Shesa's SEPTEMBER 2018 INVESTMENT BLOG

September 2018 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update

U.S. Stock market is behaving as if it is immune to tariff and volatility as market keeps moving north. DOW, S&P 500 made all-time high on Friday as investors fears of full -blown trade war taking place decreased. NASDAQ had already reached to all time high a couple of weeks ago. The stock market rally is not a hype, rather it has been very substantive and robust. The economy remains strong, corporate earnings are robust, consumer spending may have taken a little pause but reminding the readers that holiday season is coming. Q3 earning season kicks-off in next 2-3 weeks which will be really exciting as we expect another round of blockbuster earnings from the corporate world. Tariff has no doubt created some hurdles for the stock market, but it has also created some terrific buying opportunities for some of the best Chinese companies. I will elaborate on these but before that, let’s take a quick glance of the U.S stock market major indexes.

	2018
Indexes	2-Jan-18	Friday Close (9/21/18)	Change in 2018	% Change in 2018	All Time High
DOW Jones	24,719.22	26,743.50	2,024.28	8.19	26,769.16
S&P 500	2,673.61	2,929.67	256.06	9.58	2,940.91
NASDAQ	6,903.39	7,986.96	1,083.57	15.70	8,133.30
BTK (Biotech)	4,222.21	5,205.94	983.73	23.30	5360.22
NBI	3,356.61	3,730.95	374.34	11.15	4165.86

Some important Economy

Interest Rate - will Fed raise rate in September?

FOMC meet on September 25-26 to decide about interest rate. There was a very high probability that Fed may hike interest rate. However, looking to current tariff issues and trade confrontation with China, let’s see what’s their stand! Let’s wait and watch. Current Fed rate stands at 2%. If rate is hiked it could go to 2.25%.

How big is U.S. Economy? As of September 20, U.S GDP is $19.4 trillion, and the total Market Capitalization is at $ 30.1 trillion, which is about 149.3% of the last reported GDP. U.S alone control about 1/3 of the total world economy.

Consumer sentiment for the U.S jumped to 100.8 in September from 96.2 in August, beating market expectations of 96.7. It is the second highest level since 2004, only behind the March 2018 reading of 101.4.

Retail sales in August edged up 0.1% month-over-month, but much below market expectations of a 0.4% increase. It is the smallest gain in retail sales in 6 months. The primary reason of this low retail sales was due to fall in sales of motor vehicles, clothing and furniture. It can also be noted that holidays season is approaching, so consumer spending should pick up in the last two months of the year.

Q3 projected Earnings Growth: The estimated Q3 2018 earnings growth rate for the S&P 500 is expected to be 19.9%. If 19.9% is the actual growth rate for the quarter, it will mark the third highest earnings growth since Q3 2010, which was 34.1% after the recovery from financial collapse.

Stock Market Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.8. This P/E ratio is above the 5-year average (16.3) and above the 10-year average (14.4). Looking to the current growth I do not think is overvalued at this point of time.

Tariff: President Donald Trump imposed 10 percent tariffs on $200 billion worth of Chinese imports on 17 Sept 2018. It may go up to 25% starting Jan 1, 2019.

Corporate News

Amazon reached $1 Trillion-dollar market capitalizing: On August 30, Amazon became the 2^nd U.S. Company to hit $1 trillion market cap. However, it just stayed for a day/two. Amazon’s current Market cap is $934 billion.

APPLE Released New iPhone: Apple has released new iPhones on September 12 and available to buy on store starting last Thursday, 20 September. Apple's new iPhones start at $749 for XR model, $999 for Xs and $1,099 for Xs Max. The company also released Apple Watch Series 4.

Geron (GERN) continuation decision THIS week.

The deadline for Janssen (JnJ) to decide whether it will continue partnership or discontinue with Geron has to happen by the end of this week. Most likely, JnJ will continue the partnership, but whether there will be a buyout is difficult to say. As said in my last month’s blog, nothing can be told with certainty. Since my inclusion of GERN in my Blog Portfolio the stock has gone up 45%. Hence, it’s advisable to take some profit sometime during this week to mitigate any risk.

