Chinese Internet Stocks Falling With Trade Dispute

The Trump administration went on the offensive regarding trade imbalances back in January. When the idea of placing tariffs on Chinese goods was announced, it caused equity markets around the world to experience a short-term selloff. Since then, there have been ups and downs in the markets as well as in the negotiations.

When the trade war started, I immediately tried to piece together thoughts and ideas on how it would impact different companies and different sectors. I analyzed it mainly from the U.S. perspective.

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One group of stocks I didn’t really expect to be hurt that badly was the Chinese internet firms. Companies like Alibaba (NYSE: BABA), Baidu (Nasdaq: BIDU), (Nasdaq: JD), Netease (Nasdaq: NTES), Tencent (Nasdaq OTC: TCEHY), and Weibo (Nasdaq: WB) were all in nice up trends after strong gains in 2017. All six of them were seeing good earnings and sales growth and ranked high in Investor’s Business Daily’s EPS ratings and SMR ratings.

I really didn’t consider these six stocks getting hurt by the proposed tariffs, and that was a mistake on my part. All six are down since January 26, and several of them have had extreme declines. Weibo is down over 40%, Netease is down 33%, and is down 29%.

Investors are concerned about the negative impact the tariffs could have on the Chinese economy and it seems that any and all Chinese companies are seeing selling pressure. Of course they were also grouped together in many cases during the run up. If it was a Chinese internet firm, investors wanted to own it.

Sounds a little like the rage back in the 90’s doesn’t it? Investors were buying any stock that was associated with the internet back then and it didn’t matter what the company did or what the fundamentals looked like. They went up together and then when the bubble burst, they all went down together. Many of those companies went under or were taken over by other firms, etc., but the ones that were ahead of the game in terms of fundamentals are still around and many of them recovered from that bear market.

These Chinese internet firms are in a much better position than some of the internet firms of the 90’s. They have earnings that are growing—many of the internet firms from 20 years ago were rallying sharply and didn’t even have earnings yet and some of them never did make money. The rallies occurred because of the potential.

I can remember a particular instance where one of my college professors was telling our class that he had just bought a mutual fund that was invested in internet stocks. When I asked him which one he said, “I don’t remember the name, but it’s one of those go-go internet funds.” That was the mentality during that period.

I don’t think the rally in Chinese internet firms can compare in terms of the quality of the stocks or in terms of the investor sentiment. Like I said before, these companies have solid earnings growth, sales growth, profit margins, operating margins, and returns on equity. And the sentiment toward them may have been a little too bullish before the trade war started, but there wasn’t an extreme bullish sentiment like there was in the late 90’s.

Investing in these six firms would certainly come with risk at this point, but it could also come with great reward. If an agreement is reached between China and the U.S., you could see a tremendous rally in these stocks. Even if an agreement isn’t reached and the rhetoric between the two countries dies down, we could see these stocks rally.

This isn’t the kind of investment idea that you want to bet the farm on, but it certainly might be worth allocating a small portion of your portfolio to all or some of these stocks. The trade war may have provided investors with a great buying opportunity.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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