As we head into 2020, emerging markets are at the top of the Cabot Global Stocks Explorer menu after developing a nice uptrend in the fourth quarter of 2019. In addition, they are cheap - trading at a substantial discount to U.S. markets on a valuation basis. Today’s new idea is at the sweet spot of several powerful trends in China and has delivered steady and substantial profits to shareholders over the past five years.
Cabot Global Stocks Explorer 702
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Emerging Markets at the Top of the Explorer Menu in 2020
As we begin 2020, it is important to stay optimistic and open to new ideas. I also recommend that you take some time to review your strategy and portfolio.That’s especially important given that we are in an election year with quite a few potential speed bumps that could lead to some above-average volatility.Start with the basics. Are you comfortable that your portfolio is well diversified and balanced? Do you have some fixed income, high-quality dividend stocks, and plenty of cash to cushion any volatility and to put to work in new ideas?
While U.S. stocks are likely to maintain momentum into 2020, having a nice allocation to international and emerging market stocks makes sense to me.
And after a stellar year for equities in 2019, it is always smart to take some profits off the table. This is why I have been advising you to sell a portion of your positions in aggressive ideas that were up sharply in 2019, such as Sea Limited and Luckin Coffee.
Some core, more established positions like Alibaba, which was up 55% in 2019, you may wish to just leave alone.
Much depends on your personal situation and tolerance for risk.
The Cabot Global Stocks Explorer strategy for 2020 is to focus on some emerging market ideas.
While emerging markets did well last year, they lagged U.S. markets. As a result, the MSCI emerging market index (EEM) trades at just 13 times earnings while U.S. markets trade at around 23 times earnings.
In addition, while we can’t count that the Phase 1 trade deal with China will get signed as scheduled on January 15, there are other story lines that may boost some emerging markets. I will outline those for you next week.
It is also worth noting that emerging markets developed a nice uptrend in the fourth quarter of 2019. Our Emerging Markets Timer (EEM) is bullish, moving from 40 to 45 in the last quarter of 2019.
Today, we head back to China to recommend a high quality and often overlooked stock that has delivered consistent returns.
Featured Stock
New Explorer Recommendation: Ping An (PNGAY)
Let’s start with the big picture.
There are a few pretty clear China trends out there.
The first is its emerging middle class consumers, which have more disposable income than their parents to invest and protect their families via life and health insurance.
The second is that China’s government is struggling with pretty heavy debt loads and it’s unlikely to be able to strengthen the safety net for its citizens in the foreseeable future.
The third is that China’s population is aging. Life expectancy for Chinese babies born today is 76 years, just short of that in America (78).
Today, Chinese women give birth to 1.6 children each on average – way below the 2.1 children required to maintain the current population.
According to United Nations projections, the median age of Chinese citizens will overtake that of Americans in 2020 and, during the next 25 years, the percentage of China’s population over the age of 65 will more than double, from 12% to 25%. By contrast, America is on track to take nearly a century to make the same shift.
These trends are a challenge for China but all this is good new for purveyors of investment services as well as health and life insurance.
This brings us to today’s new recommendation - Ping An.
For some reason, Ping An is not well known or followed by the investment community despite the fact that its stock has delivered an average annual return of 22% over the past five years.
The company provides financial products and services for insurance, banking, and asset management but is best known for its life, health and property insurance business.
It is also evolving into more of a financial technology (fintech) play and its Co-CEO, a former McKinsey consultant, is heading up the effort to transform the company into more of a blend of financial services and technology.
Management has a stated policy of dedicating 1% of revenue to next-generation technologies and spent some $1.4 billion on technology in 2018 alone.
Ping An is a dominant player in this space with over 200 million retail customers and 574 million that are registered at their website.
Ping An also ranked 7th on the Forbes Global 2,000 list and 29th on the Fortune Global 500 list.
The numbers for Ping An are great; the most recent quarterly earnings were up 49.7%, the company delivers a 24% return on equity and the stock is only trading at 14 times trailing earnings and nine time projected earnings.
I recommend you begin 2020 by taking a full position in Ping An (PNGAY). BUY A FULL POSITION
Model Portfolio
Updates
Alibaba (BABA) has jumped from 150 in early 2019 to a recent all-time high of 218. The next earnings release is particularly important because it will show results for the most important quarter of the year.
Because of the seasonality of shopping, Alibaba generates approximately 30% of yearly profits in the fourth quarter and this includes Singles’ Day—its annual discount holiday shopping day that takes place on November 11 (11/11 symbolizing four “single” numbers). Alibaba hauled in $38 billion of revenue in its latest Singles’ Day.
For a company of its size, BABA is a remarkable growth stock and is a great core holding for those looking for exposure to the rising Chinese consumer class. I would still be a buyer at these levels. BUY A FULL
Cosan (CZZ) shares lost a point in the stock’s first two weeks in the portfolio.