Major Stock Market Performances across the world so far in 2018

DOW	8.19%
S&P 500	9.58%
NASDAQ	15.70%
China Shanghai Index	-15.41% (was down over 20%)
India BSE Sensex	8.18%
Japan Nikki	4.85%
Hongkong Hang Seng	-6.57%
Germany: DAX	-3.77%
UK: FTSE 100	-2.57%

Sectorial Performances (1 Month, 3 Month, Year to date)

Sector	Performance			Price per Earnings (P/E)	Dividend Yield
	1 Month	3 Month	Year-To Date
Consumer Discretionary (3rd)	+1.95%	+3.89%	+15.8%	16.5x	1.27%
Consumer Staples	+1.75%	+6.29%	-2.91%	15.1x	2.86%
Energy	+1.60%	-0.01%	+5.01%	14.0x	1.74%
Financials	+1.19%	+4.94%	+3.28%	15.2x	1.91%
Health Care (2nd)	+2.81%	+9.88%	+15.8%	18.2x	1.86%
Industrials	+3.55%	+8.87%	+5.39%	15.7x	1.85%
IT (TOP performer)	+2.00%	+5.46%	+19.39%	14.8x	0.90%
Materials	+2.56%	+2.81%	-0.07%	13.2x	1.79%
Telecommunication	+1.96%	+8.73%	-3.06%	22.6x	4.83%
Utilities	-0.25%	+4.37%	+1.70%	17.1x	3.78%

Source: Bloomberg.com

Sock Market Volatility in September

As predicted there are some market volatility in September, particularly due to tariff issue. Most the of Chinese stocks are beaten down. However, the stock market is still holding up quite nicely. This trend could continue going forward. I think the stability and rise of stock market would happen during November/December timeframe. Till then, I expect the market to be in a trading range. In next 3-4 weeks Q3 earnings season will kick-off. Analysts are anticipating better earnings this quarter. As said earlier, Q3 2018 earnings growth rate for the S&P 500 is expected to be 19.9%.

Has the Tariff created a great buying opportunity for Chinese Stock?

China market has been going south since the beginning of this year and was down 20%, which is considered to be recession territory. In contrast, U.S stock markets have been going up. DOW is up +8.19%, S&P 500: +95.58% and NASDAQ: +15.70% so far this year. So, what’s impacting the emerging markets? Let’s discuss..

As U.S Federal Reserve goes on tightening monetary policy, the dollar becomes stronger. So, when the emerging markets exports to U.S they get less dollar for the same goods and services. This impacts their profitability. Also, they need to pay higher interest rate for same debt/loan. Dollar index has gone up about 2.5% this year.

President Donald Trump will impose 10% tariffs on $200 billion worth of Chinese imports starting 17 Sept 2018. Trump said in a statement that, the tariffs would rise to 25% on Jan. 1, 2019, adding that "if China takes retaliatory action against U.S farmers or other industries, U.S will immediately pursue phase three, which is tariffs on approximately $267 billions of additional imports.". It can be noted that Trump administration has already levied tariffs on $50 billion worth of Chinese products. How much will be the impact of such tariff is difficult to predict at this moment. Will there be bilateral talk to resolve these issues? It’s anybody’s guess. All these have results into lot of uncertainties. These are really hitting the Chinese stocks very hard and many good companies have seen their valuations cut down 25-40% or even 50% in light of heightened trade tensions between the U.S. and China.

Obviously, these tariffs will not have greater impact immediately, but it can impact going forward. Having said that, I remember Warren Buffet rule, when there is a bloodbath in the street, it’s time to jump in. Nobody can predict how long these blood bath will continue but I do see it as an opportunity to grab some stocks of the great Chine companies. In last few days, the Chinese stocks have bounced but it’s still down significantly. For the short-term there may be more hurdles and some more down-turn, however, for long-term I see it as a compelling opportunity. It does not mean that every Chinese stock will be a great buy but some blue-chip growing companies are worth considering. China stock market current P/E is around 7.5. So, obviously it’s much cheaper comparing to U.S stock market.

Now let’s see some of the key Chinese ADR stock on my Blog Portfolio holding.

