For a while, things were dicey between the United States and China on the economic front. The fundamentals were fine, but the rhetoric between the two countries was detrimental to equities prices — especially Chinese stocks.
Nonetheless, that is in the past and the new administration promises to be more progressive. However, we’ve not seen evidence of this yet. In fact, there could be some trouble brewing but nothing concrete yet.
That said, now we will look at three Chinese stocks to trade positively at least for the next six months. However, we first should acknowledge the fact that there is the potential for macroeconomic debacles. In the U.S., we still have millions unemployed. Small businesses in America are on life support, especially in the states that extended the lockdowns.
The government knows this, and that’s why they are pumping another $1.9 trillion in stimulus. They wouldn’t do this if the economy was healthy. Moreover, the Federal Reserve is also on schedule to pour $1.4 trillion in liquidity in 12 months. Things are not well!
In spite of this, the equity indices made new all-time highs this week mere hours after the NASDAQ Composite fell 4%. Clearly sentiment is on edge and traders are trigger Happy. Therefore, as much as I like any stock, the opinion has comes with a giant caveat. There is definite extrinsic risk to all bullish theses. Meaning that good stocks can fall through no fault of their own.
When it comes to opportunities from Chinese equities I stick with, the major names. This all but eliminates the possibility of nasty surprises like what happened with Luckin Coffee (OTCMKTS:LKNCY). Spoiler alert, Baidu (NASDAQ:BIDU) will not be one of the three in this article. This is nothing against the company, and it’s purely based on technicals. BIDU stock has gone too far for it to be an obvious entry point at these altitudes. However, I will keep it on my watch list for future dip opportunities.
With all of that in mind, our three Chinese stocks we’re considering are:
Now, let’s dive in and take a closer look at each one.
Chinese Stocks to Buy: Alibaba (BABA)
Click to Enlarge
Very few companies can generate the amount of sales that Alibaba can. Their revenues from the 2020 Singles day alone were as big as Boeing (NYSE:BA) full-year revenues in 2019 — and 30% larger than 2020’s. Potential this big is hard to fail. Up until recently, management was beyond reproach. They have been executing flawlessly for years and investors trusted it. Then, things went south with co-founder Jack Ma’s confrontation with Chinese officials. BABA stock collapsed 30% in the process. It is on the mends now but there is a lot of repair-work to do.
Meanwhile, there is no denying its fundamental value. Alibaba stock is cheap even when we compare it to the huge tech stocks. From the profitability perspective, it’s in line with all of them. The price-earnings (P/E) ratio is under 30 and slightly cheaper than Apple (NASDAQ:AAPL). BABA is a growth stock, and for it to beat a stagnant company like AAPL stock on profits is impressive.
From the growth perspective, its price-sales (P/S) ratio is 7.4. This is much more expensive than Amazon’s (NASDAQ:AMZN) 4.3, but is lower than the rest of the giants. Any which way you slice it, BABA stock it is worth owning. And I am confident that buying at these levels over time is not going to be a financial mistake.
Of course, it will need the help of the entire stock market. Therefore, I wouldn’t take a full size position so to leave room for error. The stock chart is constructive and shows a solid base just below current prices. That cluster below came courtesy of the disaster that Jack Ma caused. Assuming that the episode is in the rear view mirror, then it’s the base of another rally.
Nio (NIO)
Click to Enlarge
One of the hottest investing themes since last year has been electric vehicles (EVs). At the same time, major money managers are also pursuing environmental, social and governance (ESG) investing. Add the two, and we must include NIO as one of the Chinese stocks to own for the future.
This is not a secret, so it’s been on fire as of late. Luckily, though, it just had a shakeout.
During the Tuesday trade, the indices hit a pothole. The NASDAQ Composite sold off 4% in a jiffy, which took Tesla (NASDAQ:TSLA) and NIO down hard with it. Testament to the bullish thesis is how quickly investors bought those dips. If you blinked, you missed it. The low for NIO stock was $41.66, and the rally back from it was extremely fast. In fact, on Wednesday, it was already back to $52 per share.
That is astonishing confirmation that investors have a big appetite for its potential. This is for good reason because they operate in the largest market on the planet. The fact that they have existing sales makes them almost unique. Besides Tesla, the bulk of the hopeful EV companies have nothing but pipe dreams now.
Overall, Nio is real right now. I can confidently own shares for the long term. Fundamentally it’s not cheap, but that’s not the point. They have to spend a lot to get a whole industry off the ground.
Tesla did a lot of the legwork already, and NIO is just adding to the effort. It’s a straight-forward thesis of massive market potential. Currently, the world produces about three million EVs, versus over 80 million fossil fuel engines.
iShares China Large-Cap ETF (FXI)
Click to Enlarge
Sometimes it’s a good idea to diversify risk from single stocks. That said, the FXI ETF would place a bet on Chinese stocks but as a whole. This allows investor to participate in the future of that market without exposing themselves to singularities. My only hesitation here is purely technical.
The weekly chart of the FXI stock shows three prior failures around these levels. The downside from them each time was significant. The offsetting argument is that the daily chart suggests that this time it could be different. The price action has been trending up with higher-lows. Eventually if this continues, the buyers will breach through the resistance.
If that happens, the bulls will rush through it and overwhelm the sellers. That breakout would have a tremendous upside potential. The longer it takes to breakout from a single point, the greater the upside opportunity becomes.
Furthermore, there’s no need to talk about the fundamentals of the FXI. It inherits them from all the major stocks that comprise it. These are the ones we read about in the news. The largest few are Tencent (OTCMKTS:TCEHY), JD.com (NASDAQ:JD), BIDU and more.
In closing, I’d like to remind the readers that having conviction is great, but it shouldn’t be blind. I’m confident of my chart reading abilities and bullish theses. However, I am also confident that I cannot foresee surprise hiccups coming. Meaning that I should break up my positions into smaller entry batches.
It’s also a good idea to diversify the investment methods when possible. Selling put options instead of buying shares is a great way to create room for error. When used responsibly, options offer alternatives that mitigate risk. The myths around them are too general to be true. They definitely deserve further investigation for those who don’t know them already.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
