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China Syndrome Hits Earnings: 4 Safe Bets - Analyst Blog

China's stocks hit an eight-year low on Monday, triggering concerns that the recent three-week rally may be unsustainable. This has heightened skepticism about recent government data which depicted a bright economic picture. Earnings posted by companies with significant China operations indicate slackening demand. In this situation, companies whose revenue flows from China are insignificant or non-existent may be better investment choices.

Stock Market Plunges

The Shanghai Composite Index tanked 8.6% to close at 3,725.56, its worst one-day slide since Feb 2007. Chinese regulator vowed to stabilize the market and prevent "systematic risks" by purchasing more shares. Regulator also said that those involved in the "malicious shorting of stocks" would be dealt severely.

This is in keeping with recent measures taken by the country's equity market regulator. Measures have included suspension of trading for several companies, preventing shareholders from offloading stakes, delaying IPOs and providing a government agency with access to funds purchase of equities. However, international investors are concerned that these measures may not be sufficient to sustain a long-term rally.

State of Economy Remains Weak

The market downslide was also a result of fears about the state of China's economy. Earlier this month, official data showed that GDP had increased 7% on a year-over-year basis. This was the same as first quarter growth and exceeded the consensus estimate of 6.8%. It also came in line with yearly targets which attracted much skepticism.

Other data released yesterday was more in keeping with the opinion of international investors. Chinese industrial profits that dropped in June after it had gained in an annual basis in the prior two months. Previously, the preliminary reading of Caixin Markit flash general manufacturing PMI had dropped a 15-month low in July.

Companies with China Operations Suffer

Earnings data from companies with China operations depicted a particularly grim picture. Last week, Whirlpool Corp. WHR said demand from China had declined by 3%. Revenue from China operations declined 2% for Illinois Tool Works Inc. ITW . Meanwhile, United Technologies UTX reported that orders for Otis elevators had fallen 10% year over year in China. It also experienced a drastic decline in orders for air conditioners, ventilation and heating equipment.

IBM IBM said China revenue had dropped 25%. In fact, the effect was particularly apparent when it comes to tech companies, but for Apple AAPL . Microsoft MSFT said conditions in China were worrying. VMware, Inc. VMW experienced its first significant decline from China operations.

The effect is also spreading to other sectors such as commodity stocks. Allegheny Technologies Inc. ATI , which reported a second-quarter loss, said cheap Chinese imports were creating adverse conditions for its products and forcing base selling prices lower. This is also borne out by Commerce Department figures which show that value of U.S. exports to China have declined by 6.1% up to May compared with the same period last year.

Our Choices

Given the evidence, companies with significant business operations in China may find it difficult to qualify on growth parameters. This is particularly true given other global headwinds, including a stronger dollar and a weak global outlook.

On the other hand, companies focused on the domestic market may have better growth prospects. The fact that the operations of these companies are primarily in the US makes them less vulnerable to the rout in China's stock market. Our selection in also backed by good Zacks Growth Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system .

Our research shows that stocks with Growth Style Scores of 'A' or 'B' when combined Zacks Rank # 1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.

Red Robin Gourmet Burgers Inc.RRGB is a full-service casual dining restaurant chain. As of Apr 19, 2015, the company owned and operated 418 restaurants located in 38 states, the District of Columbia, and two Canadian provinces. The company also had 99 franchised casual-dining restaurants in 15 states.

Red Robin Gourmet Burgers holds a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of 'A.' The company has expected earnings growth of 20.3% for the current year. Its Earnings ESP for the current quarter is 2.63%.

Dave & Buster's Entertainment, Inc.PLAY is a chain of dining and entertainment venues. The company owned and operated 76 such venues across 30 states and Canada as of Jun 8, 2015.

Apart from a Zacks Rank #1 (Strong Buy), Dave & Buster's Entertainment has a Growth Style Score of 'A.' The company has expected earnings growth of 52.9% for the current year. Its Earnings ESP for the current quarter is 4.55%.

SeaWorld Entertainment, Inc.SEAS is a theme park and entertainment company operating primarily in the United States.

SeaWorld Entertainment holds a Zacks Rank #2 (Buy) and has a Growth Style Score of 'A.' The company has expected earnings growth of 22.5% for the current year. Its Earnings ESP for the current quarter is 10%.

Darden Restaurants, Inc.DRI is one of the largest casual dining restaurant operators worldwide. The company has operations in the United States and Canada with more than 1,500 restaurants.

Darden Restaurants holds a Zacks Rank #2 (Buy) and has a Growth Style Score of 'A.' The company has expected earnings growth of 19.2% for the current year. Its Earnings ESP for the current quarter is 5.36%.

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WHIRLPOOL CORP (WHR): Free Stock Analysis Report

APPLE INC (AAPL): Free Stock Analysis Report

MICROSOFT CORP (MSFT): Free Stock Analysis Report

VMWARE INC-A (VMW): Free Stock Analysis Report

INTL BUS MACH (IBM): Free Stock Analysis Report

ALLEGHENY TECH (ATI): Free Stock Analysis Report

DARDEN RESTRNT (DRI): Free Stock Analysis Report

UTD TECHS CORP (UTX): Free Stock Analysis Report

RED ROBIN GOURM (RRGB): Free Stock Analysis Report

ILL TOOL WORKS (ITW): Free Stock Analysis Report

SEAWORLD ENTERT (SEAS): Free Stock Analysis Report

DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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