It was a rough 2018 for China e-retail giant JD (NASDAQ:JD). As the China economy slowed, JD slowed, too. A strong dollar didn’t help things, either. Nor did escalating trade tensions between the U.S. and China. Ultimately, JD went from a 40% revenue grower with expanding margins, to a 20% revenue grower with compressing margins. In the process, JD stock lost more than half of its value.
Calendar 2019 could be an entirely different story.
Signs have emerged over the past three months that the worst may be over for JD stock. Specifically, China’s economy may have bottomed, and the U.S. dollar may have maxed out. If so, macroeconomic conditions in China will improve dramatically in 2019.
And, if that happens, JD stock (which trades at anemic valuation levels with majorly depressed sentiment) will soar.
As such, now looks like a good time to buy the dip in JD. Things may not get better right away. But, signs indicate that things will get better in 2019. When they do, this stock could easily see $40 again.
Positive Economic Developments
We’ve all seen the headlines by now. Apple (NASDAQ:AAPL) said it had a rough holiday season in China. China’s official GDP growth last year was the worst in nearly 30 years. Retail sales growth is at a 15 year low.
But, that’s all backward looking data, and it confirms the obvious. China’s economy slowed in the back half of 2018, and that slowdown caused once high-flying China internet stocks to fall off a cliff.
More important, signs are starting emerge which imply that 2019 could be the year when China rebounds. Consider the following:
- U.S. and China trade talks are making progress, and global trade tensions have eased dramatically over the past few weeks. These trade tensions killed China consumer sentiment in late 2018, so easing of such tensions should boost consumer sentiment in 2019.
- The U.S. Dollar has significantly weakened against the Chinese Yuan in 2019, after strengthening throughout all of 2018. Out-sized U.S. Dollar strength diluted the value of China internet stocks. Reversion to a normal dollar should enhance the value of China internet stocks.
- The OECD’s composite leading indicator for China (CLI) has increased month-over-month for two consecutive months (October and November). Historically speaking over the past ~20 years, back-to-back months of CLI improvement after a multi-month streak of CLI deterioration has always indicated a positive inflection point in China’s economy.
- The OECD’s consumer confidence index for China (CCI) has also increased month-over-month for two consecutive months (October and November). Much like the CLI, back-to-back months of improvement in the CCI have historically signaled a turning point in economic trend for China.
- Multiple companies outside of Apple, including Nike (NYSE:NKE) and Proctor & Gamble (NYSE:PG), said they felt no slowdown in the China economy over the past few months.
Overall, there were multiple positive developments in the last two months of 2018 and the first month of 2019 which, in sum, provide substantial evidence that the worst may be over for the China economy, and that 2019 could be a big rebound year.
Relative Undervaluation Creates Opportunity
If the Chinese economy does rebound in 2019, that will spark a huge rally in JD stock for many reasons. Those reasons are as follows:
- JD has dropped more than 50% off early 2018 highs due to slowing revenue growth rates amid the rapidly slowing China economy. Improvement in the China economic environment will recharge revenue growth rates, and help push JD way higher.
- Margins have been hurt as the company has lost sales leverage. If revenue growth re-accelerates due to economic improvements, sales leverage will return, and margins will start heading higher again. This should push EPS estimates higher, and spur multiple expansion, a double tailwind which will send the stock flying higher.
- JD currently trades at under 0.5X trailing sales, its lowest multiple ever as a public company. Thus, the aforementioned multiple expansion could be quite large, and we could reasonably see that multiple double under normal circumstances, implying $40 prices for JD stock in 2019.
- Sentiment headwinds related to rape allegations against JD’s CEO are now in the rear-view mirror.
Overall, if early 2019 signs are correct and China’s economy rebounds this year, then JD is optimally positioned for a rip-your-face-off rally as improving fundamentals converge on a depressed valuation and depressed sentiment.
Bottom Line on JD Stock
Calendar 2018 was a year to forget for JD stock. Leading economic signs suggest that calendar 2019 could be a year to remember. As such, now looks like a good time buy the dip in JD.
As of this writing, Luke Lango was long JD, AAPL, and NKE.