Sell: INFY and GMKT - InvestorPlace Asia

Sell These Two Speculative Stocks

Robert Hsu, February 28, 2007

I was up most of the night watching the action in the Asian markets and talking to our analysts there, and I closely followed today's trading here in the U.S. I'm happy that things played out much as I expected they would today.

The place where it all started, the red-hot Shanghai A Share Index in Mainland China, bounced back 4% last night after its 9% drop Tuesday. As I told you in the Flash Alert, Tuesday's sell-off was painful for not just us, but especially for the Chinese people and the government. That's why, as I expected, officials in China addressed today some of the concerns that led to the sell-off.

Word came even faster than I thought it would as government officials said there will be no capital gains taxes on stock and mutual fund investments in Mainland China. That news came as welcome relief to both individual and institutional investors—domestic and foreign—and as a result, the Shanghai A Share Index recouped nearly half of its losses from yesterday.

That wasn't the case in many other Asian markets. The selling that started in China Tuesday spread to the U.S., and then found its way back to Asia last night. Japan's Nikkei 225 Stock Average recorded its biggest loss since June, dropping almost 2.9%. In Hong Kong, the Hang Seng index fell 2.1%, while the Hang Seng China Enterprises Index (which contains 37 Mainland Chinese companies listed in Hong Kong) dropped 3.2%. The biggest decline came in the Philippines, where the main stock index tumbled 7.9%, its biggest drop in nine years. India's Sensitive Index shed 2.1%. The Taiwanese stock market is closed for the February 28 Memorial Holiday.

I believe the selling in most Asian markets was simply those markets absorbing the shockwaves from Tuesday's action in China. As I said yesterday, I do not believe this is the start of a more ominous period for Asian stocks. I think the most important evidence supporting that today was the market bounce in China and in the U.S. The truth is that global markets still follow the lead of the U.S.

U.S. Stocks Rebound

Yesterday's selling in the U.S. was overdone. A lot of it was clearly an overreaction by some investors, but there's another important point to keep in mind: Much of the sharp downdraft late in the day came as a result of computerized program trades.

One thing I've learned in my career is that large institutional investors such as hedge funds, mutual funds and investment banks tend to dominate the market in the final 90 minutes of trading. The trading platforms used by institutions tend to be lightning fast and highly automated. This is an advantage in most circumstances, but when extremely large trades are made—as we saw yesterday—it can overload the system and know the usual balances between bid and ask prices out of whack.

Yesterday around 3:00 p.m. EST, a large options-related sell program hit the market and caused the Dow to drop 250 points in only 20 minutes! This is mindless, automated selling, and it almost always works against those who get caught in the middle of it. This is one reason I advised you to sit tight while things were so unsettled yesterday.

Here's an ironic point you may not realize: In the U.S., "crash" days like we saw yesterday generally take place during bull markets, and they are actually healthy because they flush out the speculators. I believe yesterday can be viewed in that context, much like other one-day crashes we saw in 1987, 1997 and 1998: a healthy part of the market cycle that should be good for us in the longer term.

In addition, big down days have always taken place on the fourth or fifth consecutive down day, and they were followed by a bounce back up. That's what we saw today. Favorable comments from Ben Bernanke about the U.S. economy and markets also helped.

What can we expect going forward? In my years of observing markets, we typically see a few up days in a row, and then there is usually another leg down as the market retests the recent lows before resuming its upward trend. I expect to see a similar pattern this time, so no matter what, you should expect increased volatility in the short-term.

The positive fundamental trends behind the bull markets in the U.S. and Asia remain firmly intact. We will be mindful of risk in the current environment, while positioning your portfolio for maximum profits.

Major market moves like we're in now are good times to make adjustments, and there are several things I recommend you do now.

Two Sells and Three Strong Buys

In markets like this, I've been very successful by following two basic strategies:

1) Sell stocks with broken chart patterns that underperform on the bounce, and

2) buy more stocks that are staying strong.

That summarizes the actions I want you to take today to maximize your profits.

I spent yesterday and today analyzing chart patterns for each of our stocks, and the two stocks I want you to sell are Infosys (NASDAQ: INFY) and Gmarket (NASDAQ: GMKT). Both have shown poor recent relative strength recently, and I don't like the way the charts look. In addition, both stocks are highly speculative, and as market volatility increases, we want to be in stocks with stronger momentum.

Infosys is up a nice 21% (even after this week's drop) since I recommended it. As you know, it's a leader in India's strong outsourcing industry, and the stock had strong momentum for a long time. Recently, momentum has slowed because Wall Street has caught up with the company's strong growth. The additional risk in the stock at the moment means it's time for us to move on for now. Sell INFY.

I recommend you use the proceeds from INFY to buy more Cognizant (NASDAQ: CTSH). Cognizant is also a big winner in outsourcing in India, and I believe it's a much stronger play at the moment. First, it has much stronger short-term momentum. Cognizant bounced better today, and in the last month, CTSH is up 5% while Infosys is down more than 5%. And second, Cognizant continues to deliver positive earnings surprises. Stocks with strong earnings growth should continue to do well, and Cognizant fits the bill. Whether you use your proceeds from Infosys or new money, I recommend you buy CTSH under $100.

The second stock I want you to sell is Gmarket. I'm disappointed in the way this trade has worked out for us. Gmarket is the online auction leader in Korea, gaining market share and beating global giant eBay. Unfortunately, the stock hasn't responded because of recent weakness in the Asian Internet sector. Worst of all, the stock was one of the few we own that didn't move back up today. In fact, it lost another 3%, which tells me this is a damaged stock at the moment.

GMKT wasn't as strong as I would have liked even before yesterday's sell-off, but I had planned to hold it through next week's earnings report in anticipation of a bounce. But I now believe there is a real risk of further downside for us. Plus, there are better stocks for us to be in right now, so we're cutting our losses and moving on. Sell GMKT.

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