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Chinese Stocks: Values or Traps?

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  • (0:45) - Is It Time To Invest In China Or Still Too Risky?
  • (4:00) - The Current State of China Market
  • (10:10) - Tracey’s Top Stock Picks: Value Or Trap?
  • (19:30) - Big Takeaways On China: BIDU, BABA, JD, TCEHY, SINA
  •             Podcast@Zacks.com

Welcome to Episode #110 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

The Chinese stock market has fallen to 4-year lows and the Chinese stocks that trade on the US exchanges have also been hit in 2018 with some falling over 40%.

Investors are fleeing the Chinese stocks.

Does that mean there’s a buying opportunity for value investors in Chinese stocks?

China 2017 Versus China 2018

In October 2017, Tracey did a Market Edge Podcast called “Should Investors Buy China’s FANG Stocks?”.

She looked at five of the largest Internet and social media stocks.

Now, a year later, she looked at the same five companies again.

Back in October 2017, she was optimistic about investing in China for the first time in years for the following 3 reasons:

1.       The Chinese economy appeared to be rebounding

2.       The “Chosen” Chinese companies were backed by the government

3.       Transparency had improved with publicly traded companies

Did these turn out to be correct assumptions?

Value Stocks Versus Value Traps

A stock could be cheap and have value fundamentals and still be a trap.

A value trap usually involves falling earnings estimates whereas a true value stock would still see rising earnings estimates.

Are the Chinese FANG Stocks Values or Value Traps?

1.       Baidu (BIDU - Free Report) was trading with a forward P/E of 35 back in October 2017 but is now trading with a P/E of just 17.8. It also has a Price-to-Book ratio of just 3.0. That’s pretty cheap. Shares are down about 10% year-to-date. Are the earnings moving in the right direction to make it a true value and not a trap?

2.       Alibaba (BABA - Free Report) has fallen 14.7% year-to-date. It’s P/E is now 39, down from its 2014 IPO where it was 66. That’s cheaper, but not really “cheap.” What’s going on with its earnings estimates though?

3.       JD.com (JD - Free Report) has fallen about 40% year-to-date yet it’s not really that cheap. It has a forward P/E of 89 but if you look at the price-to-sales ratio, which is just 0.6, you might have a good argument that the shares are undervalued. Are earnings estimates headed up, or down?

4.       Tencent (TCEHY - Free Report) has fallen 25% in 2018. The “Facebook of China” still doesn’t look like a deal, however, as it has a forward P/E of 33. Should growth investors still be buying?

5.       Sina (SINA - Free Report) has plunged 39% year-to-date. It has a forward P/E of 20.4 and a Price-to-book ratio of just 1.3. A P/B ratio under 3.0 usually indicates value. It appears that there’s some value there then. But do the earnings estimates match up for it to be a value stock, and not a value trap?

What else should you know about investing in Chinese stocks?

Tune into this week’s podcast to find out.

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