Cosan, based in Brazil, offers a nice blend of emerging growth and western management with a diversified portfolio of fuel distribution, sugar production, ethanol and electricity, rail transportation, warehousing, as well as the distribution of natural gas.
Its most recent quarter indicated that momentum is accelerating, with net profits up 790% year over year. Still, the stock is trading at just 12 times trailing earnings. BUY A HALF
DBS Bank (DBSDY) is the highest quality bank in Asia but its shares have been underperforming. This has been largely a dividend and income play with dividends more than doubling from 2014 to 2018. I’m banking on some catch-up growth in 2020.
DBS is the largest and highest quality bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore. 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 trades at just 12 times trailing earnings.
Though this is a great long-term core holding, based on its lack of momentum, I’m moving DBSDY to a hold. MOVE FROM BUY A HALF TO HOLD
Freeport-McMoRan (FCX) shares didn’t do much this week. This is a play on recovering sentiment in iron and copper; over the last 25 years, FCX has moved with copper prices 88% of the time.
The company primarily explores for copper, gold, molybdenum, silver, and other metals primarily in Indonesia as well as in Chile, Peru, New Mexico and Colorado. It is the world’s most significant copper producer. I encourage you to buy FCX if you have not already done so. BUY A HALF
Luckin Coffee (LK) shares pulled back late last week but this week came roaring back, moving from 33 to 39, including a 12% bump on Wednesday.
LK announced Luckin Coffee Express – a vending machine for brewed coffee and snacks. The company also announced that it ended 2019 with about 4,500 outlets, a number that exceeds the total Starbucks stores in China.
Luckin trades more than 100% above where its IPO was priced last May so some more conservative investors may wish to take some profits off the table at these levels. More aggressive investors should keep all their shares but may wish to put in place a stop-loss at 30. BUY A HALF
Marvell Technology Group (MRVL) shares lost a point this past week.
Our 5G play, Marvell recently sold its Wi-Fi business to NXP Semiconductors and is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware.
New markets are emerging in which Marvell has a first-mover advantage—virtual reality, drones, data integration and consumer and industrial robotics, to name a few. This is a quality company operating in high-growth, strategically important markets and the company is boosting its stock buyback program.
I recommend that you buy a half position if you have not already done so. BUY A HALF
NovoCure (NVCR) shares regained their footing, moving from 73 to 79 this week, and I’m hoping the stock gets more momentum from the company’s presentation at the JP Morgan Healthcare Conference on January 13.
NVCR is a unique company in the biotech space, marketing a device called Optune that treats cancer in a revolutionary way by mechanically disrupting cancer cell division.
This process uses electrical fields to non-invasively disrupt cancer cell division and growth. Sales are expected to be up 30% in 2020 with positive earnings.
In its most recent quarter, gross margins were firm at 75% and the balance sheet is strong with $313 million in cash. I encourage you to begin with a half position if you have not already done so. BUY A HALF
Rakuten (RKUNY) shares are trading where they were a month ago and have been lackluster since they delayed the rollout of 5G services into 2020.
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, and #1 credit card.
RKUNY stock is cheap, trading at just under nine times trailing earnings, so I’m leaving it at buy for now. BUY A HALF
Rio Tinto (RIO) shares, like Freeport McMoRan’s, were flat again this week.
London-based Rio is one of the world’s premier multinational mining and commodity firms. Operating across 35 countries, it supplies the world with gold, diamonds, copper, titanium, iron ore and other industrial metals.
As some key commodities such as copper seem to be beginning an uptrend, Rio offers good value, currently trading for about seven times earnings. It also boasts a dividend yield of 5.1%. BUY A FULL POSITION
Sea Limited (SE) shares held at 40 this week – still an all-time high for the stock.
Sea is an aggressive idea focused specifically on Southeast Asian markets representing 650 million consumers.
The company is primarily known for gaming and its e-commerce platform Shopee is being deeply discounted despite gaining share in the fast-growing Southeast Asian market.
More conservative investors may want to take some partial profits in Sea while aggressive investors should keep all shares but put in place a trailing stop-loss of 20%. BUY A HALF
Virgin Galactic (SPCE) shares are up 39% over the last month. Today the company is presenting at the Merrill Lynch Defense and Aerospace Forum and announced that its second commercial spaceship was nearing completion ahead of schedule.
The company has reservations from over 600 people in 60 countries, totaling $80 million in deposits and $120 million in potential revenue. Company founder Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021. The cost of a Virgin flight on SpaceShipTwo, which can hold seven passengers and two pilots, is $250,000.
The big payoff is down the road, when hypersonic point-to-point travel becomes a reality. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at five times the speed of sound could make the same journey in just two hours.
I agree with a recent Morgan Stanley report that compares the space tourism company to a biotech in terms of risk/reward, and I encourage you to buy this stock if you have not yet done so. BUY A HALF
The next Cabot Global Stocks Explorer issue will be published on January 23, 2020.
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