Bulls in the China shop
05/23/17

Forget about North Korea’s missiles, traders are paying more attention to rocketing Chinese stocks.

Several major companies operating in the giant Asian country have ripped to new highs this month – often without clear catalysts. Some have beaten earnings estimates, others missed. Many rallied apart from any news event at all. 

Take e-commerce behemoth Alibaba (NASDAQ: BABA), which is up 8 percent so far in May. Sure, profit may have lagged estimates last Thursday.1 And sure, the stock may have initially sold off more than 6 percent… but that didn’t deter buyers long. They piled in almost immediately on the drop, and just 24 hours later BABA was back in record territory. 

Then consider Baidu (NASDAQ: BIDU). Traders initially sold the shares after the Internet-search giant issued weak guidance on April 27, but it bounced 1-2 weeks later and now BIDU is sitting on a 6 percent gain for the month is and also flirting with 52-week highs.2

How to explain that kind of glass-half-full price action? Experts are looking beyond individual companies and into the bigger picture of what’s happening in China.

First, they point to valuations, arguing that on a renminbi-for-renminbi basis the country remains cheap.3 Next, they’re focused on a steady trickle of potentially positive news like deregulation and increased openness to foreign investors.4 Third, business leaders have been pleasantly surprised by how agreeably conversations are progressing between Beijing and U.S. President Trump.5 So much for that trade war everyone feared...

Alibaba (BABA) vs S&P 500, 6-month chart

Source: OptionsHouse by E*TRADE

If traders have been happy with earnings misses, then they’ve been overjoyed when results have beaten the Street. Weibo (NASDAQ: WB), for instance, is up a whopping 45 percent this month amid a rush of traffic to its microblogging site. And, JD.com (NASDAQ: JD), a smaller e-commerce competitor to BABA, is sitting on a 19 percent gain amid stronger-than-expected growth.6

Here are some other names that have been on the move and making new 52-week highs:

  • Sohu.com (NASDAQ: SOHU): Earnings missed on April 24, but it broke its 50-day moving average in mid-May and is up 27 percent on the month.
  • Bitauto (NASDAQ: BITA): It initially fell after earnings on May 11, but quickly bounced and is up 11 percent on the month.
  • Changyou.com (NASDAQ: CYOU): It fell on weak earnings April 24, but held its 50-day moving average and is up 23 percent on the month.
  • The U.S.-focused S&P 500 index, in comparison, has risen less than 0.5 percent so far in May.

While most of the attention has focused on e-commerce companies, traders also targeted Macau casino operator Melco Resorts Entertainment (NASDAQ: MLCO) amid a rebound in the city’s gaming business.

Bottom line, whether the news is good or bad, buyers seem to be returning to Chinese stocks.

 

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1. Reuters: Alibaba announces $6 billion buyback but misses EPS forecast. 5/18/17.

2. Reuters: Baidu sees weak second quarter as ad business curbs hurt; shares fall. 4/28/17.

3. Bloomberg: Chinese Stocks Are Finding Favor, as Long as You're Not in China. 5/17/17. StarCapital: Global Stock Market Valuation Ratios.

4. Reuters: Hong Kong, China regulators approve bond trading link. 5.17/17. Bloomberg: China's Bond Link Aims to Spur Foreign Inflows Through Hong Kong. 5/16/17.

5. Reuters: U.S., China agree to first trade steps under 100-day plan. 5/12/17. The Financial Review (Australia): 'ChiMerica' is back as China-US trade relations begin to take shape. 5/21/17.

6. Reuters: JD.com reorts record first quarter, warns growth to weaken future profits. 5/9/17. Investor's Business Daily: Weibo Skyrockets As Earnings, Guidance Clear Views. 5/16/17.