🗞️ Lighting Does Strike Twice in China

WHILE YOU POUR THE JOE… ☕️ 
You’ll Own Nothing and Be Happy

That’s what the World Economic Forum (WEF) leaders said not too long ago. Klaus Schwab openly declared that his ‘great reset’ after COVID-19 was the culmination of his life’s work to have you own nothing and ‘be happy.’ 🤢

Sure, letting go of a mortgage payment or not having to worry about making your car payment every month just for the privilege of driving would be nice, but giving that up also means giving up your freedom.

Yesterday, Federal Reserve Chairman Jerome Powell testified about the current state of the economy, with a particular focus on inflation and employment.

During this testimony, Senator Tim Scott confronted Powell by saying, “Biden broke this economy” with policies like student loan forgiveness that would add inflationary pressures to everyday Americans while bailing out those who had the means to access higher education.

To which Powell said nothing, quoting that inflation will be around for longer, making costs for Americans rise steadily, to where eventually (not his words) they’ll own nothing and be happy.

Some say this sort of socialism/communism only happens in China, but today, it seems California is more communist than China.

Speaking of China, let’s get on with today’s email 📧…

VALUE INVESTING
It’s Been Long Enough for Alibaba Investors

There is one thing that Wall Street forgets about China, and that is that the economy is far from dead. You may disagree with this statement (I would, too, if I were listening to mainstream media), but here are the facts ✅:

• After traveling to Asia last year, I noticed that the new Chinese generation is not only more tech savvy, but also more attuned to the habits of the wealthy, you see the opposite in the Western world

• Chinese inflation has been positive every month of 2024 consecutively, with last night’s reading showing monthly inflation rates of 0.2%. While not the expected 0.4%, it still shows the Chinese consumer is moving in the right direction.

• GDP is growing at 1.6% 📈(vs US’s 1.3%) with much - much - less inflation than its American counterpart

But, enough of economics, here’s the one trend that can silence all the China haters, at least for now…

The Chinese bond yield is now 2.3%, which is not only below the U.S. ten-year bond yield of 4.3% but also much lower than the stock market yield of 6.9% on average for the Hong Kong index and 5.5% for the Hang Seng Index.

Now, here’s why that matters. Bonds should typically always have a higher yield than stocks. After all, bonds are loans that don’t appreciate in value, so investors should have an extra safety net in predictable income.

So, when stocks turn so low that they have a higher yield over bonds, it means you should be buying stocks. As much as you can, every single day.

Why? Well, because that’s like saying you have an insurance policy on a house that’s appraised for $750k, yet you can buy that house for only $325k today; you don’t ask questions. You just buy the damn thing! 💰️

The last time the difference between the stock market yield and the bond yield was this wide was in 2008. To close the difference, stocks rallied by over 100% 🔥to bring investors an incredible run for those brave enough to buy Chinese stocks.

Of course, buying Chinese stocks comes with a risk, but not all of them are equal.

Alibaba Group (NYSE: BABA)

This stock has been flat for over two years, hovering between $70 and $90 without making any headway into its true valuation.

Because Alibaba is one of the largest - if not the largest - companies in China, led by Tencent Holdings (OTC: TCEHY), it will be among the first to deliver a rally for investors once the overall Chinese market turns around.

When is that? Well, judging by the way inflation has been going and the 8 consecutive months of Caixin Manufacturing PMI expansion 📈, it really can’t be that much longer.

** Quick Tip: Stock market activity has been proven to be 88% correlated to PMI readings, lagged by one year. So, where PMI goes, stocks will likely follow.

As hard as it is to believe, money isn’t infinitely going around the market today, and the Fed is ensuring that. So, to see money flowing into companies like Alibaba (which is considered second-tier), money will have to go out of other famous names like Nvidia Co. (NASDAQ: NVDA).

Speaking of Nvidia, check out our last post, where we explain why that stock may be a little too high today.

Now, even if it takes longer than one would want (it has been 2 years for me), the facts backing Alibaba are undeniable 🔎.

How much is it worth?

This is where my finance guys will get excited; yes, we’re running a discounted cash flow model (DCF).

And, for the non-finance audience, keep the following saying in mind:

All investments are the present value of future cash flow

Or how much I should pay today based on how much I expect a business to generate profits in the future.

So, here’s what we see for Alibaba (on a base case):

We kept the future growth relatively in line with the past, but we also made a few tweaks in our projections based on the following:

• A lot - and I mean a lot - of Alibaba’s businesses are still in that growth equity phase 📈, where they have just become profitable but haven’t seen puberty yet.

