3 Elite Chinese Internet Stocks Pulling Back to Support – February 1, 2023
Leadership potential
Over the past three months, China-based internet stocks have been among the strongest in the market. The KraneShares CSI China Internet ETF (KWEB Quick QuoteKWEB – Free Report) is one of the most followed Chinese ETFs in the United States. Prior to its recent pullback, the KWEB ETF had more than doubled since hitting dramatic lows in late October 2022.
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Due to the sharp and relentless rally from lows, investors who blinked or had doubts planted in their minds about China-related names likely missed the mark. However, after a recent downturn in these leaders, they could offer investors a second chance.
Not all withdrawals are created equal
There are subtle attributes investors need to be aware of when assessing risk to reward the potential for a pullout, including:
1. Early pullbacks offer an attractive risk-reward ratio: Often, the initial pullback towards the 50-day moving average in a trend provides investors with the most optimal buying zone. As a trend ages and lengthens in the tooth, the number of times you can “go back to the cookie jar” decreases. Chipmaker Lattice Semiconductor (LSCC Quick QuoteLSCC – Free Report) is a prime example. Recently, the stock returned to its 50-day moving average for the first time and found support before heading back up.
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2. Power and distance are correlated: When it comes to the stock market, strength tends to beget strength. In other words, the stronger the price trend during the first pullback, the more likely the trend is to continue.
3. Surprises tend to happen in the direction of the trend: Stocks in uptrends tend to stay in uptrends more often than not. For example, a stock with a strong earnings trend is more likely to rise than fall after the earnings release, all else being equal.
Chinese internet names offer second chance to withdrawal buyers
Investors who have missed the gigantic moves in Chinese internet stocks over the past few months have an opportunity to pull back. Alibaba (BABA Quick QuoteBABA – Free Report), JD.com (JD Quick QuoteJD – Free Report) and Vipshop (VIPS Quick QuoteVIPS – Free Report) are three of the most well-known names. Each stock has more than doubled from last year’s lows, holds a strong Zack buy rating and is nearing the 50-day moving average for the first time in this trend.
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Basement appraisals
The technical image is not the only positive attribute of these actions. Following the multi-year decline in these stocks, valuations are becoming much more attractive. For example, from a P/E perspective, BABA shares are at their most attractive levels since inception.
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Pictured: BABA P/E ratio since inception.
Analysts are pumped up
Judging by consensus estimates, analysts believe that earnings momentum is just beginning from a growth perspective. For example, over the past 60 days, analysts’ consensus estimates for JD’s second-quarter earnings rose 25%.
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