Dear Sheryl,
On the heels of last Monday’s Flash Alert to sell Melco Resorts & Entertainment (MLCO), we’re cutting ties with another Chinese stock this week: Huazhu Group Ltd. (HTHT). I originally recommended HTHT in the November 2017 Monthly Issue. As a refresher, Huazhu Group manages and develops hotel franchises in China. Founded in 2007 and based in Shanghai, the company operates several brand hotels, including Manxin Hotels and Resorts, JI Hotel, Joya Hotel, Starway Hotel and Hi Inn. At the end of last quarter, Huazhu Group operated 3,903 hotels and 393,417 hotel rooms. For the first several months on the Buy List, HTHT rose higher on quarter-after-quarter of strong results. However, in recent months the stock has become more volatile along with other Chinese companies. I wanted to hold HTHT through its second-quarter earnings announcement to give the stock a chance to rebound. And, Huazhu Group did post strong results for the second quarter. Net revenues climbed 25.9% year-on-year to RMB2.52 billion ($381.0 million). This hit the high end of the company’s second-quarter sales guidance. Meanwhile, income from operations jumped 53.2% year-on-year to RMB671.0 million ($101.4 million). Adjusted earnings came in at $0.26 per ADR. Analysts were looking for $0.25 adjusted earnings per ADR, so Huazhu Group posted a 4% earnings surprise. Despite these strong results, HTHT shares trended lower after the announcement. Unfortunately, the stock doesn’t look like it’ll be rebounding anytime soon. Analysts have been cutting their earnings estimates; over the past ninety days, the consensus EPS estimate has fallen nearly 12%. This is a red flag that HTHT won’t be able to meet estimates going forward. Due to the earnings downgrades, and deteriorating buying pressure, HTHT fell to a D-rating in Portfolio Grader over the weekend. HTHT clearly no longer has the fundamental strength or buying pressure to continue holding it in Growth Investor. Today, I’d like everyone to sell HTHT. If you added HTHT in the November 2017 Issue, you should be selling it at about a 17% loss. I apologize that HTHT didn’t meet expectations. It’s never fun to sell a position at a loss. Overall, we still have an excellent batting average—on the High-Growth Investments Buy List, our stocks have risen an average 47.1% since we added them. As I mentioned on Friday, I’m looking to end September—and the third quarter—on a high note. I expect that our Buy Lists will climb higher over the next few weeks. Please get those sell orders in, and I’ll be in touch on Friday with your Growth Investor Weekly Update. Sincerely, Louis Navellier
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