• Most of these business branches are experiencing compressed margins because of all the investment that has had to go into them to get them off the ground.

• This does not at all reflect how much the company is reinvesting into itself, about $25 billion 💵as of the latest buyback program.

So, keeping all of the things we can really get excited for out of our model, this is how much we think the stock is worth today:

Around $131 per share 🎯, which would jump to something like $150 if we changed our assumptions on the business growth, but where it really gets sexy is when we assume all of the $25 billion in buybacks.

** Quick Tip: Buybacks mean a company uses profits to buy back its stock. Taking out stock from the market not only gives you a greater ownership rate but it also pushes up the stock price

Plugging these benefits into our model, the valuation goes way up:

To just shy of $215 a share. With our base assumptions, this means the stock carries 72% upside 🔥from today’s price, and roughly 185% when plugging in the realities of what Alibaba could be.

Now are we high out of our minds, or are these valuations actually a thing?

We checked with other analysts, and this is what we got:

• Citigroup sees a valuation of $122, close to our base case

• HSBC sees a $135 valuation, again close to ours

You can relax now, we’re not delusionally bullish on China, at least today.

Looking at the daily chart, our price targets don’t look that crazy since the stock’s all-time high was made at $319.32 a share in 2020.

By the way, the stock jumped that high because the Fed was cutting rates in the U.S., pushing all stocks higher. Guess what? The Fed might be about to do it again this September 18, so get ready to party 🥳.

STOCK OF THE WEEK
If the Shoe Stock Fits

We might be going off the rail here, but hear me out.

Skechers (NYSE: SKX) is now making a new all-time high, or at least it did not too long ago. The point is that it took a dip recently 📉, and we are watching it, so seeing what attracted us to it is worth your while.

We are also watching shares of Nike (NYSE: NKE) as they recently took an even bigger dip. In fact, we bought some as well, and it’s all broken down in this post we sent out last week. However, we do think it’ll be a few months before Nike gets back on track.

On the other hand, Skechers could get us there much faster ⏰. Here’s why:

If you’ve been with us for a while, you already know what to look for in this table; if not, stick around.

Excluding Nike and arguably excluding Steve Madden, as it is an entirely different shoe fashion brand, Skechers made markets overpay for its stock.

Judging by the forward P/E (PE2 column), which is how much markets pay today for next year’s earnings, Skechers’ 14.5x multiple is a premium above Foot Locker’s 10.9x and Crocs’ 10.4x.

We wondered why markets are paying more for Skechers stock.

That’s a start. Record revenue, double-digit growth in everything that matters, and buybacks (see above for the importance of buybacks).

But wait there’s more

Gross margins and operating margins gave way to over 30% earnings per share jump 🔥? Now, that’s something to set some cash aside for, and it is definitely one of the reasons why markets are okay with paying a premium for this company.

Something didn’t add up, though… If the U.S. consumer is so tight on a budget due to inflation, as you saw with Senator Scott at the beginning, what drove Skechers’ success?

The company is betting the ranch on international markets 🌎️, which makes absolute sense as the Dollar remains strong and domestic consumption weakens, it means our European friends are having a big old party across the pond.

Yeah, checks out; it’s Europe and Asia that are bringing in the dough for Skechers. We feel good about the European consumer economy, and, well, now you have a good idea, too; we’re also bullish on Asia consumption today.

But how does Wall Street feel about this? Apart from bringing the stock to 90% of its 52-week high, a much better price action than peers, analysts had their own optimistic views to relay:

• Bank of America analysts just slapped a price target of $87 a share for Skechers stock, daring it to rally by 30% 🔥from today’s dip

• The Vanguard Group added to it in May 2024, so that’s something

• It also trades at 13.2x its past two-year free cash flow, a metric that also grew by 97.6% in the past five years

For reference, we like anything below 15.0x P/FCF unless it is a smaller company, so this fits like a glove.

Some other things we liked about the stock:

• Gross margins of 53% which are almost a dream in the retail sector

• 11.3% Return on invested capital (ROIC), again not that common in retail

• Only 27.7% of the company’s capital is debt, extremely flexible balance sheet allowing management to successfully pivot between markets

NOW GO AND MAKE IT HAPPEN
Understanding the Fed

For those history buffs out there, today’s book recommendation 📖will walk you through the Bretton Woods agreement and how that gave life to the Federal Reserve’s power.

You’ll hopefully be able to understand its role better not only in the economy but in your life as well since, well, you’re also dependent on money!

To your success,

G. 🥃