The headline risk here, folks, is that if you wait for your central banker to give you insight into ...
Global Growth Star Search
02/18/2010 4:03 pm EST
Paul Goodwin, editor of the Cabot China & Emerging Markets report, has his eye on a Chinese fertilizer maker and a Brazilian home builder.
Q. Could you describe your emerging markets timing system?
A. The system uses the trailing-25-day and the 50-day moving averages. As long as the index remains above those two averages, it's a positive situation. When the index drops below both, the indicator turns red, you begin to raise cash, get rid of your weakest holdings, and hold off on new buying. And once the index comes back up [to] the lower of those two averages, and the moving average itself begins to trend up, then you have a buy signal again.
Q. So, presumably you're still in a defensive, get-rid-of-the-losers mode?
A. Yes. The portfolio that I'm advising right now is about 60% in cash. [The interview took place on February 10th—Editor.] It's the only thing that allows any kind of success in aggressive growth investing: If you're not willing to exit the market, to really pull in your horns when the trend of the market turns against you, it's very difficult to be consistently profitable.
Q. How long do you expect to remain on the sidelines?
A. I think this has been a really useful correction. After having had a really portfolio-warming advance from the November/March bottoms, we had begun to attract too much hot money into China and emerging markets and some of it needed to be wrung out.
If we got a period of five strong up days, we could have a buy signal again; it's just that I don't think that's going to happen.
Q. I assume you're excited about Baidu.com (Nasdaq: BIDU), which has been one of your picks. So, would you be encouraging people to buy it because it's above all the moving averages right now, or to sell it because sentiment is so bullish on it?
A. Our experience has been that when a stock gaps up on earnings and good volume, which Baidu has shown, that although there may be a little profit-taking, the energy added to the stock from a change in investor sentiment will tend to send the stock up more. I'm pretty bullish on Baidu.
If Google (Nasdaq: GOOG) were to pull out [of China], Baidu would get a tremendous boost. Google had a 30% market share in China, as I recall. Although it's certainly not what they're used to in the English-speaking world, China is an enormous market and 30% is nothing to sneeze at, especially [given] the relatively low penetration rate of Internet access there. I don't think Baidu needs Google to pull out, but it would be constructive for them if Google did.
Q. How concerned are you that Google's problems are related to Rio Tinto's (NYSE: RTP) problems [with the arrest of four China employees on industrial espionage charges] and are related to what people are starting to say is a deteriorating business climate in China for foreign companies?
A. If China is going to be run as China Inc., with the government actively encouraging and supporting Chinese businesses and actively discouraging foreign ones, that will make a big difference. But it won't make a big difference to investors in the ADRs of Chinese companies.
Q. Is China the strongest emerging market?
A. Yes. For one thing, it has the largest number of ADRs of any of the emerging market countries, and at this point China has the strongest GDP growth of any major country on earth. The latest projection was that annualized first-quarter growth is going to be about 10%, and that's about where the government wants it, because it will allow them to keep inflation under control while creating enough jobs to maintain the kind of social stability they want. What the government wants more than anything is not to have a bunch of angry unemployed workers out in the streets.
Q. How do other emerging markets compare with China right now?
A. Probably the next strongest market is Brazil.
Q. Do you like Brazil because it's also growing fast?
A. Yes. [One of the stocks I like there] is Gafisa (NYSE: GFA), the Brazilian developer and home builder. Brazil's interest rates are much higher than [those] in the United States, because the danger of inflation there has always been much higher. Any kind of break lower in interest rates in Brazil will make Gafisa a very attractive item.
Brazil has enormous natural resources; last year, they were the only major economy in the world that was a net exporter of oil, so no one has [that] leverage on them. Petrobras (NYSE: PBR) has made some enormous offshore oil strikes. With their iron ore resources and other commodities, and just the general build out of the phone system, the Internet, and housing there's huge potential there.
Q. Of the 300+ ADRs that you watch, which looks best now both technically and fundamentally?
A. One I'm very interested in is China Agritech (Nasdaq: CAGC). They make liquid organic fertilizer using humic acid, so you don't get the problems you do with synthetic fertilizers. You don't get a nasty runoff into streams, and China is becoming a lot more ecologically minded. In their third quarter, they had a 46% earnings bump on a 67% increase in revenue and a 21.1% margin after taxes. It's very liquid, it came public just in September, and the chart shows a very nice outperformance.
Q. Could you share another name?
A. There is a Chinese real-estate stock called E-House China Holdings (NYSE: EJ). I know people have been worried that housing in China is a bubble…
Q. …And it's got a chart to prove it, doesn't it?
A. Yes. But perception is fortune. China clearly at this point has enough economic strength to keep it going and to do well based on its internal consumption.With the attractive setup that EJ's decline has caused, I have a close eye on that one.
Q. Thank you.
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