2018 has been a tough year for equity investors even if the scoreboard doesn’t quite reflect it. A 10% correction from all-time highs in the Nasdaq doesn’t quite scream disaster in a few months. But inside the numbers lie a disaster in the Chinese stocks. The iShares China Large-Cap ETF (NYSEARCA:FXI) is down 15% year-to-date.
Primarily, the fears on Wall Street stem from the tariff war between the U.S. and China. The White House has already levied a 10% tariff on $250 billion of goods, which will go up to 25% this January. Just this weekend, Vice President Pence noted that the White House is willing to more than double these tariffs. Both sides say they want to deal but so far they’ve done nothing about it but antagonize each other.
So the worries are justified, but perhaps overblown. Both sides have too much to lose so cooler heads will prevail. In that case, some of the hurt inflicted on quality stocks is overblown. There are worthy long-term bets in some of the Chinese stocks. Some have value and others make for good speculative bets. Today I am sharing three that should be on investors’ shopping lists.
Alibaba (BABA)
Alibaba (NYSE:BABA) stock is not cheap but it is not bloated either — for a growth stock. BABA sells at a 45 price-to-earnings ratio, which puts it in between Aliphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). To me, it’s not exactly in the same league of Amazon. So the reason to buy BABA is the hope of a trade deal being done soon.
If the China and the U.S. finally do get a deal done, then Chinese stocks will bounce hard out of this abyss. Arguably this is hopium, but not without its basis. The upcoming G20 meetings are near and they could lay the basis for a workable framework. The end results will likely not be an earth-shattering deal, but good enough for both leaders to save face and declare victory for their nations.
BABA in particular has $15 upside target on the most recent technical breakout from $154 per share. A trade deal between the U.S. and China could send it to this point or higher. The experts agree as they all rate BABA a BUY and it still trades well below their lowest of price targets.
Baidu (BIDU)
Unlike BABA, Baidu (NASDAQ:BIDU) stock is cheap. It sells at 15 price-to-earnings ratio. This is low for a successful search engine. In theory, tariffs shouldn’t even affect BIDU’s business but investors have a tendency to treat all Chinese stocks as one unit on headlines.
With BIDU being a value stock, I am confident betting purely on its chart technical setups.
The sharp declines in BIDU formed a sharp descending wedge. These usually collect energy as they start forming bottoms. The outcome is then often a breakout spike from the descending trend line of lower-highs. Bidu stock stopped setting lower lows so the squeeze is happening. The smallest bit of positive catalyst will send it higher in bursts to $196 then 206 per share. Above $210, the rally could gather steam to even hit $230. But this is putting the cart before the horse since there are still at least hurdles above current price. Nevertheless the potential is worth the risk.
iQIYI (IQ)
The last of Chinese stocks worthy of a trade is iQIYI (NASDAQ:IQ). IQ stock rose to glory on its IPO, but since then has fallen more than 50% off the highs. Such is the nature of trading fast movers like IQ. They rarely give traders clear entry points, but IQ stock is giving one now.
Luckily, IQ stock is cheap as it sell at 9 price-to-earnings ratio. Technically, IQ stock is showing a double bottom last week at $19 per share. If that is the case, then rising above $22 could start a rally that has legs for another $4 from there. There will be resistance at pivot points but this momentum stock will surprise investors of both sides.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
