Investing in value opportunities usually comes with a feeling that you are going against the consensus, where everyone else will misunderstand your reasoning behind a potential investment and even call you out on why you’re wrong. However, value investors like Warren Buffett and Michael Burry are used to ignoring this feeling, and they almost always come out winning.
Today, the market is focused on the massive upside and bullish price action seen in the technology stocks space, with names like NVIDIA (NASDAQ: NVDA) breaking past their all-time highs as if they weren’t a barrier. However, not all technology stocks are made equal; it seems that the rally party hasn’t reached stocks in this sector in other countries like China.
Termed as ‘uninvestable,’ Chinese stocks have seen nothing but fear and even hatred from investors globally. However, it is the 1% of investors like Burry that know how to spot the value to be had in stocks like JD.com Inc. (NASDAQ: JD), where the spillover effect of a new tech boom has yet to be seen due to stubborn fear and sentiment regarding Asia’s powerhouse.
Join the Party
But Burry isn’t alone in buying a basket of Chinese stocks, including Alibaba Group (NYSE: BABA) as a clear value proposition being ignored today. Other significant players in Wall Street, like Ray Dalio, have also been quietly trickling into the nation’s stock market by allocating considerable capital to it.
According to 13-F filings, Ray Dalio’s hedge fund, Bridgewater Associates (the largest in the world), has been buying into the iShares MSCI China ETF (NASDAQ: MCHI) since October of 2023. There are plenty of reasons why Dalio – a macro investor – sees value in China; here’s one of them.
The Chinese government is now applying several measures to rescue and prop up its financial markets, with the latest wave of stimulus including a $278 billion injection of capital alongside short-selling bans across the stock market. The CSI 300 (China’s S&P 500) sits now at a five-year low, so cheap that the average dividend yield is up to 5.5%.
By the way, bonds in China are offering a mere 2.5% yield on the ten-year, meaning that investors can (in theory) beat bonds by just picking a random stock in the Chinese marketplace, something that in any other country would have already brought a massive buying spree and inflow of global investors into it.
The fact China hasn’t seen this inflow is a testament to how stubbornly bearish people are today, which is an advantage to you.
Taking the internet commerce sector as a whole, you will notice that it trades at an average of 87% of its 52-week high prices, where JD.com comes to be the worst performer at only 45% of its 52-week high, meaning it is also the cheapest and most discounted name in an otherwise bullish space.
Build your Case
Price action is one thing, but you must also consider the more traditional valuation metrics, such as the price-to-earnings ratio and the price-to-book ratio. So, your task now becomes figuring out whether JD.com also offers you a discount on these factors and the price action.
There must be a reason why Wall Street analysts see as much as 83% upside from where the stock trades today, all reflected in their consensus price target of $42 a share. Playing on the back of China’s economic comeback, and maybe even the interest from other mega investors, this target makes a lot of sense.
As a peer group, the internet commerce industry trades at an average P/E ratio of 25.3x, whereas JD.com sits at a discount of 73% with its 6.9x P/E ratio, building up a case of severe undervaluation. On a P/B ratio basis, the apple doesn’t fall too far from the tree.
With a 0.8x ratio, JD.com also offers a massive 90% discount to the sector’s 8.0x average valuation. By the way, today’s stock price is so low that markets have not seen JD.com trade at these ranges since 2018; all the while, earnings, and financials have expanded massively year after year, making these prices unjustified at the least.
In any case, you can remember that, historically, when stock market yields are higher than those found in bonds, blind stock picking (while also a risky endeavor) tends to be an almost guaranteed way to make money. By aligning the odds in your favor with a consumer discretionary stock like JD.com, the picture could be a lot brighter for you.
