Relative strength focuses on stocks that have performed well compared to a relevant benchmark. For our purposes, the S&P 500 will be the benchmark.
By targeting those displaying this favorable price action, investors can participate in positive market trends where buyers are in control. Recently, several China stocks have shown precisely that.
Alibaba BABA, PDD Holdings PDD, and JD.com JD have all been scorching hot over the last month, as illustrated below.
Image Source: Zacks Investment Research
But what’s driving the outperformance? Let’s take a closer look.
China Announces Stimulus
China recently unveiled a new round of economic stimulus measures aimed at boosting its slowing economy. A few key aspects of the package include monetary policy adjustments, real estate support, and capital market enhancements.
The real estate measures are particularly interesting, as China’s real estate market has been heavily impacted by weakening demand and falling home prices.
The measures are clearly designed to stabilize economic growth and address low consumer confidence and deflation, though many are skeptical of the moves, thinking that much more will be needed to yank it out of its current low-growth state.
Time will tell how the measures stack up, but at the present, China stocks have reacted notably favorably. It’s worth noting that some of the drastic moves are likely a result of some short-squeezes, as many of these Chinese stocks have been heavily targeted by bears over recent years given its struggling economic state.
Alibaba’s Sales Growth Raises Eyebrows
Alibaba, often dubbed the Amazon of China, has seen positive earnings estimate revisions hit the tape across several timeframes over recent months. The company’s quarterly results have overall been solid concerning expectations, with the company exceeding the Zacks Consensus EPS estimate by an average of 4% across its last four releases.
Image Source: Zacks Investment Research
Still, the company’s top line trend does warrant some concern, which has primarily remained stagnant over recent years, unable to find any momentum. Consistent sales growth is key, as it’s the foundation of generating profits.
Image Source: Zacks Investment Research
Analysts Get Bullish on JD
JD.com is a leading supply chain-based technology and service provider. The company’s cutting-edge retail infrastructure seeks to enable consumers to buy whatever they want, whenever and wherever they want it.
The stock sports the highly-coveted Zacks Rank #1 (Strong Buy), boasting a bullish earnings outlook across the board.
Image Source: Zacks Investment Research
Growth expectations remain constructive, with consensus expectations for its current fiscal year suggesting 28% EPS growth on 4% higher sales. Peeking a bit ahead, expectations for FY25 allude to an additional 5% of earnings growth paired with a 4% sales boost.
The valuation picture here isn’t rich either, with the current 0.6X PEG ratio reflecting a blend of both growth and value. The stock sports a Style Score of ‘A’ for Value.
Image Source: Zacks Investment Research
PDD Sees Bearish Outlook
PDD Holdings is a multinational commerce group that owns and operates a portfolio of businesses, including the popular Temu. The company’s earnings outlook has turned considerably negative over recent months, with analysts slashing their expectations across the board.
Image Source: Zacks Investment Research
Still, the company’s sales growth has been undeniably strong over recent years, as shown below. Quarterly revenue of $13.3 billion throughout its latest release was 85% higher than the year-ago figure.
Image Source: Zacks Investment Research
The negative revisions trends are hard to glance over, and investors would be better off waiting for positive earnings estimate revisions to hit the tape.
Bottom Line
Several China stocks, including Alibaba BABA, PDD Holdings PDD, and JD.com JD, have all been red-hot, displaying relative strength thanks to announced stimulus measures.
Many are skeptical of the moves, claiming more will be needed to yank it out of a low-growth state. In addition, investors should be aware that short squeezes have likely added fuel to the recent performances. Investors should also be aware that Chinese stocks are volatile by nature.
All in all, a sideline approach looks beneficial here concerning BABA and PDD, whereas JD’s bullish Zacks Rank #1 (Strong Buy) supports a closer look.
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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.