Equity	Last 3 months Return (YTD)
BABA	-18.5%. It was down as much as 25%.
BIDU	-12%
JD	-35%
IQ	-38%
KWQB	-28%
EEM	-1.6%
EMQQ	14.35%

Let’s analyze from economy perspective: U.S, China and India

	U.S.	CHINA	INDIA
TOTAL GDP	$19.4 trillion	$12.2 trillion	$2.6 trillion
GDP Growth (Yearly)	2.90%	6.70%	8.20%
GDP Growth (Quarterly)	4.2 %	1.80%	1.90%
Unemployment Rate	3.9 %	3.83%	3.53%
Inflation Rate	2.7 %	2.30%	3.69%
Interest Rate	2 %	4.35%	6.90%

How about Indian Stock Market? If China loses, India gains. Also, form GDP perspective India is ahead with 8.2% yearly growth. Indian stock market has also bounced back in last 3 months. However, I do not see such elite companies like BABA, IQ, BIDU or JD in India. Hence, personally I am not seeing that kind of opportunity which excites me to invest more. In fact, I could see that BSE India Sensex has gone up more than 3000 points, but the ETFs and Mutual Funds are lagging.  Hence, I will be truncating these holdings and sell INDA ETF. In other words, I am not excited by the Return on Investment from my current Indian equity portfolio holdings. Moreover, the valuation (P/E Ratio) of India stock market stands at around 27.5, which looks expensive whereas China is just around 7.5. So, I will hold my investment for now.

Now let me discuss about this month’s inclusion to my Blog Portfolio.

iQIYI, Inc. (IQ): As I wrote earlier, Chinese market stocks have been beaten down heavily and that brings some great buying opportunity for long term. I see iQiyi as a great opportunity. On Tuesday, 18 Sept, I pinged my WhatsApp group members and published on my blog that I am adding IQ to my Blog Portfolio at $26.13.

Let me discuss the reason for my inclusion: iQiyi (IQ) is a Chinse company, that was spun off from its parent company Baidu (BIDU). On March 26, 2018 iQiyi went public in Nasdaq stock exchange at $18 per share, valued about USD $2.5 billion. The company provides online entertainment services and operates a platform that provides a collection of Internet video content, professionally produced content licensed from third-party content providers, produces original in-house contents like episodes, serials, provides membership, and distribute contents. Hence, iQiyi is also known as “Netflix of China”. In addition, it goes a step further streaming video and operates physical movie theaters in China. It also provides online gaming services. Thus, it’s trying to achieve a level of scale and diversity closer to Disney. Hence, I would say that it’s a mixed blend of ‘Netflix’ and ‘Disney’.

Revenue: Since it is known to be “Netflix of China”, let me take a quick comparison of their revenues. In 2017, iQiyi generated $2.67 billion in revenue, 55% year-over-year growth, whereas Netflix's had $11.7 billion in revenue, 32% year-over-year growth. IQ had generated only $825 million of revenue in 2015. As aid above, IQ just went public in March this year. So, it’s too early to compare these two companies. Now let’s see its user base. IQ had 126 million daily active users on mobile platforms, including 53.7 million PC users. Moreover, its monthly active users were astronomical 421.3 million mobile users, which is more than American population. The company also stated that iQiyi users watched 9.2 billion hours of video on its platform last year. If we do the math, it comes to an average 1.7 hours per day, per user which is amazing. In the recent quarter, iQiyi's membership revenue increased 66% year over year, and its subscriber base grew by 75%.

Paid Subscribers: IQ expanded its paid-subscriber rolls to 67 million members, up from 50 million subscribers at the end of 2017 and it had just 5 million members as of May 2015.

iQiyi's business is mostly focused on building its content platform in its domestic market. It’s also pursuing distribution in other countries, mostly in Asian markets.  Recently it signed a deal with Western entertainment (see later), which is not subject to tariffs or other new regulations. Hence, iQiyi's business looks less vulnerable to trade issues comparing to many other companies. But why is the stock still down 43%? After it went IPO in late March with $18, the stock went up to $46.23 before diving down due to tariff news. So, it went up 200%. Now it’s down 43% from its 52-weeks high. Let me discuss some other negatives before going to positives.

