The trade dispute between the U.S. and China has been a black cloud hanging over the markets of both countries. Domestic stocks have continued to climb the wall of worry with the indices hitting new records in spite of the trade dispute and its possible impact on the economy. Chinese stocks haven’t been as fortunate and many are hitting 52-week lows.
Personally, I have been eyeing several Chinese stocks that I think will soar once there is an agreement reached between the two countries. I also have a theory on when an agreement will be reached. With the mid-term elections coming up on Nov. 6, I believe the Trump Administration will likely reach some sort of an agreement with Canada, China or the E.U. Maybe not all three, but I am guessing we will see agreements reached with two of the three.
This will give the administration a victory to celebrate and it will likely give the market a boost when it happens. This could be a well-timed announcement that gives Republicans a boost as America heads to the polls. Most reports are showing that Democrats have a good shot at taking control of the House, but are a long shot to take control of the Senate.
Regardless of your political beliefs, or mine, I can see some serious progress in the trade negotiations over the next eight weeks. With that in mind, there are three Chinese stocks that I have been watching and will want to own when an agreement between the U.S. and China is reached.
Chinese Stocks to Buy: Alibaba (BABA)
Alibaba (NYSE:BABA) has been falling since it hit an all-time high in June. The company announced over the weekend that founder and Chairman Jack Ma will be stepping down with a gradual withdrawal from his duties throughout 2019. The reins will be passed to current CEO Daniel Zhang in September 2019.
The company has seen tremendous growth in its earnings and sales over the last three years. The earnings-per-share have grown at an average annual rate of 32%, while sales have grown at a rate of 50%. Alibaba stock sports a profit margin of 44.9%, a return on equity of 26.1% and an operating margin of 21.8%.
What really stands out about BABA stock is how oversold the shares are currently. The 10-week RSI is the lowest it has been since the third quarter of 2015 and the weekly stochastic readings are the lowest they have been since December 2016. I took note of how BABA shares have rallied when the stochastic readings made a bullish crossover in late 2016 and also early 2016.
Alibaba stock rallied over 130% from the December 2016 low through January 2018 high and it rallied approximately 70% from the February 2016 low to the September 2016 high. I look for a strong rally again and I wouldn’t be surprised if a trade agreement is what creates the next bullish crossover in the stochastic readings for this Chinese stock.
Chinese Stocks to Buy: Baozun (BZUN)
Compared to other Chinese stocks like BABA, Baozun (NASDAQ:BZUN) hasn’t seen as much selling pressure, but it has dipped from its all-time high, which was also hit in June. The provider of e-commerce solutions has seen even better earnings and sales growth than Alibaba, but its profitability measurements aren’t as strong overall.
The company has averaged EPS growth of 116% annually for the last three years, while sales have grown at a rate of 25%. BZUN’s most recent earnings report showed earnings growth of 27% on sales growth of 34%. The return on equity is 16.1%, the profit margin is 7.8% and the operating margin is 6.4%.
Another thing I like about Baozun stock is that it doesn’t have a lot of coverage from Wall Street analysts. There are only seven that rate Baozun stock currently, with six of them rating the stock as a buy. This leaves room for additional coverage from Wall Street and this could give the stock a boost.
I mentioned that BZUN hasn’t seen as much selling pressure and that is reflected in the chart. BZUN stock is still above its 52-week moving average and it is above a trendline that connects the lows over the last few years.
Like we saw with BABA stock, Baozun’s overbought/oversold indicators are the lowest they have been in quite some time. The 10-week RSI is the lowest it has been since May 2016 and the weekly stochastics are the lowest they have been since late 2016. BZUN stock has also rallied sharply after the weekly stochastic readings have made a bullish crossover in the last few years.
Chinese Stocks to Buy: ZTO Express (ZTO)
ZTO Express (NYSE:ZTO) is an express delivery service in China that also provides additional logistics services. Like we saw with the other two Chinese stocks to buy, ZTO has experienced tremendous growth over the last three years. Earnings have averaged annual growth of 52%, while sales have grown at a rate of 46%. The most recent quarterly report showed EPS growth of 53% on sales growth of 45%.
ZTO’s profitability measures show a profit margin of 26.2%, an operating margin of 26.7% and a return on equity of 15.8%.
The bearish sentiment toward ZTO stock has been growing in recent months as the number of shares sold short has gone over 15 million shares. The short interest ratio comes in at 4.5 and that is a good thing. If ZTO stock starts to rally, short sellers can add buying pressure as they scramble to cover their positions.
The chart for ZTO shows that the weekly stochastic readings are the lowest they have ever been and the 10-week RSI is the lowest it has been since the second quarter of 2017 when stock in ZTO was trading below $13.
The stock has a couple of layers of support that should help it. There is the old closing high in the $17.50 area and there is also the 52-week moving average. Either of these support levels could keep ZTO stock from falling much further and once we get a trade agreement this Chinese stock can resume its upward trend.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.