The U.S. stock market is off to a tough start in 2016. A very tough start.
The Dow Jones Industrial Average was briefly down more than 400 points, and some of 2015’s best performers — notably Amazon (AMZN) and Netflix (NFLX) — were some of Wall Street’s most abject losers on Monday.
On Monday, BABA shares were trading about 6% lower, while JD stock was off about 10%. (Both were rebounding modestly on Tuesday.) As Chinese companies, both stocks were victims of the hellfire that was the Chinese stock market on Monday.
After a 10th straight month of declining manufacturing activity in the world’s second-largest economy, investors refused to usher in the New Year with good cheer. I don’t blame them.
China’s slowing growth and declining manufacturing activity are clear-cut signs that investors should sell their exposure to China in general (insofar as that is possible). But when it comes to BABA and JD stock specifically, well … you should sell them, too.
Why BABA and JD.com Are Losers
Alibaba and JD.com are the biggest players in online retail in China, so many investors think of them as a fine way to bet on the emergence of the Chinese middle class. That’s all fine and dandy, but one of the bigger issues with publicly traded Chinese companies is currency conversion.
Since the Chinese government began letting the yuan trade more freely in August, the yuan has weakened against the U.S. dollar, and all signs point to that continuing, especially with a tightening U.S. monetary policy. That will have a negative impact on BABA and JD results when they convert their sales in yuan over to U.S. dollars for the purpose of reporting to American investors.
But even ignoring currency headwinds, these stocks are shaky investments.
Since its record-setting IPO in 2014, Wall Street has worried aloud about the corporate governance issues facing BABA stock, and they haven’t gone away. Basically, a small group of tight-knit BABA insiders effectively controls the Alibaba board of directors, rendering the public shareholders powerless.
Then there’s the widespread and repeated counterfeiting allegations, wherein brands like Michael Kors (KORS), Nike (NKE), and others have seen their products ripped off and sold on Alibaba sites over and over again.
My main gripe with JD stock is somewhat more straightforward: The company doesn’t make money.
Analysts expect JD stock to actually lose 14 cents per share in the current fiscal year — and that’s on the more lenient, non-GAAP basis. Last year, JD.com lost $809 million.
Posting a loss doesn’t automatically disqualify a stock from my portfolio, but posting a history of losses does — especially when you’re a Chinese company, and when you’re relying on a rapidly slowing economy to propel you into the black.
There are too many good, profitable companies here in the U.S. worth investing in to take a flier on shady/unprofitable Chinese stocks, particularly when the Chinese stock market itself is trading on thin ice.
Sell China, sell Alibaba and sell JD stock. Later this year, you’ll be glad you did.