“A leader is one who knows the way, follows the way, and shows the way.” – John C. Maxwell
When targeting portfolio stocks, we want to focus on creams of crops that are leading the herd and showing signs of outperformance. Many Chinese stocks appeared to have bottomed out all through his March, and these companies have taken the lead as the recent rally continues. And as China continues to ease its strict COVID policies and lift lockdown restrictions, there’s plenty of reason to believe the rally in these stocks is just getting started.
One company showing relative strength is Tencent Music Entertainment Group (TME – Free report), Zacks rank #2 (buy) stock. TME fell victim to the massive sell-off in Chinese stocks over the past year. Stocks are relatively undervalued and undervalued, so this is a once-in-a-lifetime opportunity. TME is ranked favorably by the Zacks Style Scores, including the highest possible ‘A’ ratings in each of the Growth and Momentum categories. This indicates that the stock is likely to rise due to a strong combination of favorable growth indicators and stock performance.
TME is part of the Zacks Internet – Content industry group and currently ranks in the top 23% of nearly 250 industries. It ranks in the top half of Zacks Ranked Industries, so we expect this group to outperform the market in the next 3-6 months. Past research studies have shown that about half of future share price gains will come from industry groupings. In fact, the top 50% of Zacks Ranked Industries are more than twice as good as the bottom 50%.
By targeting stocks within the top industry groups, you can dramatically improve your odds of success. Also note the following promising characteristics of this industry:
Image Source: Sachs Investment Research
Company Profile
Tencent Music Entertainment Group, a subsidiary of Tencent Holdings Limited, operates an online music entertainment platform, providing music streaming, online karaoke and live streaming services in China. Its service allows users to discover and listen to personalized music. TME also provides an opportunity for users to interact with friends and share songs and performances through an online stage. Additionally, through strategic partnerships with Chinese Literature, TME offers a variety of audio content, including audiobooks, crosstalk, radio dramas, and other forms of entertainment.
Over the past few years, there has been talk of Chinese companies being delisted from U.S. stock exchanges due to lack of transparency regarding China’s accounting practices. But in August, US and Chinese regulators agreed to allow Chinese accounting firms to share more information about companies listed on US exchanges. It marked a tipping point in resolving a major dispute that initially pointed to the largest companies exiting domestic exchanges.
Performance trends and future outlook
TME has built an impressive earnings history, exceeding earnings expectations in each of the last four quarters. The online music provider last month reported his EPS of $0.12 per share for the third quarter, beating consensus expectations by 9.09%. Consistently and significantly exceeding revenue estimates is a recipe for future success.
Analysts agree, raising their estimates across the board for the future. The fourth-quarter analyst said he raised her EPS estimate by 18.18% over the past 60 days. The Zacks Consensus Estimate is now at $0.13 per share, reflecting 62.5% growth compared to the same quarter last year. Clearly, the momentum for TME investors is on the rise.
Image Source: Sachs Investment Research
Stock Price Movement and Evaluation
TME’s stock bottomed out at $2.95 in March. The stock has more than doubled over the past month and shows no signs of slowing down. Also note that both the 50-day and 200-day moving averages are moving up.
Image Source: StockCharts
Empirical studies show a strong correlation between short-term stock price movements and earnings forecast revision trends. As you know, TME recently witnessed a positive revision. Unless this trend changes (and TME continues to turn a profit), the stock could continue to be bullish into next year.
Despite recent price action, TME stocks are relatively undervalued regardless of the metrics used.
Image Source: Sachs Investment Research
Conclusion
TME is rated the highest ‘A’ in Zacks overall VGM score, and it’s easy to see why. Strong fundamentals coupled with strong technical trends certainly justify adding more stocks. With a history of profitability backed by industry-leading groups, it’s not hard to see why this company is an attractive investment.
Keep an eye on TME for the new year.