The first-quarter of 2022 has been brutal. The S&P 500 and Dow dipped into correction territory, and the NASDAQ officially fell into a bear market in early March. In my opinion, all of the major indices have been grossly oversold this year – setting each up for a nice rebound. The folks at Bespoke agree, pointing out that the market usually bounces back strongly after a dismal start to a year.
So, if you stay invested in companies with accelerating earnings and sales momentum, as well as those benefitting from positive analyst estimates, things should start to pick up in your portfolio.
But something that may not help your portfolio? Chinese stocks. Here’s why:
Early last week, Chinese stocks saw a lot of panic selling as investors expressed concerns over reports of Russia asking for Beijing military aid in Ukraine, talks of delisting Chinese equities in the U.S., the rapid spread of the latest COVID-19 strain and continued regulatory penalties for tech companies.
As a result, Chinese stocks in Hong Kong listed their worst day since the 2008 global financial crisis, with the Hang Seng China Enterprises Index closing down 7.2% last Monday, March 14. The benchmark CSI 300 Index slipped 3.1%.
But by Wednesday, March 16, there was an interesting shift. The Chinese government released a statement that it would ease its crackdown, support the tech companies it once cracked down on with targeted regulatory campaigns and stimulate the economy.
After repeated and sudden regulatory reforms on internet giants, the Chinese financial committee said regulation of internet companies should be “standardized, transparent and predictable” going forward.
The statement offered some reassurance to investors that the crackdowns on tech companies would soon come to an end, offering a bit more stability.
The Chinese government’s change of heart triggered a stunning reversal in the Asian markets. The Hang Seng China Enterprises Index jumped 13% by Wednesday’s close, its biggest one-day gain since 2008. And the CSI 300 Index spiked 4.3%.
Now, to understand why this is so significant, we need to rewind back to last year. During April 2021, Chinese regulators fined Alibaba Group Holding Limited (BABA) a record $2.8 billion after an antitrust probe found it had abused its market dominance. Before that, in November, they delayed a planned IPO of Alibaba fintech spin-off Ant Group.
In July 2021, the crackdowns really ramped up with DiDi Global Inc. (DIDI), the “Uber of China.” The company went public on June 30, 2021, and just a few days after its public debut, the Cyberspace Administration of China (CAC) ordered smartphone app stores to yank DIDI’s 25 ride-sharing apps from their stores and for the company to stop adding new customers following the CAC’s cybersecurity review that found “serious violations” in how DIDI gathered and used users’ private data.
Also that July, China targeted Chinese for-profit education companies. Basically, companies could no longer operate as for-profit or raise money through the stock market to grow their businesses.
This caused New Oriental Education & Technology Group, Inc. (EDU) and TAL Education Group (TAL) to drop 66% and 72%, respectively, over the course of two weeks.
Uneasy with the growing influence of tech firms, Beijing has been cracking down on numerous Chinese tech companies for months and months, subsequently wiping out hundreds of billions of market value.
Needly to say, Chinese tech stocks have suffered significantly from these crackdowns. However, following the Chinese government decision last week to relax its privacy policies, popular Chinese companies like BABA, NIO Inc. (NIO), Niu Technologies, Inc. (NIU) and JD.com (JD) have rebounded with a vengeance. In the past two weeks, the stocks rallied 46%, 40%, 29% and 40% respectively. So, is the recent strength a beginning of a new uptrend? And, more importantly, does that make BABA, JD, NIO and NIU good buys right now?
First, let’s see how they stack up in my Portfolio Grader.
As you can see in chart above, every stock is a sell. Each company also earns a low rating for their Fundamental Grade and either a measly D-rating or F-rating for their Quantitative Grade. So, institutional buying pressure has all but dried up.
I should add that before I would even consider any of the aforementioned stocks, I need to see the stocks’ volatility die down. And when these companies announce their new auditors, accounting firms the SEC approves of, stocks should surge. But those auditors may not be announced for a year or more. So, I recommend pumping the brakes on these Chinese stocks for now.
If you do have some cash to invest, I encourage you to consider fundamentally superior inflation hedges instead. The reality is there are now very real fears about stagflation. The last time it reared its ugly head was back in the 1970s. Stagflation occurs when prosperity stops rising, since wages and retail sales cannot keep pace with inflation. In other words, inflation is soaring, economic growth is stalling, and unemployment rises – a situation similar to what we’re facing right now.
Now, I remember the 1970s and stagflation very well. What I can tell you from this experience is that a stagflation environment is an ideal environment for stock investing if you invest in stocks that are prospering from inflation and have pricing power.
Case in point: Tyson Foods, Inc. (TSN).
In the U.S., Tyson Foods produces about 20% of its beef, pork and chicken, as well as offers a portfolio of familiar food brands: Tyson, Jimmy Dean, Hillshire Farm, BallPark, Wright, Aidell’s and State Fair. During its fiscal year 2021, Tyson Foods achieved $47 billion in total sales, with beef sales accounting for 37% and chicken sales accounting for 29%.
Recently, Tyson Foods reported results for its first quarter in fiscal year 2022. First-quarter sales rose 23.6% year-over-year to $12.93 billion, while adjusted earnings per share jumped 48% year-over-year to $2.87. The analyst community was only expecting total sales of $11.74 billion and adjusted earnings of $1.90 per share, so Tyson Foods posted a 9.2% sales surprise and a 51.1% earnings surprise.
Looking forward, Tyson Foods expects full-year 2022 sales between $49 billion and $51 billion. Thanks to the strong outlook, analysts have upped second-quarter earnings estimates by 23% and full-year earnings estimates by 17.5% in the past month alone.
Personally, I’ve been loading up on inflation hedges in Growth Investor to make my Buy Lists “inflation-proof.” This includes my newest recommendations in Friday’s Growth Investor Monthly Issue for April: I added nine new stocks to the Buy Lists – six new buys for the High-Growth Investments Buy List and three new buys for the Elite Dividend Payers Buy List.
With the changes I’ve made in the past month, my Growth Investor stocks will now be characterized by 51.4% average annual sales growth and 370.9% average annual earnings growth. In other words, we’re invested in the crème de la crème of growth stocks, and they should continue to prosper in the more inflationary environment.
P.S. Right now, successful Americans like us have a bullseye on our back.
We’re facing a direct threat to our safety and prosperity.
The values we hold dear, like individual freedom, hard work and fiscal responsibility have been tossed aside.
The US national debt is growing at an unprecedented rate. And more spending is coming.
The cost of essential goods and services seems to get more expensive by the day. Critical materials are on backorder for months. Grocery store shelves are half-empty.
If you have any money in savings, in the stock market, in a 401k or even cash stuffed under the mattress, this should make the hair on your neck stand up.
To help understand the monumental problem we’re facing and why both our way of life and financial security are under attack, I put together a special presentation.
So, if you want to protect yourself and grow your wealth, I encourage you to watch this video now.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: