Every once in a cycle, investors look back and wish they had jumped on those opportunities that seemed 'too good to be true' at the time. The ones that other fearless operators took advantage of, and now they have to sit back and watch how those investors boast their double – sometimes triple–digit returns. Contrary to popular sentiment, Alibaba Group (NYSE: BABA) is one of those names today.
For reasons that will become clear in just a bit, there is a significant tailwind pushing for bulls to consider China as their next stop for attractive equity investments. Any other market would have already seen massive inflows. But fear dominates the sentiment around China due to "geopolitical risks." That's a fancy expression for "we fear what we don't know." And there are times to ignore that expression. Profit is profit, whether in the U.S. or on the moon.
Management stood firm by shareholders this quarter, and outlooks for this year look more optimistic than ever. To put it this way, Jim Rogers (George Soros' right hand from back in the day) says he is "Optimistic about Chinese stock market recovery," and who better to lead the pack than a technology blue chip stock like Alibaba.
Market forces at play
The CSI 300 index, which is China's broader stock market index, is down to a five-year low. In contrast, other emerging markets, such as Brazil, have flirted with their 52-week high prices.
You can check this trend live by following the iShares MSCI Brazil ETF (NYSEARCA: EWZ) against the iShares MSCI China ETF (NASDAQ: MCHI), which is as low as it was in 2011! However, given the worry that has taken over the global marketplace, only the U.S. market indices keep making all-time highs today.
One thing stays the same across any financial market: the debt cycle – and the price of that debt – drives business outlooks and valuations (stock prices). Whenever a country's bond yields fall significantly below the dividend yields of a stock market, you can bet that a money shift is soon to come, rotating money out of bonds into stocks.
Today, the dividend yield on the China ETF is an annualized 3.7%, while the Chinese ten-year bond yield pays a coupon of 2.5%. Remember that the China ETF excludes some of the CSI 300 stocks that cannot be traded in the U.S., some of which pay dividends well above 6.0%.
Judging by the way stocks now pay a better yield than bonds, you can rest assured that the macro perspective suggests stocks are undervalued in the region. Don't just take it at face value, though; look at guys like Ray Dalio, who have been allocating funds into China since November of 2023.
In any case, fear is still king, and it keeps investors from gaining enough confidence to buy this stock market. The truth is that analysts and insiders have so much faith in the stock that you just cannot ignore a near 62.0% upside potential from where the stock trades today.
Everything just changed
To save time, here is the meat you can extract from the company's latest quarterly earnings report. On the top line, Alibaba reported 5.1% revenue growth and a slight bump in gross margins to 40.0%. But it's obvious that not everyone caught this fact.
Investors are selling the stock this morning by as much as 5% at the opening of Wednesday's trading session. Why? Who wouldn't panic when they see a 77% decline in net income from a business they had invested their money into? The truth is that the actual net income from the company wasn't all that bad.
Management reported an impairment of assets charge along with a write down in their equity investments, and who didn't take a paper loss on equity investments in a stock market that is hitting 2011 lows? Investment bankers call these "non-core" items, which are added back to reflect the true earning power of the core business.
Adding these non-core items back to the financials, Alibaba grew its operating income by 5.4% ahead of its 5.1% revenue growth, a testament to its increasing operating efficiencies throughout the year. Knowing what you know now, you can probably guess the sell-off is unjustified.
This is also why analysts could soon boost their $119.80 a share price target today after they revise the actual state of the business, but wait, there's more. Management added $25 billion into their stock buyback program, giving them a total of $35 to buy cheap shares today discretionarily; that's 18% of the company's size, by the way!
For your consideration, Alibaba has grown its retained earnings by an average of 87% over the past 10 years, which trumps NVIDIA (NASDAQ: NVDA) with its 7.6% average growth in the one item that drives business (and stock) valuations.
NVIDIA stock is all the hype today, hitting all-time highs while Alibaba struggles at prices not seen since 2015; please make that make sense. You can't, which is why this is an opportunity to take advantage of massive market mispricing, where you can potentially look back at your decision and say, "Boy, am I glad I didn't share the market's fear."
