In this mailbag segment of the Market Foolery podcast, host Chris Hill and senior analyst Matt Argersinger analyze what's going on with China's major foreign-listed tech giants, which have lost value in 2018 even though their fundamentals appear to be positive.
From the Fools' point of view, it's a combination of factors plaguing Alibaba (NYSE: BABA), Baidu (NASDAQ: BIDU) and JD.com (NASDAQ: JD), among others: the trade war, decelerating economic growth in China, and large institutions cashing out of Chinese stocks. But the key question for Foolish investors is this: Is this a buying opportunity, or are further declines coming?
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A full transcript follows the video.
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This video was recorded on Sept. 19, 2018.
Chris Hill: First question from P.K. Patel in Arlington Heights, Illinois. "Can you cover the dynamics of some of the big Chinese companies like Alibaba, Baidu, JD.com, etc. and why those stocks are down significantly, despite sales and earnings growth? Is this a buy opportunity, or do you see a further decline?"
It's a great question, Matty. Look, we're getting toward the end of the year. As we get into November, December, people will start to do their look-backs on 2018 and say, "Well, what was the big investing story of the year? What was the big business story?" This isn't going to be No. 1, I think, on anyone's list, but it really should be a top five story in terms of investing. He's right.
Matt Argersinger: Yes, I think so. If you think about it, we haven't experienced a "bear market" for U.S. stocks. 2011 was a tough year, but really, since the end of the financial crisis, the end of the last recession, so, nine years here. But that's not the case for China. If you look at the Shanghai and Shenzhen stock markets, the primary domestic stock markets in China, they're down more than 25%, at least as of yesterday. So, China has experienced a bear market. What's interesting is, these foreign-listed Chinese stocks -- the Baidus, the Alibabas, JD -- they've been wrapped into this downturn, which has been precipitated, I think, by the trade war that we have between the U.S. and China, the tariffs, the threat of more tariffs and what that's going to mean long-term.
I think now, the narrative is, "Well, even if this trade spat smooths out, or it isn't as impactful as we think it could be today, there could be a slowing down of the Chinese economy." We've already seen some signs of that.
So, what you're seeing, I think, is this institutional rotation out of Chinese stocks. Big institutions have just hit the sell button for many reasons. A lot of these companies, which PK rightly pointed out, are growing -- I mean, the market opportunities are vast. I have to say the stocks look very cheap. But they've been thrown out like every other Chinese stock in the world, certainly, over the last few months.
Hill: Yeah, I almost feel like the answer to his question, "Is this buy opportunity, or do you see a further decline?" I almost feel like the answer to the question is yes. I'm not prepared to say "Oh, no, this is the bottom for them, they're going to bounce back." There's a really good chance we see further decline. It may still be a nice buying opportunity.
Argersinger: Right. I think, PK, if your time horizon is long enough -- and I hope, as a Fool, if you're a listener, we tend to think in years, obviously, not months or quarters -- this could be a really great time. I think what we've talked about before, the advent of the Chinese ADRs, what they're calling CDRs, which is going to enable companies like Baidu, the companies we talked about, like Alibaba, to list their shares in China as well for capital-raising purposes. That, I think, is a near-term catalyst that is still going to happen. Short-term and long-term reasons to think you could be getting a great value right now looking at these stocks.
Hill: Remind me, is there a firm date on that? Or is that like, we'll know it when it gets announced?
Argersinger: The Chinese regulatory authority that manages that has kept saying by the end of the year. But things are fluid, there's no set date for it. I think it'll happen sooner than later.
Hill: It's like Amazon's second headquarters. "By the end of the year. We'll let you know."
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Matthew Argersinger owns shares of Amazon, Baidu, and JD.com and has the following options: long January 2020 $50 calls on JD.com and short January 2020 $50 puts on JD.com. The Motley Fool owns shares of and recommends Amazon, Baidu, and JD.com. The Motley Fool has a disclosure policy.