The Strongest Stocks in the Strongest Markets

08/09/2013 10:00 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Paul Goodwin, editor of Cabot China & Emerging Markets Report, explains his global strategy and highlights some favorite investing ideas, from Latin America to Asia.

Steve Halpern: We are here today with Paul Goodwin, editor of Cabot China & Emerging Markets Report. How are you doing, Paul?

Paul Goodwin: I am fine, thanks.

Steve Halpern: You developed an emerging markets timing system which lets you know whether to be adding to your positions or scaling back. Could you tell us a little about your system, and what the outlook for emerging markets is, based on that?

Paul Goodwin: Sure. The Cabot Market Timing Strategy is based on the idea that it isn't really possible to know what markets are going to do in the future, but we can certainly know what they are doing right now.

We use a 25 and 50-day simple moving average on the particular index that we're using, which, in my case, is the Power Shares Golden Dragon China, and we see if the index is above its 25 and 50-day moving averages, and if those averages are moving up.

So, right now the Power Shares is up at 24.40, the 25-day moving average is down at 22, so we have a nice, strong bull market in Chinese stocks, we have a pretty fair margin there, a very comfortable margin.

So, when we have a situation like this, where the market is definitely bullish, we increase our exposure to emerging market funds, and if the market is down, when it falls below those moving averages, then we reduce our positions somewhat and go to cash.

We don't really have an outlook on what the market is going to do, but this system makes sure that we never miss a bull market and that we never stay heavily invested in a bear market.

Steve Halpern: One interesting point that you've made is that US commentators often allow their ideology to cloud their view of China, which is an area that's the primary focus of yours, but that you have no axe to grind. Could you explain that?

Paul Goodwin: Yeah, I know that there are a lot of people in the same way that, you know, I knew people who went through World War II who would never buy a Volkswagen, in the same way there are people who see China as essentially a communist dictatorship and they say they will never invest there, and you know, I don't want to argue with these people.

I could point out that China has brought more people out of poverty than any country in the past century, but I don't really care. What I'm trying to do is to advise people on how to find the strongest stocks in the strongest emerging markets.

So if people want to be patriotic about it, or if they want to view China as the enemy, as people did, say, with Japan back when it was strong, that's their business, but I'm looking for strong stocks and strong markets.

Steve Halpern: You've also noted that you don't have a country bias when you look globally, and while you do look closely at China, you're also willing to look anywhere within the emerging markets world. Where are you seeing opportunities now?

Paul Goodwin: Well, one stock I kind of like right now is called Mercado Libre (MELI), it's essentially the eBay of Latin America, and its stock has been in an uptrend for awhile, and I think there is great opportunity in Latin America.

But when I say I don't have a country, or even a regional bias, I really don't care where the growth is coming. I don't have projections for what's going to happen in, you know, Turkey, or Kazakhstan, or anything of the sort. I'm looking for strong stocks that are delivering good results.

Steve Halpern: Given that you also do focus on China, for those investors who are willing to invest there, is there a stock you'd mention that you particularly like at this time?

Paul Goodwin: I, you know, I think one that I really like right now is a name that everyone should be familiar with. It's Baidu (BIDU), which generally is—whenever people mention Baidu they generally say—the Google of China.

Baidu does have a commanding lead in the search market in China, but for various reasons the stock, after peaking in 2011, went from 166 about down to 83, and along with a lot of Chinese stocks, they were just out of fashion.

But it's really hard to argue with a company that has, the last three years of revenue growth are 81%, 92%, and 57%, and I think with the stock now trading up around 135, I still think it represents a great value and a great way to play the strength of China.

Steve Halpern: Well, thank you very much for joining us today. We really appreciate your time.

Paul Goodwin: Thank you.

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