Companies that derive a significant portion of their sales from China have recently seen their stocks get hit. If China’s economic troubles ease—or at least stop getting worse—these stocks could be solid pickups.
China’s economy was supposed to get a boost when the nation ended its zero-Covid policy—and it did, but an all too brief one. Deflation is a reality, with the consumer price index down 0.3% year over year in July, unemployment among 16 to 24-year-olds so bad that the country will no longer release the data, and the real estate market in turmoil. The People’s Bank of China seems reluctant to do much more than the bare minimum, which risks a further slowdown. “Investors are waiting for signs that Beijing, facing mounting downside pressures on growth, will adopt significantly more forceful and effective stimulus policies,” writes 22V Research’s Michael Hirson. “The latest signals aren’t very encouraging, suggesting continuation of a conservative approach despite the risks that it is insufficient to address China’s current challenges.”
Calling China’s approach conservative might be an understatement. Its actions so far have been muted, with a tiny rate cut, from 3.55% to 3.45%, and the loosening of reserve requirements in the banking system, the primary actions taken to boost the economy. China might do more—Evercore ISI, for one, expects at least one more rate cut to juice the economy, something that would likely be a boon to sales and profits of companies exposed to the world’s second-largest economy—but just how much and when is up in the air.
In that messy environment, Evercore strategist Julian Emanuel recommends focusing on the stocks that get at least 20% of their sales from China, have underperformed the
S&P 500,
and have a relatively high level of short interest while lightening up on those that have outperformed and have few betting against them. Stocks in the former group include
Estée Lauder
(EL),
Albemarle
(ALB), and
Avery Dennison
(AVY), while companies in the latter group—and thus to be avoided—include
Tesla
(TSLA), and chip markers
Intel
(INTC), and
Advanced Micro Devices
(AMD).
“Within the context of our near-term market view, we are inclined to have more patience in buying the high Short Interest names, and less patience in trimming the low Short Interest names,” Emanuel writes.
Still,
Qualcomm
(QCOM) is looking interesting. Nearly two-thirds of its sales come from China, while short interest is in the forty-fourth percentile. While chip stocks
Nvidia
(NVDA) and AMD have gained 219% and 65% so far this year, Qualcomm shares are up just 2%.
China is a big reason for that underperformance. On its fiscal third-quarter earnings call, Qualcomm said that handset chips are down this year because of continued demand weakness in China, and analysts expected earnings and sales to fall 26% and 14%, respectively for the full year. But if Chinese demand firms up, Qualcomm stock could be set up for a rebound, especially if the shorts are forced to buy back their shares.
Write to Jacob Sonenshine at [email protected]
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