Leadership Potential
Over the past three months, China-based internet stocks have been among the market’s strongest. the KraneShares CSI China Internet ETF (QUEB – Free Report) one of the most followed Chinese ETFs in the United States. Before pulling back recently, the KWEB ETF has doubled since making dramatic lows in late October 2022.
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Because of the sudden and unstoppable rally from the bottom, investors who blinked or hesitated to spread their thoughts about Chinese-related names may not have acted. However, after a recent retreat by these leaders, they may be giving investors a second chance.
All Pullbacks Are Not Created Equal
There are subtle characteristics that investors can recognize when weighing the risk to reward potential of a pullback, including:
1. Early Pullbacks Offer Attractive Risk Reward: Usually, the first retracement of the 50-day moving average in a trend offers investors the most optimal place to buy. As you get older and the teething trend lasts longer, the number of times you can “go back to the cookie jar” decreases. Chip maker Lattice Semiconductor (LSCC – Free Report) is a prime example. Recently, the stock pulled back to its 50-day moving average for the first time and found support before breaking out again.
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2. Power and Distance are related: When it comes to the stock market, stability tends to bring strength. In other words, the stronger the price trend towards the first pullback, the more the trend is likely to continue.
3. Surprises tend to happen in the direction of the trend: Stocks in trending trends tend to stay in trends more often than not. For example, a stock that is trending strongly in earnings is more likely to gap higher than lower after the release of results – all else being equal.
Chinese Names on the Internet Offer Pullbacks to Second-Chance Buyers
Investors who have missed the big moves in Chinese internet stocks over the past few months are getting a chance to pull back. Three of the most powerful names include Alibaba (chin – Free Report) , JD.com (JD – Free Report), and vipshop (VIPs – Free Report). Each stock has more than doubled last year’s lows, holds a Zack’s Strong Buy Rating, and is pulling the 50-day moving average for the first time in this trend.
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Bargain Basement Pricing
The technical picture is not the only positive aspect of these stocks. After years of retreat in these stocks, valuations have become more attractive. For example, from a P/E perspective, BABA shares are at their most attractive levels since inception.
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Illustrated: BABA P/E ratio since inception.
Analysts were blown away
Judging by the consensus estimate, analysts believe that the income momentum has just begun from a growth perspective. For example, over the past 60 days, the consensus analyst estimate for JD’s Q2 earnings has risen 25%.
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