A Big Breakout in Small Caps
Another quarter, another record profit for Tencent... Sjug's favorite 'New China' recommendation continues to dominate... Checking in on U.S. stocks... A big breakout in small caps... LAST CALL: Your final chance to hear from Porter, Steve, and Dr. Richard Smith...
Tencent Holdings (TCEHY) reported first-quarter earnings on Wednesday...
And as has often been the case of late, the True Wealth China Opportunities holding absolutely trounced expectations.
Tencent reported revenue grew 48% during the first three months of the year to 73.5 billion yuan ($12.7 billion), versus estimates of 70.8 billion yuan. Meanwhile, net profit rose 61% to a record 23.3 billion yuan ($3.7 billion), nearly 30% higher than analysts had expected.
The company has been investing heavily in growth, which many analysts expected to hurt profits. But that clearly wasn't the case. In fact, the company's gross profit margin actually rose to more than 50% in the quarter – its first year-over-year increase in nearly three years – versus estimates of 47%.
But the highlight of the report may have been Tencent's WeChat business...
As regular Digest readers know, WeChat is Tencent's "do everything" app. In simple terms, WeChat is something like Facebook, Amazon, Twitter, Skype, Uber, PayPal, and dozens of other apps all rolled into one.
It's already the most dominant digital "ecosystem" in China. But it continues to grow rapidly. In fact, WeChat's active monthly users rose 11% year-over-year in the quarter and crossed 1 billion for the first time.
Currently, WeChat's advertising revenue accounts for less than 20% of the company's total sales. But this percentage could expand significantly in coming years. As Bloomberg reported yesterday...
A momentous thing happened at Tencent Holdings last quarter. The details were buried in its 44-page earnings statement late Wednesday.
To cater to the strong demand for social advertising on our platforms, [WeChat] Moments increased its maximum ad load to two advertisements per user day in late March.
When two is an increase you know that the earlier number wasn't very high.
[WeChat] Moments is like a user's Facebook or Twitter feed, and the ubiquity of [WeChat] makes it a powerful tool for reaching consumers. But with great power comes... yadda, yadda.
In fact, Tencent has wielded that power with great discipline by not spamming feeds in order to avoid annoying consumers. Such a savvy strategy helped it keep attracting users while avoiding the negative feedback we often hear from users of Facebook or Twitter.
Even at just one ad per day in the Moments feed, Tencent's social media platform has climbed to account for almost 70% of ad revenue.
In other words, Tencent has only just begun to tap into the revenue-generating potential of its 1 billion and growing WeChat users. If the company were to expand its advertising efforts to even half that of Facebook – and despite the complaints and recent scandals, Facebook users continue to log in – sales could absolutely soar.
Here in the U.S., the major stock market indexes remain range bound...
On the plus side, all three indexes – the Dow Jones Industrial Average, the S&P 500, and the tech-heavy Nasdaq Composite – remain above their February "volatility panic" lows. All three are also still trading above their respective 200-day moving averages ("DMA").
In addition, the benchmark S&P 500 has now broken out above the "triangle" formation our colleagues Ben Morris and Drew McConnell highlighted late last month. This is a positive development, but we may not be "out of the woods" just yet.
Without getting too technical, traders would typically expect to see stocks explode higher out of this type of pattern. That hasn't been the case so far.
Of course, this doesn't mean stocks can't (or won't) continue higher from here. But we can't rule out another move lower in the near term... And we'd prefer to see the market recapture its March highs – approximately 2,800 in the S&P 500 – before getting too bullish again.
In the meantime, we're seeing some pockets of relative strength...
Regular readers know bank stocks – particularly regional bank stocks – have been outperforming the market of late.
Small-cap stocks in general are another. In fact, while the major indexes are still well below their January highs, the small-cap Russell 2000 Index just made a new all-time high...
These companies – which tend to operate solely in the U.S. – are likely benefiting from a combination of the recent tax cuts, relative U.S. economic strength, and rising fears of a "trade war." As the Wall Street Journal reported last night...
