by Travis Johnson, Stock Gumshoe | September 20, 2017 2:29 pm
Cabot[1] is pitching its Stock of the Week service, which chooses a favorite stock from among all of Cabot’s newsletters each week, and in order to entice subscribers they’re dangling the promise of huge gains… including this promise:
“If you’ll give me just 10 minutes a week, I promise our Cabot Stock of the Week[2] picks will double your money in the next 12 months.”
On average? Or all of them? Or just one of the 52? That’s a pretty bold promise to make unless you’re just claiming that you’ll have one stock double in a year — which should be pretty easy, given that Cabot newsletters are mostly buying growth and momentum stocks (meaning that you’ve got a better chance of a double, and also a better chance of a pretty sharp collapse if the momentum hits a wall).
So… what’s the idea they’re dangling this time to get us to pull out our credit cards? (Stock of the Week is currently $997/year, in case you’re wondering.) Here are our hints:
“I’d be willing to bet that this company could give us Tesla-like returns (+1,120%) over the next four years.
“What makes me say so? Because this company will become one of the biggest profit takers in the hotel services business in China[3].”
OK, so there aren’t a lot of “hotel services” companies in China that are publicly traded (quite a few have disappeared, been hoovered up into other companies, or been delisted over the years), so that cuts down our list of candidates quite a bit.
Any other clues? This is what we get from the ad:
“The company is growing rapidly not only by building many new hotels but also by acquiring existing hotels and rebranding them. In this way, they take from the competition and add to their own. Since 2009, using this method, this company has grown its share of the Chinese market from less than 0.4% all the way to 2.4% and shows no signs of slowing down.”
And we get some hints about what the stock has done recently…
“The stock is up 133% in the last 12 months and up 92% year-to-date! With double-digit revenue growth and continuing business expansion, this company has much more room to grow.”
So… hoodat? Thinkolator sez that these hints being dropped point to: China Lodging Group (HTHT)
China Lodging was founded by Qi Ji, who was previously CEO of HomeInns (HMIN)[4], the most recent Chinese hotel stock darling (though HMIN wasn’t exactly booming at the time that it was acquired by a consortium that included its management team, Ctrip (CTRP)[5], and China-listed tourism company BTG). There are a lot of connections among these travel companies in China, with Ctrip, particularly, seemingly pretty focused on integrating hotels into its platforms — Ctrip also bought into HTHT at its IPO[6] in 2010, though I don’t know whether or not they still hold a meaningful stake.
Why is this the match? Well, it’s mostly that stock return hint that matches for us today. If you go from a mid-August date, which might have been when this stock was originally recommended (presumably by Paul Goodwin[7] in his Cabot Emerging Markets Investor[8], which remains very China-focused despite striking “China” from its name a year or two ago) then HTHT was indeed up 92% year to date… and at that moment, it was also up 133% over the previous 12 months. That kind of precise match is a nearly perfect indicator that the Thinkolator is on target.
Will China Lodging Group be a big winner? Certainly tourism is growing like gangbusters in China, though there’s also plenty of competition, particularly in the low-end hotels that make up most of China Lodging’s portfolio… though they’re also acquiring new hotels and brands and expanding more into the more compelling mid-tier hotels (the luxury hotel segment in China is apparently still dominated by foreign brands, but the rising middle class is making the mid-tier look appealing).
You can get a look at where HTHT sees itself now, and where it sees opportunity, in its latest investor presentation here[9] and the earnings call transcript here[10]. If you want a bit more background, there’s a story here[11] about founder Ji Qi’s strategy.
I do like the general strategy that HTHT is using, expanding primarily through “manchised” properties (where they franchise the brand and manage the property, but don’t own it) that give them a better chance of a good return on capital, but that’s not particularly unique — most successful hotel brands do something similar to avoid taking on a lot of debt or property-ownership risk. The stock is expensive, at 60X trailing earnings and 33X forward earnings, but they’re also expecting to grow revenue by 20% and earnings by 30% next year, so paying that kind of multiple makes sense if they can keep that growth going.
Can they? Beats me. Analysts say “no” — according to the summary collected by Yahoo[12] Finance, they have HTHT penciled in for 4% earnings growth per year over the next four years… but that seems, well, silly. It could just be that not many analysts are making longer-term projections, so perhaps that’s your opportunity — those who have a big more faith in the longer-term prospects win because they’re willing to pay that premium on current earnings. After all, if the few analysts who have a 2019 estimate in are at all accurate (a big “if”), then the stock is only trading at 26X 2019 earnings.
