Over the past month I have brought up four different Chinese stocks that I like — three I believe will bounce sharply higher when a trade agreement is reached and one that I saw was a great buy at the beginning of September.
The four Chinese stocks I have written about — Autohome (NYSE:ATHM), Alibaba (NYSE:BABA), Baozun (NASDAQ:BZUN) and ZTO Express (NYSE:ZTO) — all have great fundamentals and have seen earnings and sales grow in recent years. They have all pulled back a little due to the trade war and with China’s economy growing at a slower pace, but I am still bullish on them.
However, there are a couple of well-known Chinese stocks that I am staying away from and it has nothing to do with the trade war. These companies have not been growing earnings or sales and their profitability measurements are well below average. Even if the U.S. and China come to an agreement on trade, these stocks are not positioned as well as many others.
The Two Chinese Stocks You Should Avoid … For Now
The first one is Sohu.com (NASDAQ:SOHU). This internet company offers media content, search and gaming services to consumers. Over the last three years the company’s earnings are flat and sales have declined by an average of 1% per year.
The profitability measurements and the management effectiveness measurements for Sohu are also below average. The company’s return on equity is -31.2% and return on assets is -1.59%. The profit margin is -27.4% and the operating margin is -3.7%. And this is while China’s economy was growing faster than almost any economy in the world. How will this Chinese stock perform now that the pace of growth is slowing?
Looking at the weekly Sohu stock chart we see that it has dropped sharply over the past year. SOHU was up above $70 a share last October and now it is down around the $20 mark.
Sure the stock is oversold right now and it was at the beginning of 2018, but it was trading at $45 a share then. Some people might say, “How much lower can it go?” The answer to that question is 100% lower. That is always the answer to that question. Whatever the price of this Chinese stock is today, it can always go 100% lower.
I am sure there are people that watched Yahoo drop from over $100 a share to $50 a share and bought it thinking that it couldn’t go any lower. The stock dropped under $10 a share in 2001 after trading over $100 in late 1999 and early 2000.
Given Sohu stock’s poor fundamentals, I wouldn’t be a buyer at this time. I don’t care how oversold it may be — oversold can become more oversold. Until the company gets things squared away and can grow earnings and sales consistently, I will be staying away from SOHU stock.
The second company is also a Chinese internet company, but this one is an internet retailer. The company is JD.com (NASDAQ:JD) and its fundamentals are a little better than Sohu’s, but they are still a concern, making it a Chinese stock to sell and/or avoid.
JD has seen its earnings grow rapidly over the last three years, but in the most recent quarter, its earnings were down 50% on a year-over-year basis. Analysts expect the earnings to drop by 25% for the year.
The company’s profit margin is -0.14% and the operating margin is -0.51%. The return on equity is -1.27% and the return on assets is -0.67%.
Like I said, the fundamentals are better than SOHU’s, but that isn’t saying much.
JD stock has dropped since January, falling from over $50 a share to under $25 a share this week. It is also in oversold territory based on the 10-week RSI and the weekly stochastic readings. But like Sohu stock, I wouldn’t be looking to buy JD stock … at least not for a long-term investment.
JD stock was oversold back in March and it did bounce from around $36 up to $45, but then it sold off again and it is still falling. The stock could find some support in the $20 range as that was the low back in June 2016.
Something else that I took note of on JD was the sentiment toward the stock. Even with the below average fundamentals and the sharp decline in the last nine months, investors and analysts are both still pretty bullish toward this Chinese stock.
The short interest ratio on JD is 1.40 and it has been falling in the last few months. There are 37 analysts following the stock and 32 of them rate the stock as a “buy” or better and there is only one “sell” rating on the stock. These two indicators are reflective of extreme bullish sentiment and that shouldn’t be the case given the drop in the JD stock price and the poor fundamental performance.
I am still optimistic that an agreement will be reached in the trade war between the U.S. and China. I believe that the two parties will be able to work out a pact that is good for both sides and that the four Chinese stocks I wrote about previously will start moving higher again. However, even if a trade agreement is reached, I don’t think Sohu or JD.com are worth the risk right now.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.
