Cashing In When Chinese Stocks “Catch Up”

There are few delays in life worth looking forward to. But when it comes to stocks, there’s one delay that can put extra money in your pocket:

It has to do with a major discrepancy between the U.S. and China.

Because our economy is much more mature than China’s, innovative new business ideas tend to spring up, attract investment capital, and get applied in the U.S. before they do in China. But since the Chinese government uses laws and regulations to restrict – and sometimes ban – non-Chinese companies from doing business in the country, many top American companies are shut out of the giant market. (Facebook (FB) is a perfect example. It is not allowed in China.)

The population of China is 1.44 billion, which is more than four times bigger than the U.S. at about 330 million. This means that many business sectors in China are even bigger than the entire, massive U.S. market.

And when a Chinese company applies a successful innovative business model like that of Amazon (AMZN) or Alphabet (GOOGL), the results can be extraordinary. The massive stock gains come well after the gains are generated in America.

This “echo effect” creates a reliable two-step formula for making 100%+ capital gains…

Step one: Determine what companies are dominating certain sectors in China, whether it’s social media, video gaming, media, internet access, or other industries… much in the same way America’s top companies dominate their markets.

Step two: Buy stock in those companies.

It’s really just common sense. Let me give you a few examples of internet companies. In the United States, these are some of the biggest stock market winners of the past 20 years.

You’ve probably heard of Shopify (SHOP), the leader in e-commerce platforms for small and mid-sized companies. The stock went public in 2015 in the mid-$20s, traded as low as $18.50 in January 2016, and then began a huge uptrend that took it to a high of $409.61 this August – a nearly 15-bagger in four years. The company is now worth over $34 billion.

The parallel company in China is Baozun (BZUN), which offers similar services to e-commerce companies. Baozun’s current market cap is $2.6 billion, 7.5% that of Shopify. Revenue this year is on pace to nearly double what it was as recently as 2017, which means the Chinese Shopify trades at just 2.5 times sales while the real Shopify is up at 21.9! Those valuation gaps won’t last, which is a big reason why I’ve been arguing here in MoneyWire that Baozun is the better play.

Then there’s Amazon, one of the largest companies on the planet and the world’s e-commerce giant.

Even after a 12% pullback from its all-time closing high, Amazon is still an $890 billion company by market cap. It traded under $50 in its first decade on the market before moving up in the last 10 years to $2,000 a share and spending a few moments in the rarified air of companies with a trillion-dollar market cap.

In China, there is an online retailer that has some of the same qualities Amazon did a decade ago. That stock is trading at a mere $48.1 billion valuation, just 4% of Amazon. (JD) has a forward P/E ratio of 27.8 and an incredibly low price-to-sales ratio of 0.6. Amazon’s price-to-sales ratio is five times higher.

I’m not saying’s valuation will one day equal Amazon’s. But the e-commerce market in China is the largest in the world, so it’s similar to buying Amazon 10 years ago at $35 per share – it has gained more than 5,000% since.

Those companies have one important thing in common: All are riding the rapidly increasing number of people coming online in China.

But, as great an opportunity as internet stocks are, they’re just the tip of the iceberg. The massive – and upwardly mobile – population of China means money will be pouring into all kinds of essential sectors there. We’ve already looked at one major beneficiary in yesterday’s MoneyWire: BeiGene (BGNE), the recent Chinese acquisition of Big Pharma giant Amgen (AMGN).

And we’ll be taking a closer look at the massive potential here all week. So, stay tuned.

Matt McCall’s MoneyLine Podcast

Click here to listen to Matt McCall’s MoneyLine podcast! This week, Matt talks about Virgin Galactic (SPCE), the first publicly traded space exploration company. Is it a good investment opportunity? Then, Matt shares his thoughts on two high-growth food stocks that got crushed this week after earnings. The show wraps up with a discussion about stocks at all-time highs and Matt’s view on why everyone can become a successful investor.

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