Good investors are always balancing risk and reward.
After all, it’s not like the market is upside all the time.
Even during this decade-long bull market, plenty of stocks have lost value and investors lost money.
So, if you’re actively investing, you’re trying to balance the potential reward against the potential risk of losing part or all of your investment.
It’s probably not a surprise that over the years, investing pros have identified specific circumstances when the risk is lower, and the potential for gains is higher.
It’s an opportunity to “buy low” almost like you would draw it in a textbook.
A chance to get into a stock with a lower downside risk, but with potential for a significant upside.
Not a no-risk situation, just one where the risk/reward balance favors the side of potential reward.
And we’ve been seeing this situation develop in this market.
Chinese stocks were treated harshly by investors in 2018. Trade tensions between the U.S. and China, plus a slowing domestic economy sent shares of most Chinese stocks into bear territory.
But all that was months ago. Most everyone who wanted to get rid of these stocks has already sold. The bad news about the stock is already baked into the current price.
Now, some Chinese stocks seem to have gone sideways for a bit, caught their breath, and are ready to head back up again.
This sounds like a great example of a chance to get in after the downside of a market, with significant potential upside.
Below is the 1-year performance chart for the KBA China ETF.
I’d like you to note that it moved above its 50-day moving average in January and now has broken through its 200-day moving average.
If you could spend your investing life betting on stocks that had a big selloff, became radioactive for a time, hit a bottom, and broke through these moving averages on the upside, you’d probably create lots of wealth.
It looks like the textbook illustration of “buy low.”
If you have the patience, now is definitely the time for long-term bets on China stocks.
Matt McCall has a favorite for folks to consider.
Last week, Matt, editor of Investment Opportunities, urged his readers to take a second look at iQiyi. iQiyi is known as the “Netflix of China” because it offers the same type of subscription-based streaming video business.
Trade tensions between China and the U.S. may have made investors reluctant to take a risk, but there is a ton of optimism over the progress in the negotiations. And when both sides come to an agreement, that risk will be mitigated.
Here is what Matt wrote to his subscribers last week about iQiyi.
iQIYI has rebounded 50% from its December low after losing two-thirds of its value during the sell-off. But it still remains well below its June all-time high of $46.23. While it may take time to regain that high status, I am confident that fresh records will be achieved in the coming years. For buyers of the stock today, that would represent a double.
iQIYI is the leader in video streaming in a country that is home to more than 1.3 billion people and is growing its economy by 6%. Disposable income will grow as the middle class does, leading to more and more subscribers for IQ.
Subscriber growth is a key metric for companies like iQIYI – just like it is for Netflix (NFLX) and Facebook (FB). The company is on the right track. Its premium subscriber total – those who actually pay – grew 89% over the last year to nearly 81 million people.
Also similar to NFLX when it was in its early stages of growth, IQ continues to lose money. But that’s perfectly okay. When a company is focused mainly on growth, the next most important figure is the top line. iQIYI has increased revenue 48% over the last year, which is a very impressive number.
Now on to valuation. Based on iQIYI’s current market cap of $14.5 billion and projected 2019 sales of $4.85 billion, the stock trades with a price-to-sales ratio of 2.99. Compare that to Netflix, which trades with a 2019 price-to-sales ratio of 7.43.
It is very common for a U.S.-based company to have a higher valuation than its Chinese peers. But with growth projections higher for IQ and the potential market in China wide open, trading at just 40% of NFLX’s value makes IQ a huge bargain buying opportunity for long-term investors.
Take a look at the iQiyi stock chart for the last 12 months. You’ll see that the pattern is very similar to the one for KWEB above.
The stock got killed, established a bottom and now has broken through its 50-day moving average. Here is Matt’s final analysis.
So… is IQ a good buy at current prices near $20?
If you’re an investor with a lot of patience and a strong long-term outlook, then I would answer that question with a big “yes!”
This is just the kind of opportunity Matt looks for and recommends to his Investment Opportunities subscribers.
iQiyi is presenting a risk/reward entry point for a long position. It has weathered the bad news and has started to break out.
If you’re still concerned about risk, you can establish tight stop losses.
Regardless, the potential downside is pretty low. The stock, and all Chinese stocks, have already been crushed, so now is the time to invest if you want a chance at a significant upside.
To a richer life,
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com