I hate to point out the obvious, but China’s stock market has been a hot mess.
Despite a robust 3% move for the Dow Jones Shanghai Index on Tuesday, this pales in comparison to the 41% drop against this year’s high — a victim of a steep correction of speculative insanity and of manufacturing activity falling to a new 77-month low.
Other global economic factors — most notably the collapse in crude oil — have mostly decimated investor enthusiasm, not only for China, but for the rest of the emerging markets.
With blood on the streets, it would be a brave move to consider Chinese companies like online retailer JD.com (JD) for anything outside of a short-term swing trade, as JD has fallen a long way since the beginning of August — more than 27% in the hole.
This places the current value of JD.com shares inside 11% of its initial public offering price. And while the just announced $1 billion buyback plan — in which JD will reacquire its allocated equity from American Depository Shares over the next two years — shot JD stock up 14% in intraday trading Tuesday, JD closed at a far less impressive 5%.
Contrarian investors will likely view this as a steal, considering that within 30 days of JD stock’s IPO, shares were up over 33%, and similar leaps were not uncommon.
But there is more weight to this story than a knee-jerk reaction to JD stock’s lowered valuation, as a large chunk of the investment community may be underestimating the economic resolve of China.
While the mainstream focus is on the global markets selloff, American pop-culture powerhouses such as Apple (AAPL) and Starbucks (SBUX) reported strong sales growth throughout the summer season in China. Which indicates that Beijing has successfully stimulated consumer spending where the other central banks have failed.
This provides even more ammunition to the contrarian argument for JD stock. Fundamentally, it’s next to impossible to ignore JD.com’s enormous revenue growth rate. Total sales in fiscal year 2014 exceeded the average of the prior three years by over 163%. In addition, revenue has steadily increased over the past four quarters, showing no signs of a slowdown. Finally, JD.com is extremely cash-rich, holding $3 billion in reserve and only about $215 million in short-term debt, with zero in long-term debt obligations.
The counterpoint is best offered by the iconic line from the film Jerry Maguire: “Show me the money!”
The glaringly optimistic data just hasn’t translated into consistent outperformance for JD.com. Year-to-date, the JD stock price is above water at 7.5%, but it is simultaneously trading at a very disconcerting 21% below its 50-day moving average.
One can easily point to the lack of transparency in the Chinese markets, and rationally denounce their trumpeted bullish statistics as outright lies. But the painful reality is that the Shanghai index is still in a consolidation phase, not a recovery phase.
From a technical analysis viewpoint, such consolidation is merely a short respite from an eventual continuation of the dominant trend. In other words, investors at present have very little appetite for risk — if they did, JD stock and others wouldn’t be trading well below their short-term averages.
When it comes to investing in companies like JD.com, it’s best to go with the money — and right now, they’re making a quick dash for the exits.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
