What to do when the market is looking ugly, and pessimism is trying to sneak in through the back door of our long-running bull market? Look for a purveyor of optimism and see what he says.
So that’s the mission today — as interest rate worries (and perhaps fears of political risk) catch enough attention to drive the market down by a little bit, we look to see what growth-happy Louis Navellier is teasing on this fine morning.
Here’s the sum-up from his latest ad for Ultimate Growth ($1,495/year “on sale”), which has been hitting my inbox for a couple days:
“Earlier this year I issued a rare ‘all in’ buy signal for a very specific type of stock.
“I recommended seven of these stocks that my system pegged for double- and triple-digit gains.
“We just sold one of them for 159% gain in less than six months.
“And as I write this, we’re sitting on gains of 106%, 139% and 158% in others that we continue to ride higher.
“I’m sorry if you weren’t with us to enjoy these phenomenal profits. But I have good news for you…
“My system is flashing a screaming BUY signal once again.”
So, in the spirit of the “buy the dips” strategy that has worked well for pretty much all growth stocks over the past five years, let’s see if we can find out from whence his “screaming BUY signal” emits.
He notes that although he liked all the FAANG stocks previously, his quantitative growth-seeking system has sold out of all of them but Netflix — with “F” ratings for Amazon and “D” for Google (Alphabet) and some pessimism when it comes to Facebook and Apple (I’m pretty much the reverse of Navellier on that group — I own all of those except Netflix).
And we get a little macro cheerleading as well, which does at least make me feel a little better:
“Yes, valuations are stretched for many stocks. But that’s only a problem if you are buying stocks that can’t deliver outstanding growth to support that valuation.
“When you are delivering high double-digit growth like the stocks I’m going to tell you about today are, smart investors aren’t bothered by a higher than average P/E.
“And of course, there’s my favorite…this bull market is “too old”. What does that even mean??
“There is no expiration date on a bull market. And the same people who have been saying this for the last three years have missed out on tremendous amounts of money as this market has exploded higher.
“The reality is that the market in general and our stocks in particular are going higher.”
So what’s he talking about? What are these “buy signal” stocks today from Navellier? They’re all Chinese growth stocks… and he’s predicting a “killing” in the short term (the next 3-12 months) for those who buy these stocks.
He also says you “must act before October 30th,” which is Monday — mostly, it appears, because he expects this to be a strong earnings season for these stocks, and he thinks you need to be in before earnings reports start hitting.
How about some names? Let’s see where the clues lead us …
“Like Buying Apple in 2001
“Our first stock got its start as a search engine, but has quickly branched out.
“Think of Amazon in 1999 when it was ‘just’ selling books online. Or Google when it was ‘just’ a search engine. Or Apple when it was ‘just’ a computer maker….
“It towers so far above its competitors that like Google, it’s hard to imagine someone catching up.
“And it has monetizing those users down to a science.
“It’s a cash machine with more than $15.5 billion on hand.
“But this company is not content to dominate one industry.
“Management just announced a $15 billion investment in R&D over the next three years.”
And apparently, like Alphabet, it has been trying to expand beyond search…
“And the company is moving aggressively to expand beyond “just” search into the hottest trends in technology, including cloud and data services, artificial intelligence, self-driving cars, online restaurant delivery, mobile payments, facial recognition and more.
“This expansion is driving phenomenal sales and earnings growth.
“The company announced blowout second quarter results. Operating profit jumped 47% year-over-year and earnings surged 98% year-over-year.
“That walloped analyst estimates, posting a stunning 56% earnings surprise.”
Got it? Right, this is Baidu (BIDU), which is often referred to as the “Google of China”, and which is working in a lot of the same areas as Alphabet, from video to self-driving cars to artificial intelligence. And they did blow out their earnings estimate last time out (and have beaten earnings handily each quarter this year, enough so that in just the past few months their 2017 earnings estimate has risen by about 25%, and their 2018 earnings estimate by almost 20%). The past six months or so have been very good for BIDU, which previously had been pretty quiet and slow-moving compared to many of its Chinese internet brothers, so the stock is now pretty richly valued at about 28X next year’s estimated earnings… but that’s arguably not so high for a stock that’s also expected to grow earnings by 30% next year.
Both the valuation and the growth expectations are pretty similar to Facebook, for what it’s worth, though BIDU is much smaller and arguably has a bigger growth runway given the still underpenetrated Chinese internet market and the growth of the Chinese economy versus the rest of the world. BIDU’s a little more richly valued than “rest of world” peer Alphabet, which trades at a forward PE of 25, but not dramatically so — and Alphabet is also likely to be a slower growth name (though, since it’s not confined to a single country like Baidu, likely a lower-risk one).
BIDU does have news coming very, very soon — the company is expected to report its next quarter tomorrow, there’s a summary here of what to expect from the Motley Fool… and here’s Louis Navellier’s Portfolio Grader page on BIDU.
“The Amazon of China
“More than 500 million Chinese shopped online in 2016.
“And industry analysts expect e-commerce revenue to grow by a compound annual growth rate of 30% a year.
“That’s a huge potential increase in revenue for any company in the space.
“But cracking into the Chinese market is extremely difficult….
