Michael Burry likes Alibaba stock, here’s why

Feeling the pulse of the market can sometimes be an impossible task. However, some things never change in how traders and portfolio managers choose where to allocate their capital, and that has everything to do with cycles. For reasons you’ll soon learn, China’s stock market may be where these investment dollars soon end up.

If anything remains true it’s that big stocks that fall out of favor but still offer a bullish scenario for investors will eventually catch up, so here’s the central question you need to answer: why does the SPDR Technology Select Sector Fund NSYEARCH: XLK has outperformed the S&P 500 by 21.0% over the trailing twelve months, while Alibaba Group NYSE: CHILD over the same period, technology stocks underperformed by more than 60.0%.

The widening performance gap has become attractive enough to push big investors like Michael Burry (yes, the guy who called the 2008 financial crisis) to start investing in stocks, not just buying them but making them the largest position in his entire fund . He’s not alone, as Ray Dalio also saw the writing on the wall in his purchase of the larger company iShares MSCI China ETF NASDAQ:MCHIbut we’ll talk about that later.

So what’s really going on?

Money moves to seek one thing and one thing only: growth. So how do the big guys look for growth in the entire stock market? Plain and simple, they attempt to price money through bond yields and compare that return to the returns found in broader stock indexes.

Take a look at what happened during the peak months of the COVID-19 pandemic, when the S&P 500 paid a 2.5% dividend yield (its highest since 2008) while U.S. 10-year bond yields plummeted. stood at a dismal 0.5%.

So, if stocks pay you a lot more than bonds, wouldn’t it make sense to move your money into better stocks and away from worthless bonds? Because that’s exactly what happened there.

Now, you can see the same scenario forming on the other side of the world in the Chinese economy, where the CSI 300 (their version of the S&P) is paying up to 5.5% in yield after hitting a new five-year low price. . Bonds? Well, these are around 2.5%.

Once again, the question remains. If stocks offer you a much more attractive return than bonds, wouldn’t you expect the money to move to the nation’s top names? Because that’s mostly what Ray Dalio started doing, and now Michael Burry has joined him with a $5.8 million long position.

Of all the notable mentions in the nation, why Burry decided to purchase Alibaba as his primary choice, with only a secondary – and more minor – position in JD.com NASDAQ:JD? To answer this question, you may have to do a little digging, which MarketBeat has already done to save you time.

How to choose them

Despite the tech sector’s underperformance, Alibaba has much better momentum than JD.com, considering it trades at 71.0% of its 52-week high prices versus JD.com at 45.0% of its highs of 52 weeks.

There’s a reason for this outperformance, of course, the same one that kept the stock from plummeting despite reporting a net income contraction of 77.0% over the past year; here’s what happened. Since it is a conglomerate in China, Alibaba’s huge cash flow is often invested in other businesses and stocks as well.

In 2023, when the Chinese stock market hit a five-year low, who didn’t suffer a loss by investing in the country’s assets? Alibaba’s balance sheet was not immune to this, as it reported a write-down of approximately $7.4 billion during the quarter, severely underestimating the company’s true earnings power.

Professional analysts like Burry know that these allegations are often “added” to company numbers to reflect what happened, which likely led to the conclusion that Alibaba shares are undervalued today.

Knowing what you know now, it shouldn’t be surprising to learn that Wall Street analysts have a per-share price target of $115.4 per share, predicting a 54.1% rally from today’s prices. Markets have provided further evidence as to why they are willing to pay a higher valuation for Alibaba than JD.com.

JD.com shares trade at a multiple of 0.77x based on book price, a discount to its book value. In contrast, Alibaba shares are valued at 1.2x P/B; keep in mind that “It has to be expensive for a reason.”

What that reason is, well, now you have a much better idea and can probably start to understand why Burry and Dalio found these offers attractive.

Before considering Alibaba Group, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Alibaba Group wasn’t on the list.

While Alibaba Group currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here