Chinese stocks have been hot over the past few weeks, turning a lot of investors’ heads. While Alibaba Group Holding Ltd (NYSE:BABA) breaking to new highs and JD.Com Inc(ADR) (NASDAQ:JD) ripping higher from critical support have been promising, a new group of Chinese stocks is captivating Wall Street.
Many of these names are recent initial public offerings, coming to market in the last few months. Of course, when we’re talking about hot Chinese stocks, I’m talking about names like Huya Inc – (ADR) (NYSE:HUYA), iQiyi, Inc (NASDAQ:IQ), Sogou Inc (NYSE:SOGO) and Bilibili Inc – ADR (NASDAQ:BILI).
In investing, sometimes it’s about luck and sometimes it’s about skill. In truth, it takes a little of both. Aside from a few of the big names — like BABA and JD — I hadn’t given China stocks much of a look. Then I live-streamed the Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) annual meeting in mid-May.
Charlie Munger, Buffett’s right-hand man, said too many American investors were simply ignoring the opportunities in China. Given the jaw-dropping pace of growth we’ve seen with Starbucks Corporation (NASDAQ:SBUX) in China — a name I follow quite closely — Munger’s take didn’t surprise me. I agreed and was admittedly one who wasn’t paying enough attention.
But it got me digging — looking at online blogs, articles and on SEC.gov. What I turned up were a few high-growth, but underperforming stocks in IQ and SOGO. I missed HUYA until its run into the upper-$20s and missed MILI completely despite seeing numerous Twitter Inc (NYSE:TWTR) posts from well-respected traders. That’s okay, though. Hitting 50-50 on these names isn’t a loss, even if it’s not a life-altering win.
At this point, many of these stocks have run way too far for most investors’ comfort. I know they have run too far for me and I am (now somewhat regrettably) waiting for a pullback in HUYA, IQ and SOGO.
Will it come? At some point, it’s only natural. But we’ve seen past IPOs rocket higher regardless of fundamentals because the floats are so small. They tend to blow off their tops, making waves as they double, triple or even quadruple. I really don’t want to see that, because it generally takes years to recover.
Chinese Stocks to Buy: iQiyi (IQ)
IQ stock is a such a fascinating one to me, being dubbed “the Netflix, Inc. (NASDAQ:NFLX) of China.” Maybe it’s the 60 million users. Maybe it’s the majority ownership and collaboration with Baidu Inc (ADR) (NASDAQ:BIDU).
Either way, I love the revenue growth and its potential, considering China’s massive (and internet-connected) population.
Consolidating nicely in the mid-$30s, another leg isn’t out of the picture. When it was near $30, I was hoping for a pullback down to $25 or so. Now though, a pullback to its last consolidation zone (near $28) would be good enough.
Chinese Stocks to Buy: Huya Inc – ADR (HUYA)
I also like Huya stock and there’s plenty of reasons why.
With almost 100 million users, Huya has triple-digit revenue growth and is profitable (albeit just barely). But who cares? Profit is profit, and for a company this young with this much growth, that’s a rare quality to find. That’s promising for the future.
Like IQ, the “Twitch of China” has plenty of growth left in the tank and a ton of potential in China. Before its latest rally, a $6 billion market capitalization just seemed too small for its attributes.
Also, like iQiyi, shares are very overbought in the short-term and at this point, a pullback to its prior consolidation level between $28 and $30 would be ideal for investors looking for a piece of the action.
Chinese Stocks to Buy: Sogou Inc (SOGO)
The second largest search engine in China isn’t a bad call either.
While many investors wouldn’t bet on the No. 2 search engine in the U.S. — instead opting for Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — SOGO has solid potential too. Remember, China is much larger than the U.S.
Sogou has plenty of cash in the bank and no debt. It’s growing sales by more than 40% this year and is expected to grow them by more than 30% next year. Although these estimates may prove to be conservative. Sogou is also profitable.
Now back at its IPO price, SOGO is recovering nicely from its 2018 spill. The nice thing about Sogou stock? Its levels are easy to decipher. Be it $10, $11, $12, $13 (IPO), $14 (its closing highs) and $14.50 (its all-time highs). Just follow the path.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long SBUX.