In recent weeks, data have suggested that momentum around the world could be faltering... The comparatively rosier outlook for the U.S. has drummed up fresh optimism among investors in small caps – especially with many expecting small companies, which tend to pay higher effective tax rates than multinationals, to get a boost from corporate tax cuts...
Smaller publicly traded companies broke away from the broader market in March and pushed higher, even as bouts of volatility related to fears of protectionist trade policies and missteps by technology companies caused the S&P 500 to slide.
One reason why small caps withstood the turmoil: Investors have bet that continuing skirmishes over trade policy between the U.S. and China, among other nations, are less likely to dent profits among domestic firms. The S&P 500 gets about 30% of its revenue from outside the U.S., compared with 21% for the Russell 2000, according to a Bank of America Merrill Lynch research note last month.
The Russell 2000 Index was up another 0.6% today. It is now up 6% year to date, compared with less than 2% in the S&P 500.
We don't make official recommendations in the Digest, but investors looking for a low-risk opportunity for new money could consider buying a small-cap exchange-traded fund – such as the iShares Russell 2000 Fund (IWM) – with a tight stop below its previous highs.
We'll end today with a reminder...
As you've likely heard by now, our friend Dr. Richard Smith joined Porter and Steve Sjuggerud for a special live presentation last week.
During the event, attendees heard the latest market forecasts from Porter and Steve... learned exactly what Richard's exciting new research has discovered about the underlying "health" of this bull market... saw in detail how his proprietary TradeStops systems can help you make more money and risk less in both Porter's and Steve's recommendations... and much more.
We know many folks were unable to join us at that time, so we prepared a free, full-length replay to be sure no interested Stansberry Research subscribers miss out.
But if you still haven't viewed it, this is your last chance. This video replay – as well as Richard's generous offer to try TradeStops for yourself at a substantial discount – will go offline tonight at midnight Eastern time.
Click here to view it now. You can also learn more about Richard's special TradeStops offer right here (without sitting through a promotional video).
New 52-week highs (as of 5/16/18): Automatic Data Processing (ADP), Baidu (BIDU), Lindsay (LNN), Pioneer Natural Resources (PXD), ALPS Medical Breakthroughs Fund (SBIO), Steel Dynamics (STLD), United States Commodity Index Fund (USCI), and Verisign (VRSN).
In the mailbag, a reader comes to Porter's defense. What can we do for you? Let us know at feedback@stansberryresearch.com.
"I have been with Stansberry Research for about a year and a half now, and I have made a TON of money. I'm confused by this recent attack in the mailbag about the opinions of Porter regarding Berkshire Hathaway. BRK is obviously deviating from what got them to where they are now. As Porter points out this truth and many other truths about the market as a whole, he gets slammed by the very people who pay for his opinions. What do people want? They pay for the opinions of people within his company. The OPINIONS of Sjug, Doc, Ben, Dan, and Porter, and the teams that work for them, have been very profitable for my family and I.
"When someone gives you a piece of bad news, do you smack them in the face and tell them to get the hell out? Or do you thank them and adjust your plans accordingly? I can surmise that the readers of this newsletter, by and large, welcome the news that may not be pleasant or profitable. We want to strike while the iron is hot and get the hell out when it is time.
"To the readers who don't like the opinions published here, do you like the opinions published that have made you money? Do you like the censorship of a view you oppose when it conflicts with a view you currently have? Are we all such pansies that we can't hear something we don't want to? You want a financial newsletter guy to tell you its all good and will be forever? You want a guy to tell you the investments that you have are gonna be rock solid forever? You want a guy who will blow smoke right up your a**? Grow up. Take charge of your own portfolios. Stop henpecking the man that created most of those portfolios. Or are you just that smart? Can you do this on your own? I doubt it. Finance is not a safe space." – Paid-up subscriber T.G.
Regards,
Justin Brill
Baltimore, Maryland
May 17, 2018