Even if you’re just a casual investor, chances are you know Michael Burry. He is the contrarian hedge fund manager made famous by The big short onethe Michael Lewis book-turned-film that captured the investors who saw the collapse of the financial system early on in 2008 and gambled accordingly.
At the time, Burry’s Scion Capital Management made $725 million for its investors by betting on mortgage-backed securities, and pocketed $100 million for itself.
The hedge fund manager has been closely followed by investors ever since, and while he doesn’t give interviews often, anyone can track his moves every quarter through Scion’s 13F filings with the SEC. Burry’s recent purchases show he’s squarely behind another contrarian bet.
The Scion Capital manager now has about 46% of his portfolio in a trio of Chinese technology stocks. Alibaba.com (NYSE: BABA) made up 21.3% of its portfolio at the end of the second quarter, followed by Baidu (NASDAQ: BIDU) at 12.4%, and JD.com (NASDAQ: JD) at 12.3%. Burry started buying these shares in the fourth quarter of 2022.
Despite the recent weeks, it is difficult to find a sector more unloved than China in recent years. As you can see in the graph below, the iShares MSCI China ETFa leading Chinese ETF, has performed poorly against the S&P500.
MCHI chart
The gains in recent weeks are tied to Beijing’s moves to ease interest rates and restrictions on lending, a sign that Burry’s patience could pay off.
He’s not alone. Billionaire fund manager David Tepper, who runs Appaloosa Management, has also been stocking up on Chinese stocks. Tepper’s main holding is also Alibaba, which represents 12.2% of his holdings, and the parent company of Pinduoduo PDD companies (NASDAQ:PDD) another 4.2%. He also owns Baidu, the Kraneshares CSI China ETF (NYSEMKT: KWEB)JD.com and KE Holdings (NYSE: BEKE)which together represent 6.6% of its portfolio.
In total, almost a quarter of Tepper’s holdings are Chinese stocks, and he first started buying the sector in the second quarter of 2022, starting with Alibaba.
Should You Follow These Top Investors to China? Let’s look at one reason to buy Chinese stocks and one reason not to.
Image source: Getty Images.
Many top investors seem to think that the US stock market, as represented by the S&P 500, is overvalued. Even Warren Buffett, one of the greatest proponents of US stocks in history, has been a net seller this year, piling into government bonds instead.
However, Chinese stocks are undeniably cheap. The iShares MSCI China ETF, which counts Tencent and Alibaba as the two largest holdings, trade at a price-to-earnings ratio of 11.6, compared to the iShares Core S&P 500 ETF valued at a price-earnings ratio of 29.4.
While investors have been snapping up AI stocks like Nvidiathe S&P 500 has become unusually expensive, causing investors like Burry and Tepper to look elsewhere for stronger returns. Based on that valuation differential, expectations for Chinese stocks are much lower, meaning even modest growth in the sector could lead it to outperform the S&P 500.
Many investors have been let down by Chinese stocks in recent years, and the conditions that led to their weak performance have not changed significantly.
While interest rates are falling and Beijing appears to be adopting a looser monetary policy, China’s economy is still weak and consumer spending is down, and it may take more than lower interest rates to change that.
At this point, it still seems unlikely that stocks like Alibaba and JD.com will return to their pre-pandemic growth rates, and the US ban on chip exports could also make it difficult for China to keep up US in the field of new technologies such as AI. . Meanwhile, the risk of a new crackdown on the sector, as we saw at the end of 2020 with the blocking of Ant Financial’s IPO, is very real.
While Chinese stocks may be cheap, there is still a lot of risk in the sector, even at a low valuation.
I think most Chinese stocks are best avoided until it is clear that the economy is on stronger footing. But there is one Chinese stock worth considering.
That’s PDD Holdings. The parent company of Pinduoduo and Temu consistently outperforms Alibaba and JD.com, despite the weak Chinese economy, and is still growing rapidly. Temu has also had success in international markets, creating a valuable new revenue stream.
That stock has been a winner lately, despite the slump in China, and is trading at a cheap valuation. It is the best choice to perform better in the industry.
Consider the following before purchasing shares in PDD Holdings:
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Baidu, JD.com, Nvidia, and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
Michael Burry bets the house on Chinese stocks and so does this billionaire investor. Should you follow them? was originally published by The Motley Fool