Negatives:

As IQ plan to grow the operating costs are rising due to company's content production, acquisition, advertising, marketing etc. This results in proliferation of operating losses and bolstering bearish sentiment. Please note that great companies like Amazon and Netflix did not earn profit for years or even decade but it does not mean that every company tying to grow becomes Amazon or Netflix. IQ also faces challenges ranging from consumer tastes, government restrictions, tightening competition. However, now let me discuss about the positives.

Positives

Apart from excellent revenue growth and subscriber growth it has also numerous collaborations and partnership. Let’s see some of those.

The company seems to be taking steps in the right direction. Let me bring some key initiatives from the company which could be major revenue generator in years to come:

• Earlier this year, iQIYI expanded its partnership with ‘The H Collective’, a Hollywood production company. Under the agreement, iQIYI will co-produce or invest in six films to be distributed to both the American and Chinese markets.
• On Sept. 10, Eros International partnered with iQiyi to provide Indian blockbuster movies to be shown in China. Reminding the reader that one of the Indian Bollywood Hindi movie ‘Dangal’ has topped most Hollywood movie in China generating a mindboggling USD $189 million.
• It collaborated with J.D.com, the Chinese e-commerce leader and the news was that one million people had signed up for a new cross-platform membership program.
• Last month, iQiyi entered into the mobile gaming space by acquiring game publisher Skymoons. 
• Recently, it partnered with Ctrip corp. to provide exclusive travel benefits to its VIP-level subscription users. 
• The company indicated that its period drama Story of Yanxi Palace had been streamed over 15 billion times and was the most-watched online drama, 300 million times per day and, at its peak, scored over 700 million viewers. 
• iQiyi (IQ) is launching a new standalone video app exclusively catering the need of Chinese senior population. At the end of 2017, China’s population of people 60 years and above hit 241.0 million. So, there is great opportunity in this segment. Also, as we know, senior people have more time to watch TV and programs resulting in more viewing.
• Another program, Hot-Blood Dance Crew, broke advertising revenue records for online programming. The show attracted astronomical 1.8 billion views!
• IQ has a joint venture with China Sport Capital and acquired broadcast rights for soccer from the English Premier League, Australian Open, ATP Tour, and WTA Tour tennis events. In addition, the company also has bought rights for four major golf championship. 
• The company has also partnered with sports Super Sports Media to release the iQiyi sports app, that will compile sporting events from both providers, to broadcast extensive sports coverage to their members.

I guess I have written enough. But why do I write all these? Because it should give visibility to the investors about its current business and future potential. These are likely to result in more impressive subscriber gains resulting in significant revenue growth.

But what’s is happening to the stock? As aforesaid, it went IPO at $18, the stock moved up to $46.23 in late June. Then came the news of Trump’s tariff and trade confrontation between U.S and China. The Chinese stock market started moving south and Shanghai stock exchange is down by 15.4% so far this year. When the Chinese stock market don’t do well, so also its ADR takes a hit. IQIYI was hit hard, and the stock fell to about $26. In other words, it came down 43% and seems to be stabilizing now. The question is, can it again bounce back? I am sure it can. Because the company is growing its revenue, user base, partnership, viewership, diversifying into different homogeneous business. Having said that, none of the business go without challenges. As it’s a newly IPOed company, there is not much fundamental data available but, let’s take a quick look of exiting fundamantals.

Fundamentals:

Market Cap	$20.36B	52 Week High	46.23
Trailing PE	N/A	52 Week Low	15.30
Forward PE	-47.60	Total Cash	1.98B
Price to Sales	6.44	Total Debt	140.09M
Revenue / Sales	3.16B	Book Value	5.04
Quarterly Revenue Growth (yoy)	42.60%	Beta	N/A
Profit / Earnings	125.45M	Institutional holders	0.21%
Quarterly Earnings Growth (yoy)	N/A	% Held by Insiders	48.20%
EPS	-0.73	Return on Equity	N/A

Risks: I have already put the risk above under negatives. But the other major risk I see is that, Chinese stock market which is going south and currently it’s near its two years low. If Chinese market goes further south, then IQ can go down further. But this is true not only for IQ but for every Chinese stock including behemoth like BABA. The stock is highly volatile, so one has to be very careful and should have the appetite to digest volatility.

