After a blistering sell-off of Chinese equities, many stocks have become so oversold that they could present excellent value opportunities for the long run. JD.com (NASDAQ:JD), the giant e-commerce firm and the largest retailer in China, maybe just that stock waiting to bounce. The market was keenly focused on JD stock after the earnings call on Aug. 13, when JD reported second-quarter 2019 results.
Typically, a stock trades flat in the days preceding its quarterly earnings announcement, ready to drop or rocket upon any earnings surprise — good or bad.
Over the last month, understandably, investors have been fearful of adding any China exposure to their portfolios. On Aug. 1, President Donald Trump surprised the market by announcing another salvo in a trade war against China. He imposed a levy of 10% tariffs on another $300 billion of Chinese goods. While Trump has made clear he is not backing off and hinted at another round of tariff hikes that could be beyond 25%, he has also delayed some of the tariffs from a Sept. 1 deadline until December for Christmas.
China-focused ETFs were hard hit after Trump’s announcement. The Harvest CSI 300 China A-Shares ETF (NYSE:ASHR) fell to $25 after having passed $30 earlier this year. The iShares MSCI China ETF (NASDAQ:MCHI) recently closed at $54, and may be headed towards its 52-week low of $50.
In the volatile atmosphere of a trade war, here are three reasons why JD could be a good bet:
The Market for Chinese Stocks is Oversold – on Fear and Rhetoric
Recent weeks have seen President Donald Trump appealing to his core base and attacking China as a currency manipulator and threatening economic retaliation. If there is anything the markets don’t like, it’s any obstacle to free global trade.
However, all this bad news hitting China had already been well and truly baked into the JD stock price. Investors discounted the worst-case scenario into their pricing for the months ahead, particularly in the run-up the first 2020 presidential primaries early next year.
The recent market sell-off must be put into perspective. The Chinese economy, JD’s primary market, is not about to head towards recession over political rhetoric from the U.S. about a trade war. China isn’t like Mexico, which sells 80% of its exports to the U.S. By contrast, China is less dependent on trade to the U.S. than many smaller nations, and less than a fifth of its exports are sold to America.
JD Is Steadily Growing the Top Line
JD has been on a steady growth pattern consistently reporting ever-greater revenues over the last three years. JD beat estimates three out of the previous four quarters, and then beat again in its report this week. Revenue was $21.89 billion, surpassing the analysts’ expectations for $20.87 billion. Earnings of 33 cents also beat expectations for 6 cents.
That said, at this early stage of the Chinese internet retail market, investors are less concerned about profits and far more focused on growing revenues, market share and capacity. Amazon (NASDAQ:AMZN) was in precisely the same boat in the late 90’s: strong revenue growth but weak profitability.
JD’s Business Model Is Rock Solid – and Getting Better All the Time
JD is undoubtedly the leader in China’s potentially huge online shopping market. It is steadily moving into international markets with robust growth in demand for home appliances, food and beverage, cosmetics, home furnishing, baby products and more.
Additionally, JD stock has an enormously extensive logistics infrastructure. JD operates 20 automated smart fulfillment centers in addition to a vast network of 550 warehouses with over 12 million square meters of storage space.
The next two weeks will be an exciting period for Chinese stocks. With or without the trade war troubles, the earnings surprise may be the beginning of a JD stock bounce.
As of writing, Theodore Kim does not hold any of the securities as mentioned above.
