My publisher, Mike Ward, didn't hold back when I told him that it was time to buy Russian Internet stocks in late 2015, saying simply…
…"That's the gutsiest call I've ever heard."
Savvy investors who followed along had the opportunity to bank some serious gains with companies like Yandex NV (NASDAQ:YNDX), which shot from a low of $10.57 on Sept. 25, 2015, to a high of $44.49 on Feb. 21, 2018. Or, on Mail.ru Group Ltd (LON:MAILRq), which jumped from $16.88 on Sept. 8, 2015, to a high of $38.05 by Feb. 27 of this year.
Both companies were under pressure, underloved, and unrecognized at the time… scraping the proverbial bottom of the barrel, in fact.
Fast forward to today.
I believe you've got the same opportunity with a very select group of stocks in one of the most unlikely places on earth… and for nearly the same reasons.
China…
The Red Dragon has every ingredient needed when it comes to building the kind of wealth most investors crave but very few will ever achieve.
Think about it.
China's almost universally hated for predatory trade practices, intellectual theft, and robbing otherwise vibrant countries of their job base. But it's also beloved in some circles for its drive to modernization.
I don't know which camp you fall into, and frankly, that's not my concern – so let's get that off the table. I don't have the luxury of taking sides in my capacity as Chief Investment Strategist for Money Morning.
My job is to help you make money by identifying compelling investment opportunities around the world, even when that means telling you things you may not like nor care to hear.
In fact, that's part of the allure.
Investors who follow the crowd are almost always led astray.
Think about what happened to everyone who piled into Internet stocks in the late 1990s, when the tech-heavy Nasdaq roared 285% in just three years. They got wiped out when the same index crumbled in March 2000 and ultimately lost 77% of its value over the next two years.
The situation was much the same in late 2007 when the stock markets were tapping new highs almost as fast as breathless headlines could report them. You know how that situation ended – the S&P 500 tumbled 57.05% from Oct. 31, 2007, to March 6, 2009.
Then there was 1939.
Millions of investors were selling everything they had, and, in many cases, locking in significant losses on the eve of WWII, as global markets tumbled. Yet, an unassuming man named John Templeton quietly began buying.
In what would ultimately go down as one of the single greatest financial moves ever made, he borrowed $10,000 and bought shares of every company trading on the NYSE for less than $1, including 37 that were already bankrupt. Just five years later, he sold 100 of the 104 he'd purchased at a profit, and, in doing so, made roughly five times his money.
Templeton would go on to refine his philosophy and make billions by investing at what he called "points of maximum pessimism." He created his own mutual fund in 1947, and investors who got on board had the opportunity to turn each $10,000 invested into more than $2 million.
Templeton, incidentally, died a billionaire and is rightly regarded as one of the greatest investors in history. Better even than "that guy from Omaha" – the brilliant Warren Buffett.
I think we've got the identical situation in China today, and especially when it comes to BAIT stocks.
You know about the FANGs – "F"acebook Inc. (Facebook Inc (NASDAQ:FB)), "A"pple Inc. (Apple Inc (NASDAQ:AAPL)), "N"etflix Inc. (Netflix Inc (NASDAQ:NFLX)), and "G"oogle (Alphabet (NASDAQ:GOOGL) I – because we've followed 'em for years. Lately, they're getting the crap kicked out of 'em, as U.S. markets come to terms with higher rates, the Saudis, midterms, a global trade war, and more. The VIX index – a commonly cited measure of volatility – is UP 83% this month alone.
But, you may not be familiar with the BAIT stocks – "B"aidu Inc. (Baidu Inc (NASDAQ:BIDU)), "A"libaba Group Holding Ltd. (Alibaba Group Holdings Ltd (NYSE:BABA)), "I"QIYI Inc. (iQIYI Inc (NASDAQ:IQ), and "T"encent Holdings Ltd. (Tencent Holdings Ltd ADR (OTC:TCEHY)).
I wish I could tell you I coined the term, but I'm not that brilliant. That honor goes to – I think – Albert Meyer at Bastiat Capital, whose research agrees with my own.
The "buy" logic is pretty simple:
- These are all great companies with solid growth that is at best only minimally impacted by trade war tariffs;
- They're generating a ton of cash; and,
- They're all down significantly from their all-time highs.
Baidu is China's de facto choice when it comes to search engines and enjoys a 69.54% market share, according to StatCounter. This is 4.32 times more than the second-place contender, Shenma, coming in at 16.1%. Core revenues are growing 14.67% year-over-year from 2014 to 2017, especially when it comes to advertising. Plus, the company is a leader in real-time simultaneous language translation, a direct challenge to its closest U.S. cousin, Google.
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Alibaba (NYSE:BABA)'s closest U.S.-listed equivalent is Amazon.com Inc (NASDAQ:AMZN). And, like its American cousin, Alibaba has a huge B2B and B2C e-commerce platform, extensive AI, payments, and more. I'm particularly attracted to the huge number of startup growth investments it's made in southeastern Asia, including Lazada, an e-commerce company based in Singapore that's expanding rapidly.
IQIYI is a recent Baidu spinoff, engaged in video streaming. It's up against very viable competition from Alibaba's Youku and Tencent Video, but there's a wrinkle you won't see in Western markets. The leaders are all cooperating to keep content production costs down, which tells me that Beijing wants a powerful, but distributed, leadership in this market. And, odds are, they'll get it.
Tencent is a harder to define because it's like getting Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), PayPal Holdings Inc (NASDAQ:PYPL), and Spotify Technology SA (NYSE:SPOT) in one company. But that's the beauty. Total revenue and profits have increased 201.22% and 143.29%, respectively, since 2014 – so I'm less concerned with the recent selloff than Wall Street is. The other thing to think about is that Facebook derives most of its revenue from advertising, which is a fickle model at best. Tencent counters that with the bulk of social media revenues coming from subscriptions.
In closing, I know China is controversial.
My email overflows every time I write about it or tackle the topic on stage during presentations when there are often more questions than answers.
Yet, that's the enigma.
China can't be stopped any more than a newly industrialized America could be back in the day. Or even now.
Which means that we've got to look at what's happening there differently if we want to bank the bucks that come with raw, unadulterated capitalism.
It'll be worth the mental gymnastics.
I promise.