My final thoughts: IQ is a growing company and in its early stage of growth. If an investor can keep a long-term perspective and do not worry too much about short-term volatility, then the opportunity could be substantial for patient investors. But if one can’t take volatility, it’s better to stay away. For me, I have been accumulating this stock and willing to take a calculated risk as I perceive that IQ has significant future potential. For such volatile stocks, I follow two strategies: trading and investing. The trading portion, I can sell with certain %age gain and the investing portion remains for long-term growth. IQ has tremendous potential to grow and I won’t be surprised if it grows like Netflix in years to come. The question is, whether my analysis and perception, right? Only time can tell that, but for now I am invested and will keep accumulating, as I smell much better opportunities in months/years to come.

Shesa’s Blog Portfolio (As of SEPT 23, 2018 => updated 9/29)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	217.66	1/25/13	322%	BUY on dip
BIDU	86.43	228.85	4/18/13	165%	HOLD
FB	47	162.93	11/13/13	247%	BUY on dip
TSLA	135	299.1	11/13/13	122%	HOLD
MA	77.18	221.9	12/12/13	188%	BUY on dip
AMZN	311.73	1915.01	4/12/14	514%	BUY on dip
BABA	67.28	164.63	2/21/16	145%	BUY on dip
JD	23.45	26.49	5/22/16	13%	HOLD
XON	26.37	14.5	7/4/16	-45%	BUY on dip
RIO	36.41	47.68	12/18/16	31%	SOLD @47.68 on 9/17.
PVH	92.82	141.62	1/22/17	53%	HOLD
EXEL	26.33	16.76	8/20/17	-36%	HOLD
MOMO	32.14	46.44	11/25/17	44%	BUY on dip
BRK-B	206.96	220.52	3/18/18	7%	HOLD
NVDA	228.71	263.45	4/22/18	15%	BUY on dip
EDIT	36.53	30.1	5/28/18	-18%	BUY
JKS	14.04	12.36	7/4/18	-12%	BUY
GERN	3.77	5.46	8/12/18	45%	HOLD
IQ	26.13	26.25	9/18/18	0%	NEW ADDITION (BUY)
ETF
INDA	31.94	33.53	3/15/15	5%	SOLD on 9/24 @32.60
INCO	34.46	43.01	5/15/15	25%	Trimmed
IHF	139.1	197.87	8/16/15	42%	BUY on dip
XLY	77.76	112.72	8/16/15	45%	HOLD
EEM	32.3	43.23	11/15/15	34%	Accumulate
IYG	112.03	138.89	3/19/16	24%	HOLD
EMQQ	32.65	32.6	5/21/17	0%	HOLD
KWEB	58.52	49.71	2/11/18	-15%	HOLD (Trimmed)
MUTUAL FUND
FBIOX	11.46	23.78	3/1/13	108%	Accumulate
PRHSX *	47.25	82.97	2/2/14	76%	Accumulate
FSCHX *	12.7	16.38	4/12/14	29%	HOLD
FSCRX *	24.3	26.86	10/25/14	11%	HOLD (Trim)
PRMTX *	59.45	108.16	12/20/14	82%	Accumulate
MINDX *	26	31.37	6/14/15	21%	HOLD (trim)
MCDFX *	12.37	16.85	12/9/15	36%	Accumulate
FSRPX *	9.05	16.63	1/15/16	84%	Accumulate
FBSOX *	37.32	67.47	3/20/16	81%	Accumulate
FSMEX	43.66	55.78	9/24/17	28%	Accumulate
* Indicates dividend adjusted

Positions closed in September 2018:

Equity	Sales Price	Buy Price	Date Sold	Gain / Loss (%)
RIO	47.68	36.41	17-Sep	30.10%

That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time. If you want to get alert on my action, then please subscribe to shesagroup_invest@googlegroups.com. You can also join my WhatsApp group, if interested.

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do not provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions and some of the information provided may not be accurate. Please contact a professional money manager to buy/sell any security. I do not charge any fees or commission by writing the blog except anything from Google AdSense. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow. Anybody buying or selling the equities mentioned here would do it on their own risk.

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