“… the Chinese government is currently making a push to redefine the retail market by supporting companies that have both an online and offline presence.
“The next company I’m recommending is perfectly positioned to profit from the government’s wishes.
“Its already one of the top e-commerce retailers in China with more than 200 million customers.
“Just like Amazon, it has amazing infrastructure and logistics that lets the majority of the products it sells ship directly from the company’s own warehouses around the country, making shipping fast and efficient.
“But they’ve also been building out their offline presence by buying a series of traditional retailers and inking a joint venture with Walmart in China.”
And Navellier says they “beat” on their last earnings report, too:
“The company has followed a path very similar to Amazon…pouring every penny back into the company to build infrastructure, gain market share and cement customer loyalty.
“But in May, they reported their first profitable quarter and it was a doozy. First quarter earnings beat estimates by a breath-taking 1,399%! That’s not a typo.
“The momentum continued in the second quarter with another profitable quarter, another earnings beat and a 42% jump in revenue.”
So that’s JD.com (JD), Which I speculated on recently with some call options, betting on a recovery after the stock was clobbered — and as the stock fell today, I actually added some additional call option positions.
JD.com is the fastest-growing ecommerce company in China, though they don’t get as much attention outside China as Alibaba does (they don’t have their fingers in a thousand different pies like Alibaba does, but they are much stronger on the core e-commerce business because of their huge investments in infrastructure… unlike Alibaba, which takes more of an eBay strategy for most of its ecommerce business, serving as the facilitator but not actually doing the logistics of warehousing, delivery, stocking, etc. That makes it easier for Alibaba to have strong margins, but it also means JD is building a hugely valuable business that should thrive as ecommerce grows in China… and if it can get the same respect as Amazon, with folks crediting them for growth and investment and not worrying about profits or margins so much during the growth phase, then it’s possible that JD.com shares could keep soaring.
It’s also possible that they could keep falling, of course (the shares were closing in on $50 in August, but are now at $37) — it’s still an expensive stock if you go by earnings (at 41X 2018 earnings estimates and 25X for 2019), the Chinese ecommerce marketplace is hugely competitive when it comes to JD.com and Tencent and Alibaba, with plenty of other competitors as well… and JD is clearly not prioritizing profits right now as they invest in more growth, so it wouldn’t take much China pessimism to bring them down another peg. JD.com is also likely to be similar to Amazon in its volatility, not least because as a real retailer it has much smaller margins — so pretty small changes in the margins (from 1% to 2%, for example) have a HUGE impact on earnings (by comparison, Alibaba’s margins are not going to go from 47% to 90%).
That risk is why I’ve put on my JD.com position using options, that way I can clearly see what my risk is but have pretty substantial exposure on the upside and profit dramatically if JD shares resume their nosebleed growth after the recent collapse. Fingers crossed, but I like the underlying strength of this business. JD should report earnings on November 15.
“Most people in the U.S. have never heard of this next company even though it has 700 million users.
“They have no idea what they are missing!
“China is the largest car market in the world, racking up record sales again in 2016 with 28 million cars sold.”
OK… 700 million users for a car-related company? Huh? That’s pretty much the whole internet audience in China. Here’s more:
“There are 190 million cars on already on the road. But unlike in America, the used car market is relatively small.
“That’s expected to change in the next 5 years, and this little-known company is at the forefront of making it happen. I can’t tell you much more without giving it away (which wouldn’t be fair to my current subscribers)….
“The company has been growing like gangbusters, with revenue growing at an average rate of 38% over the last four quarters.
“Last quarter, they posted a 35% earnings surprise, crushing analyst estimates. And they have already raised guidance for 3Q earnings.”
Those clues actually apply to a few companies (other than the 700 million users clue, which pretty much only applies to Chinese messaging and gaming giant Tencent, which I like just fine and may end up being the largest company in the world someday soon… but it’s not particularly connected to the auto market, other than through owning some shares of BitAuto)… so this is very likely either BitAuto (BITA) or Autohome (ATHM) — both are automotive marketplaces much like cars.com here in the US, and they also have partnerships with auto dealerships for marketing and, importantly, have financing businesses to help people get car loans.
Autohome (ATHM) is the more likely choice, I suppose, despite the fact that the stock recently got crushed because of a management shakeup, but both have been strong performers of late as China’s auto market has been very healthy. Here’s Navellier’s scorecard ATHM, which is pretty similar to his score for BITA, which has not been as strong for long but which was recently upgraded.
Both are fairly small, BITA has a market cap of about $3 billion and ATHM is roughly twice that size. I don’t know what else distinguishes them in terms of long-term staying power, though I do like that BITA has investments from Tencent, Baidu and JD.com.
And… I’ve got to leave it there for you. Navellier didn’t drop many hints about his other four “buy signal” Chinese stocks, but I’ll keep sniffing around to see if I find anything else interesting in that ad. For now, I’ll leave it to you, dear readers — want a piece of any of these Chinese internet businesses? Scared about the wild volatility of China stocks during the Party Congress? Let us know with a comment below, and thanks for reading!
Disclosure: I own shares of Amazon, Facebook, Google and Apple, and have call options on Alibaba and JD.com among the stocks covered above. I will not trade in any covered stocks for at least three days per Stock Gumshoe’s trading rules.