So you’ll have to make your own call on this one. There is decent insider ownership, there is no major short position in the stock, they’re profitable and have beaten estimates pretty handily for three of the past four quarters, and I don’t see any big red flags on the balance sheet or in their operating or profit margins. But the stock sure is expensive, and I don’t know what the future holds… if your look into the future conjures up darkness or light for China Lodging Group, let us know with a comment below.
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It does sound expensive. I am actually more interested in your opinion on CTRP. Any thoughts you can share on this stock?
Not sure about the stock itself, but when I lived in China between 2012 and 2014, they were insanely popular for the deals they had. So unless it has an insanely high P/E, I’d be interesting in buying a couple shares.
I like a number of Chinese stocks and wish we could openly invest in mainland “A Shares” rather than only H and S shares and a few companies on the NY exchange. This is a solid company with a good future but its price has more than doubled YTD and has already risen about 50% since early July and that is too much in the short term (from around $80 to over $120 since mid-July) . . . this guy must be taking lessons from Ms. Kramer whose major services like to recommend stocks sure to rise in price about one to three months AFTER their major jump.
As a resident of Hong Kong I am naturally leary of any China stocks other than the big guys.
In resect of prior comments, I thought to mention that there is a fund, The China A Share Fund, which invests in Chinese SMEs, all local or A shares. It has had a committed, professional research team since inception in 2003. The aim is for longterm growth in the private sector, where management and owners are focussed on the business. So far there have been no serious problems in the nature of fraud or deceit. (Open Door, the fund manager, has had such problems in another fund centred on Hong Kong.)
The fund managers and analysts make over 400 company visits a year. The portfolio is 40-50 stocks. It has achieved an 18% return annualised since its commencement, considerably outperforming the market.
It is open to sophisticated investors with a minimum of $100,000. It trades monthly.
Alternatively, individuals can also buy many stocks on the HK-Shanghai and HK-Shenzhen connect trains. Most, but not all of the shares owned by the above fund are available through these routes.
Declaration: I am currently Chair of The China A Share Fund
Anyway to get in as a smaller investor?
If you made an application with $50,000, say, I imagine it would be considered; the fund, though, was not set up for a retail clientele; so it would be inappropriate to suggest that anything less would be acceptable, indeed even that amount may not be.
But i would support if asked.
consider KraneShares Bosera MSCI China A Share Fund
I just wanted to add that Paul Goodwin has been around a long time and has seemed to have what I think (for what that’s worth) a long lasting and pretty good track record with his picks for Emerging Markets. His portfolio of 10 stocks have done extremely well over the past year with few exceptions. All of his suggested buys seem too expensive but I’ve found that waiting for a better entry point hasn’t worked very well as they just continue to rise with a pullback of only a few points now and then. He suggests dividing your Emerging Markets Portfolio into 10 equal amounts so you have equal investments in different countries and companies and he’ll suggest if you should take a 1/2 position or a full buy. You won’t find any penny stocks on this service but he has done well for himself and his subscribers especially over the past 18 months since I became a subscriber. I also used his service back in 2010-2013 but Emerging markets have evolved a lot in a short period of time.
Of course being an Irregular with our favorite Stock Gumshoe “Travis” has been exceptional and I think the best service for your money anywhere, Paul Goodwin is the only service I would recommend taking a look at if you want some exposure to Emerging Markets. It’s been very good to me.
I’m not trying to promote it, I’m just sharing my personal experience with his service. Thank you Travis. JB
Talk about closing the barn door AFTER the horses have run off. Paying nearly $1K/yr. for this type of service is robbery!
Excellent info Travis, it may be a little early but having a look at Vietnam stocks, got to start somewhere, they are starting to mature and there are some interesting opportunities – http://eqibeat.com/top-20-vietnamese-stocks-by-market-cap/
HTHT is actually doing well.
There is probably a lot going for the long term picture. China has and will always manage its economy. The company has amassed critical mass to enable it to continue to grow using stock and bank borrowing without fear to double over the coming 3-5 years its revenues….Its still more expensive than Hilton…but its niche is a much more profitable one…
First, about A shares. Kraneshares have an ETF which is comprised of A shares of those companies most likely to benefit from the recent MSCI ruling. (Ticker KBA.)
Second, I bought HTHT in early May, about $65 as I recall, and it’s been in a boring uptrend ever since. Sometimes, for excitement, I sell puts or calls. Gets kinda hairy because there’s no volume and the spreads are wild. Jack be nimble.