After Slump In Chinese Equities, These Are Five Stocks You Should Consider For Your Portfolio

The Chinese equity market soared to record highs last year in June, but then quickly changed its trajectory and gave up most of its gains within a short span of time. It  has continued its downward journey this year too with the Shanghai Composite Index currently trading down over 16.43% year-to-date. Considering the slowdown in the Chinese economy, most analysts feel that this correction was necessary to bring Chinese stocks back to reasonable levels. However, a lot of them also are of the opinion that this sell-off has caused unnecessary damage to Chinese stocks with sound fundamentals. Since several Chinese stocks are now trading at a fraction of what they used to trade earlier, we thought it might be the right time to come up with a list of Chinese stocks which investors should consider buying at current levels. To compile the list, we scanned the portfolios of some 800 hedge funds we track and identified the Chinese stocks which ranked as the most popular among these funds at the end of last year.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Qunar Cayman Islands Ltd (NASDAQ:QUNR)

– Investors with Long Positions (as of December 31): 25

– Aggregate Value of Investors’ Holdings (as of December 31): $2.11 billion

Shares of Qunar Cayman Islands Ltd (NASDAQ:QUNR) saw spectacular 75% rise during the last quarter of 2015. During the same period, the ownership of the company among funds covered by us inched up by one and the aggregate value of their holdings more than doubled. Though Qunar Cayman Islands Ltd (NASDAQ:QUNR)’s stock is currently trading down by over 30% year-to-date, it is still 20% in green from the start of the fourth quarter of 2015. At the beginning of 2016, the company announced a major reshuffle in its top management, in which Zhenyu Chen, the former head of the company’s Mobile Business Group, was promoted as the CEO and Qiang Zhang, the former head of its Destination Services Business Group, was promoted as the COO. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), once the biggest rival of Qunar Cayman Islands and another Chinese stock that has made it to this list, acquired a 45% stake in Qunar from Baidu Inc (ADR) (NASDAQ:BIDU) at the end of last year in exchange for a 25% stake in Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP).

#4 Baidu Inc (ADR)(NASDAQ:BIDU)

– Investors with Long Positions (as of December 31): 55

– Aggregate Value of Investors’ Holdings (as of December 31): $4.19 billion

The unprecedented 58.4% rise that Baidu Inc (ADR)(NASDAQ:BIDU)’s stock saw during October and November, helped boost the company’s popularity among hedge funds during the fourth quarter. During the quarter, the number investors covered by us with long positions in Baidu Inc increased by three and the aggregate value of their holdings in the company rose by $787 million. Billionaire Ken Fisher‘s Fisher Asset Management was among the hedge funds which upped their stakes in the company during the fourth quarter; it increased its holding by 5% to slightly above 1 million shares. Shares of the Chinese search giant have recouped a large amount of the loss they suffered earlier this year and currently trade down only 3.6% year-to-date. According to recent reports, the company is currently in talks with US government to test its driverless cars in the country and plans to launch its first driverless cars in the Chinese market by 2018. On March 1, analysts at Oppenheimer reiterated their ‘Outperform’ rating on the stock, while upping their price target to $240 from $220, which represents a potential upside of nearly 30% from the stock’s current trading price.

#3 Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)

– Investors with Long Positions (as of December 31): 61

– Aggregate Value of Investors’ Holdings (as of December 31): $3 billion

The market leader in online travel services in China, Ctrip.com International, saw a notable  increase in its popularity among hedge fund during the fourth quarter with its ownership among investors covered by us increasing by 18 and the aggregate value of their holdings in it growing by $914 million. Lei Zhang‘s Hillhouse Capital Management doubled its stake in the company to nearly 7.5 million shares during that period. Taking into account the one-for-two reverse stock split in December, the stock is currently trading up by 37.8% from the start of the fourth quarter. On March 16, the company reported its fiscal 2015 fourth quarter results, declaring EPS of $0.11 on revenue of $440 million versus a per share loss of $0.11 on revenue of $308.37 million it had reported for the same quarter of the previous year. According to most analysts, despite a slowdown in the Chinese economy, China’s travel market is expected to grow at a phenomenal pace over the next few years and Ctrip.com International is better positioned than most of its peers to benefit from that growth.

#2 Alibaba Group Holding Ltd (NYSE:BABA)

– Investors with Long Positions (as of December 31): 77

– Aggregate Value of Investors’ Holdings (as of December 31): $6.74 billion

Although 2015 wasn’t a great year for Alibaba Group Holding Ltd (NYSE:BABA), it ended the fourth quarter on a positive note. During that period, its stock appreciated by 38%, its ownership among funds covered by us increased by 17 and the aggregate value of their holdings in it jumped by 78%. Jim Davidson, Dave Roux and Glenn Hutchins‘ Silver Lake Partners initiated a large stake in the company by purchasing 24.46 million shares during the fourth quarter and became its largest shareholder among the funds covered by us at the end of December. In the first few weeks of 2016, Alibaba Group Holding Ltd (NYSE:BABA) gave up almost all its fourth quarter gains, but it has recovered since then and now trades down by only 6% year-to-date. A lot of analysts feel that Alibaba Group Holding Ltd (NYSE:BABA)’s is undervalued, trading at a trailing P/E of 18.58, when one takes into account the phenomenal pace at which the company is growing. Earlier in March, the company announced that it has crossed 3 trillion RMB ($463 billion) GMV (Gross Merchandise Volume) mark for this fiscal year and is targeting $6 billion in GMV in 2020.

#1 JD.Com Inc (ADR) (NASDAQ:JD)

– Investors with Long Positions (as of December 31): 78

– Aggregate Value of Investors’ Holdings (as of December 31): $10.84 billion

JD.Com Inc (ADR) (NASDAQ:JD) was the most popular Chinese stock among the funds tracked by us going into 2016. During the fourth quarter, investors with long positions in the stock increased by seven and the aggregate value of their holding in it swelled by almost $1 billion. Though the company has lost almost 20% of its market capitalization so far this year and its shares have gone nowhere in the past two years,  analysts and investors remain confident about its long-term prospects. In January, the company announced that its internet finance arm has raised $1.01 billion from a consortium of investors including Sequoia Capital China. According to leading analysts, the internet finance arm of the company can give it a significant leverage over other Chinese e-commerce players in the times to come. On March 1, JD.Com Inc (ADR) (NASDAQ:JD) reported its fourth quarter earnings, beating analysts’ projections of a per share loss of $0.12 on revenue of $51.90 billion by declaring a per share loss of $0.07 on revenue of $54.60 billion. The stock currently sports an average rating of ‘Overweight’ and an average price target of $36.10 from the 32 prominent analysts and brokerages who cover it.

Disclosure: None