recommendation. This is an exciting company and momentum stock in a high growth market.
Featured Stock
New Recommendation:
Marvell Technology Group (MRVL)
The best play on 5G may be smart devices—what is known as the “Internet of Things.”
This is the name for all the web-enabled devices that collect, send and act on data using sensors, processors and other hardware to talk to each other.
5G is much more than just a faster Internet. With data rates more than 100X over 4G technology, it will have a major impact on many industries and services from robotics to artificial intelligence, self-driving cars and, of course, smart phones.
The 5G launch is off with AT&T, Verizon, Sprint and T-Mobile and leading international carriers all moving forward.
Samsung introduced its Galaxy S10 5G in March and the controversial Huawei launched its 5G smartphones in mid-August. And Apple is laying the groundwork for the first 5G iPhone.
My recommendation today is Marvell Technology Group (Nasdaq: MRVL).
Marvell is headquartered in Bermuda with operations in the U.S., China, Taiwan, Japan, India, South Korea, Vietnam and several other countries.
Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G-capable networks, processors and devices as they partner with and transition from 4G to 5G.
The company’s embedded processors and products are cutting-edge and already generating multibillion-dollar annual sales.
The company’s reputation as a player in this 5G space was made as it revolutionized the digital storage industry by moving data at speeds way beyond expectations.
New markets are emerging in which Marvell has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics.
These are all huge markets giving Marvell a long runway of growth as it could hit $3.5 billion of sales next year with some analysts expecting $1.49 in earnings—up significantly over expected 2019 earnings.
Finally, although the stock is up 50% this year, it is still trading at just 2.3 times book value. I have high expectations for this stock and encourage you to start with a half position. BUY A HALF.
Marvell Technology (MRVL)
Canon’s Court
22 Victoria Street
Hamilton HM 12
Bermuda
441-296-6395
http://www.marvell.com
Model Portfolio
Prices as of 12:00 pm on 9/19/19
Updates
Alibaba (BABA) shares were flat this week. The latest quarter showed revenue jumping 42% over last year comparisons, while earnings per share came in at $1.83, beating Wall Street estimates by $0.34.
In addition, BABA posted an increase of 20 million active customers, up 17% since last year and all-important cloud revenue saw an increase of 66% since last year.
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 actives 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 can get back to 200 level provided that trade tensions ease. I encourage you to buy a full position in this stock if you have not already done so. BUY.
DBS Bank (DBSDY), a high quality play on growth in Southeast Asia, held its own this week in a tough market for Asian stocks.
It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore. Its tentacles reach out through 200 branches in 50 cities. DBS produces steady profit margins, revenue, and earnings and is also increasing market share in consumer and corporate banking.
Despite all of these strengths, DBS is trading at only eleven times trailing earnings and sports a solid 4.5% dividend yield.
Any tangible improvements in the US-China relationship will get this stock moving and this is a great stock for those who that want a conservative quality play for Southeast Asia. BUY A HALF.
ICICI Bank (IBN) shares lost some ground this week and have not demonstrated much relative strength in the last month so I’m moving this to a hold.
India’s second-largest private lender recently 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 good entry point to take a stake in IBN if you have not yet done so. MOVE FROM BUY A HALF TO HOLD A HALF.
Infineon Technologies (IFNNY) shares broke 20 early in the week before ending just below this level for a small gain.
Infineon, founded when the company was divided from its Siemens parent in 1999, is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors.
While the company has spun off of 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.
LexinFintech (LX) lost a little ground this week after two strong weeks following positive financial results and the announcement that it is raising $300MM of capital to fund its expansion.
Here are just a few highlights:
• Registered users increased 72% to more than 50 million.
• Active users hit 1.3 million, a 153% increase.
• Total loan originations rose 57% to reach $3.6 billion.
• Its 90-day loan delinquency ratio remains low at 1.49%.
• Adjusted net income jumped 35% on a 140% increase in sales.
• It now has more than 100 institutional funding partners.
LX operates an online consumer finance platform aimed at young adults in China. More than 90% of LexinFintech’s customers are young, educated, and between the ages of 18 and 36.
This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and based on this and its solid quarter I encourage you to build a position if you have not already done so. BUY.
Luckin Coffee (LK) shares were up 6% early in the week and then gave it all back yesterday.
Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations and it plans to eclipse Starbucks with 4,500 stores by the end of the year.
According to Iyiou’s estimate, Starbucks China sold 400 million cups in 2018, which implies only 311 cups per day per store. Luckin currently operates at 345 orders per store at the day level, an increase of 18% from a year ago and 41% from the previous quarter. Keep in mind that while Taiwan consumes 209 cups of coffee per person each year, China consumes only 6 cups of coffee per person.
This sort of growth comes at a cost as it posted $379 million in operating expenses so it will be a while before the company posts a profit.
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 up to a half position with a 20% trailing stop loss in place. BUY A HALF.
MakeMyTrip Limited (MMYT) shares followed a flat India market and, like ICICI Bank, have been fairly lackluster in terms of momentum so I’m moving this to a hold as well.
A play on India’s travel industry as well as digital payments and marketing, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services.
The company has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group. MOVE FROM BUY A HALF TO HOLD A HALF.
Rakuten (RKUNY) shares were up 4% for the week with the six-month delay for the launch of its wireless network weighing on the stock.
If you haven’t yet bought shares, this would be a good time to buy a half position.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. 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%. It 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 ten times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 30% return on equity. BUY A HALF.
Sea Limited (SE) remained in the $31-$32 range after hitting a $36 high a few weeks ago. This stock has definitely lost its near term momentum after an impressive run throughout much of this year.
I have been recommending that we take some profits over the last three months and a few weeks ago moved this stock to a hold. HOLD A HALF.
Tencent (TCEHY) shares were lackluster this week losing a point.
Growth investors want more than the 20.6% revenue growth for its latest quarter while net profits surged 35%. Its gaming business, which accounts for 30% of total revenue, was up only 8% but this a big improvement after three consecutive quarters of negative comparisons.
Tencent has invested in over 700 companies in recent years and many of the most intriguing of these are in overseas entities. It is thought that between 30% and 40% of its investments are in non-Chinese companies.
This is a great core China/Asia holding so I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
Yandex (YNDX), recommended in our last issue, is overlooked by even sophisticated investors and even then, is primarily viewed as only a search engine play that has cornered 57% of the Russian market.
The company is incorporated and based in the Netherlands but its core business is online search.
This core business is up 20% over the last year but I believe it has room to run and the market is not recognizing some key growth drivers such as Yandex Taxi, a food delivery service, and its (loss making) autonomous driving technology through a partnership with Hyundai.
Founded in October 2011, Yandex Taxi is a technology company that operates a ride-hailing and food technology business in more than 300 cities across Russia, Eastern Europe, Africa, and the Middle East. In July 2017, the company signed an agreement with Uber to combine their operations in many of these markets. Yandex Taxi revenue grew 117% in the last quarter on a year over year basis. BUY A HALF.
ZTO Express (ZTO) shares were up 5% today, more than offsetting some weakness earlier in the week.
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 5,000 trucks, as well as hundreds of business partners. And ZTO serves foreign customers through partnerships with many international express delivery companies. I’m keeping this a hold for now. HOLD A HALF.
Watch List
Baidu (BIDU) shares have rebounded a bit after falling below 100 but I believe there are many other China ideas out there with more upside potential so I’m removing this from the watch list.
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