Oct 05, 2018
It is not uncommon for Chinese stocks to trade at a discount to their American peers, as the combination of higher perceived political and geographic risk leads to more attractive valuations. However, the recent talk of a potential trade war has these stocks trading at valuations not seen in years. Currently, the P/E ratio for the Shanghai Composite Index is near 10 while the S&P 500’s is up at 17.5.
Considering earnings growth is expected to increase at a faster pace in China than here in the United States, the discount comes down to the fear of a trade war. Investors are not willing to bet on a resolution between the two countries.
I am, though. I have been saying for months now that I do not believe the recent threats will escalate into a full-blown trade war, and that means that Chinese stocks are a great buying opportunity right now. Today, I’d like to introduce you to three that are especially attractive at current prices.
1. JD.com (JD)
I think it is fair to assume that you have heard of Alibaba (BABA), the largest e-commerce company in China. But you need to take notice of JD.com as well, which comes in at second place on that list.
JD is down 40% this year as a result of the broad Chinese sell-off, and it’s also been hurt by sexual assault allegations against the CEO. The ongoing investigation is a large black cloud over the stock and will likely keep some investors at bay.
While the allegations are serious, it’s important to focus on the company’s business model and valuation. JD is a major player in the e-commerce landscape in the world’s second-largest economy. It is also a logistics leader in China, which makes it comparable with Amazon (AMZN).
The weakness has pushed the stock’s price-to-sales ratio all the way down to 0.57, and shares are trading at prices not seen since 2016. While the assault allegations will still need to play out over time, I think JD holds a lot of upside potential in the years ahead.
2. Momo (MOMO)
This company runs one of China’s top social and entertainment platforms. This high-growth tech stock is actually up big this year – more than 70% to be exact – but weakness throughout the entire Chinese market has MOMO sitting about 20% off its June high and at a very attractive level.
Momo had a very strong second quarter, with adjusted earnings up 89% and revenue increasing 57%. That growth is expected to continue, and that coupled with a forward P/E ratio of 13.6 and a PEG ratio of 0.6 suggests that that the stock could be a double in the coming year.
3. Baidu (BIDU)
Baidu is one of the largest technology companies in China, and it’s a play on both web search and artificial intelligence. These two trends go hand in hand, and if you don’t believe me just ask Alphabet (GOOGL). BIDU is a leader in this space, and considering the Chinese government is making it hard for outsiders to enter the market, I expect it will remain in this position for the foreseeable future.
The stock has held up fairly well versus its peers amid the broad selling, as it is only down about 7% in 2018. It is currently trading near long-term support, and with a forward P/E ratio of 18, the weakness in this growth stock represents a very attractive opportunity.
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