This is an excerpt from Cabot China & Emerging Markets Report, which seeks to capitalize on the big boom in China and other emerging market countries. Editor Paul Goodwin, Cabot’s international investing guru, provides your passport to profits.
Earnings season is kind of the Final Jeopardy of the stock market. One report of revenues, earnings, margins and associated data can power stocks higher or let the air out of their tires in short order.
On Wednesday, LightInTheBox (LITB) and Baidu (BIDU) reported their quarterly results. LightInTheBox beat on revenue for the quarter, reporting sales of $78.8 million, which was nicely above the expected $75.3 million. Unfortunately the company booked a loss of six cents per share, which doubled the expected three-cent loss and investors reacted by taking the stock off at the knees. LITB was down 15% shortly after the open. It’s a good illustration of how bad earnings can torpedo a stock, and it makes us glad that we had LITB just on the watch list.
Baidu’s report came after the market closed, and it was a winner, all things considered. Revenue for the quarter was up 55% from the previous year, earnings grew by 6% and earnings should accelerate this year. Baidu is making big investments with an eye to growth in mobile Internet, and investors seem to approve. The stock was up modestly today.
Since emerging markets stocks are generally considered riskier than their developed market peers, the earnings reactions from Chinese stocks (the only ones we now have in the portfolio) can be especially emphatic.
Accordingly, it’s always a good idea to have a game plan before the vital numbers hit the wires. At the very least, you should know exactly what your cost basis is for the stocks in your portfolio. It’s also helpful to pre-calculate the prices that would represent a 15% and 20% loss for each stock. Those are the recommended maximum loss limits when markets are bearish and bullish, respectively. If a stock turns decisively against you, there’s no reason to hold on until you reach those limits, of course, but they are a good line in the sand to help you think about controlling losses.
Switching gears, the constant gush of news and commentary about China is always interesting, but not necessarily useful. Recent headlines have centered on the country’s pollution problems, the progress of the government’s anti-corruption campaign, readings of economic indicators and high levels of provincial and municipal debt and the steps the government is taking to get them under control.
Of all these stories, the most compelling from our point of view is the government’s efforts to squeeze non-bank lending as a way to reduce regional and local debt loads. Too much pressure might suppress economic growth, dragging it below the 7% level that is usually considered the minimum necessary expansion to keep job creation on track.
It’s a compelling story, easily on a par with any produced by the Winter Olympics. But as usual, we will follow our number one rule: Look at everything, but make investing decisions based solely on what stocks and the market are actually doing.
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