Chinese Stocks Collapse: Time to Buy?

Believe it or not, there are bargains to be found in the stock market. Even as the major market indexes test new all-time highs, value hunters can find opportunities – though they might not be in your own backyard.

There’s absolutely nothing wrong with getting international exposure in your portfolio. In fact, that’s a great way to diversify and therefore hedge against weakness in specific markets.

Today, there’s a major test to see who’s a true contrarian and who’s not. It’s emotionally easy to invest in markets when they’re up, but do you have what it takes to buy into a market that’s distressed and despised?

To be honest, most people don’t have the guts to do this. Yet, we have to remember that the markets are cyclical, rotating in and out of sectors and regions: ones that are hated today, will be loved again later.

Such is the case, I believe, with China. We’re talking about the second biggest economic power in the world – and some folks would say that it will overtake the United States at some point.

Just a few words of caution, though. The Chinese government is not like the one you’re familiar with in the U.S. There aren’t the same checks and balances. Chinese regulators can wipe out companies, or entire industries, without anything that resembles due process.

Courtesy: Yahoo Finance

Anyone who doubts this, should check the latest developments with Chinese private education and tutoring companies like TAL Education Group (TAL) and New Oriental Education & Technology Group (EDU). These companies and their stocks were absolutely clobbered recently.

Reportedly, the Chinese government is banning companies that teach school curriculums from making profits, raising capital, or going public. Moreover, these businesses must effectively go non-profit, and cannot pursue IPO’s or accept foreign-sourced capital.

As a result, in a single day, TAL stock lost 70% of its value while EDU stock shed 54%. The stock of a similar company, Gaotu Techedu (GOTU), fell 63%.

Clearly, when the hammer of the Chinese government falls, entire swaths of the market can collapse. At the same time, though, there may be collateral damage which bold investors can capitalize on.

By “collateral damage,” I mean that other Chinese stocks might also decline even though they weren’t directly targeted by the government in this instance.

This is typical behavior in the stock market. Some stocks in a sector will fall – sometimes, it’s just one stock – and people will panic-sell other stocks in that same sector, or even in sectors that are barely related at all.

Granted, education companies aren’t the only ones being targeted by Chinese authorities. Ride-hailing company DiDi Global (DIDI), which is basically the Uber of China, is currently the subject of a cybersecurity probe.

So, it’s understandable if you don’t want to invest in TAL, EDU, or DIDI right now. However, there are bigger companies that sustained some collateral damage, but are still thriving businesses.

Courtesy: Yahoo Finance

Consider Baidu (BIDU), for example. This is basically the Google of China. It’s a vast business with a $60 billion market cap – and a super-low P/E ratio of 8, which suggests that there’s a major bargain here.

While you’re at it, you might want to check out Alibaba (BABA), which is like China’s version of Amazon. This company dwarfs Baidu with a market cap of $573 billion, and Alibaba’s P/E ratio of 24.4 is quite reasonable.

You may recall the time when Alibaba’s founder, Jack Ma, went missing for a while. The investors freaked out – until Ma showed up, perfectly fine and healthy.

That incident was a buying opportunity, and I believe that the current situation could also represent an overstatement of worry and panic.

So just maybe, there’s a silver lining to the collapse in Chinese equities: a chance to buy low, with the hope of selling higher when the fear subsides.