This Major Sell-Off in Chinese Stocks Could Be Your Buy Signal

Key Points

• Chinese stocks are now selling off after having a major weekly rally, but the reasons behind the sell-off are better than they seem.
• There is still double-digit upside for some of China's biggest names, backed by Wall Street analyst views and projections. 
• Investors should keep in mind that these discounts may last only a short time, and they should take advantage of this second chance to get in.

The market’s price action and attention are making a new shift this quarter. For most of 2024, everyone wanted to find the next best thing in the United States technology sector, as the semiconductor industry saw massive rallies in shares of NVIDIA Co. NASDAQ: NVDA. However, it seems that the industry has run its course, and investors are now left to find the next hot trend, which came up in an unlikely place worldwide.

Asia’s powerhouse, China, has recently sparked a new stock market rally after cutting interest rates by 50 basis points and injecting a few billion in capital into the economy to support its faltering financial markets. Some of the nation’s biggest companies saw their stocks break out into multi-year highs, from valuations that were undeniably low to attract some of the United States’ best investors and fund managers.

These stock picks include names like Alibaba Group NYSE: BABA, which is the fit choice amongst many investors today looking to get exposure to China. Then, there is Baidu Inc. NASDAQ: BIDU, serving as a companion to the technology sector. For those investors who don’t feel comfortable investing in individual stocks, the iShares MSCI China ETF NASDAQ: MCHI can diversify their capital across different industries and companies.

For Investors Who Missed the First Rally, China’s Markets Are Offering a Second Chance

Even after having the best days in over two years and bringing these stocks to new valuations, reality fell short of bullish expectations to justify keeping the rally going for these stocks. At least, this is what the media headlines are blaming the recent retracement on, ignoring the fact that there might have been a lot of old business "stuck" on these stocks waiting to get out.

When investors realize that stocks like Alibaba and others in the iShares China ETF spent just over two years trading in a near-flat channel, it's easier to imagine many premature bulls holding onto their positions and waiting for the first big rally to start unloading some of their inventory.

That might be what's actually happening at the moment, and that's why investors should not take the current sell-off lightly or as anything short of an opportunity to get in before the sentiment continues. Surely, some investors who recently bought these stocks before the rally may be obligated to trim down their positions for weighing purposes, but that doesn't mean they're suddenly bears.

Investors like Michael Burry and David Tepper recently chose to make Alibaba their largest position. Institutional players like these two have to decrease the weight of a stock if its position becomes too big compared to the rest of its holdings. This, combined with old stuck bulls getting out, might have caused the sell-offs.

However, Wall Street analysts recognize these stocks for their double-digit upside potential and high-quality business models. China's economy is just starting to come off its bottoming cycle, so it would seem that only clear skies lie ahead for this nation and the Asian region.

Worst Day in the Market? A Golden Opportunity for Value Investors

After suffering a 10.8% decline in a single day, the iShares China ETF just posted its worst day in history this week. However, that doesn’t have to mean everyone should get out; in fact, just the opposite might be true.

The same goes for Alibaba and Baidu, as these two stocks fell by 6.7% and 7.4%, respectively, in a single day.

Compared to today’s prices, investors can see that current Wall Street valuations and projections would place an attractive value proposition for these companies in the next 12 months; here’s what these analysts have to say.

Alibaba’s Recovery Still Intact

While the consensus price target for Alibaba stock is now set at $111.1 a share, a few analysts felt bold enough to stand out from the pack. Leading the way were those at Macquarie, upgrading Alibaba stock to an “Outperform” rating, a new view that was coupled with a $145 a share price target for the company.

To prove these analysts right, the stock would need to rally by as much as 32.2% from where it has gotten to today. More than that, Alibaba’s management has approved a stock buyback program of up to $25 billion for this year, representing roughly 10% of the company’s market capitalization today.

Baidu’s Value Proposition Seems Best

What better way to play the world's fastest-growing middle class than by having access to consumer and user data on a daily basis, as well as being able to monetize such data to other businesses that might find it useful. Investors can think of Baidu as America's Alphabet Inc. NASDAQ: GOOGL, only with a few more years of high growth.

Wall Street's consensus price target of $132.1 a share calls for a net upside of as much as 24.6% from where it trades today, especially after the recent sell-off. More than that, Baidu is one of Michael Burry's top five holdings in his fund, and if he's known for anything, it is for being right on his big bets.

Based on the noncyclical nature of Baidu's business, unlike Alibaba's dependence on consumer discretionary trends, it is the best path to a recovery stemming from its value proposition to investors today.