Time For A Contrarian Bet On China, As Chinese Stocks Suffer Their Worst Week Since February

Magnificent Seven Stocks Aren’t The Only Casualties 

While most investors’ attention has been drawn to the nearly $2 trillion shaved off of American mega cap tech stocks’ market caps this month…

$1.75 trillion in market cap was erased from the Magnificent seven in 10 days. pic.twitter.com/EsNg4foGgc

— Global Markets Investor (@GlobalMktObserv) July 24, 2024

Chinese mega caps have been getting hammered too. As Barchart noted on X, this has been their worst week since last winter. 

Flashback To Last Winter

Back in late January, we saw this headline on ZeroHedge: “China Stocks HIt Rock Bottom“. We did some research on the big Chinese stocks, and decided Alibaba Group Holding Limited BABA had the strongest fundamentals. We posted a trade alert about it the same day…

Though we ended up deciding to wait until after BABA’s earnings the next month to place the trade. We ended up making 100% on that trade over the next few months. 

1. Call spread on Alibaba (BABA 1.32%↑). Entered at a net debit of $2.25 on 2/8/2024; exited at a net credit of $4.50 on 5/3/2024. Profit: 100%.

Alibaba Doesn’t Look Like The Best Bet Today

Here’s how Alibaba’s fundamentals look, according to selected metrics from Chartmill (these are all on a scale of 0-to-10, with 10 being the best). 

• Overall Fundamental Rating: 5
• Profitability: 6
• Health: 5
• Growth: 5
• Valuation: 7

Apple Doesn’t Either 

If you’re curious how a Magnificent Seven stock compares on those metrics, let’s look at Apple, Inc. AAPL:

• Overall Fundamental Rating: 6
• Profitability: 9
• Health: 8
• Growth: 4
• Valuation: 2

This Chinese Stock Does Look Like A Good Bet

In contrast, here’s how the Chinese stock we’re bullish on now compares: 

• Overall Fundamental Rating: 8
• Profitability: 8
• Health: 9
• Growth: 8
• Valuation: 8

This company beat on both top and bottom lines when it reported earnings in May, but its shares are down more than 20% since. The options market expects a movement of about 11% up or down after its next earnings release in August.

The trade we placed on Friday is a bet that the stock will be up about 10% from here by the end of August. If we’re right, we’ll make about 200% on that trade (and if we’re wrong, we could lose up to 100%).