Buy This, Not That: Which Is Hotter… BABA or BIDU?

Shah Gilani|October 2, 2024

There’s a new hot market in town…

Chinese stocks.

Now that the government will do its very best to juice its downtrodden economy…

Companies like Alibaba (the Amazon of China) and Baidu (the Google of China) have just launched skyward.

But my money’s on just one to continue their rocket ride.

Find out which one in my latest Buy This, Not That episode.

Click here or on the thumbnail below to dive in.

TRANSCRIPT

Hey, everybody. Shah Gilani with your weekly BTNT, as in Buy This, Not That.

Now, last week was an insane week for Chinese equities. It absolutely just blew everything apart like a rocket leaving the launch pad.

Chinese stocks took off, and for good reasons. The government is stimulating the economy. They cut mortgage rates. They cut reserves for banks – the cash that banks have to hold.

But they also did a couple of things for the stock market. And the reason that they’re doing it is the economy has been in the doldrums. While we’re worried about inflation, they’re worried about deflation.

They’re worried about the economy slowing so much that they see some deflation, and they don’t want to see prices come down too much because that puts off buying. Because people think if prices are going to be lower next week, next month, in six months, then they put off purchases and that slows the economy even further. So they want to make sure that they grow the economy, which has been languishing.

This is not unlike what the Federal Reserve tried to do and did successfully here – creating something of a wealth effect. So if you own real estate in China – and most of people’s personal wealth in China is in real estate holdings – the real estate market has been just abysmal. It’s been horrible. So a lot of people are underwater on their real estate, so their net worth sinking right before their eyes.

If a government can create a rally in stocks, which a lot of Chinese own, they can stimulate a wealth effect where people are actually feeling wealthier because they’re getting wealthier because their stocks are appreciating.

It’s a brilliant move and certainly a good way to stimulate buying, to stimulate consumption. It worked here. That’s the real reason that stocks were targeted.

Now, there were two things that the government did to target stocks.

First, they provided a $70 billion-plus swaps program for brokers, stock brokerages, funds – including mutual funds – and insurers to be able to swap some assets, to get more cash, to buy more stocks, to bid up the prices of stocks. This is obviously stimulative if you’re trying to bid up the price of stocks, and you’re providing money, providing leverage for institutions to do that. And they’re going to do it because they’re not going spend it elsewhere… because the government will come down pretty hard on them.

That’s what they want them to do. Buy more stocks, bid up the stocks, create this wealth effect.

And second – although not quite as big a package – they did the same thing with buybacks. They will help fund stock repurchase programs for listed companies.

They’re going to provide cheap financing to companies to buy their own shares. Again, that puts a bid under a lot of these stocks.

So the markets just absolutely soared.

Last week, Chinese stocks were up 16% on the CSI 300. That’s the blue chip index. That was the best one-week performance in 26 years, since 1998.

There’s another measure that was up about 8%. Yes, different benchmarks were up different measures, but the bottom line is stocks exploded.

So Buy This, Not That this week is about two Chinese stocks, two of the biggest Chinese names that you guys asked me about.

Should you buy Baidu (BIDU), which is essentially the Chinese Google, or should you buy Alibaba (BABA)?

Alibaba is essentially China’s Amazon… so do you buy the Amazon or Google of China?

And the answer is, you buy the Amazon of China. You buy Alibaba.

Now, Alibaba had a great pop. Let’s get a quick look at the chart here.

There’s several reasons I like Alibaba over Baidu. No. 1 is I just like the business model better… just as I like Amazon better than Google because search has its limitations.

We know where Google makes its money and where Baidu makes its money.

But as far as Alibaba, as far as Amazon, they have broader ecommerce channels through which they make money, including cloud, delivery services. All the things that Amazon does Alibaba does.

So I like Alibaba better.

But on a technical basis, here’s this huge pop. Now, given the fact that we’re talking about a base over here because the stock had rounded here, as you can see, what I really like about the move is the stock was heading higher. It had formed a really nice base.

Even without the pop, the stock is still something worth considering because it’s gotten above the 200-day. The 50-day had crossed above the 200-day. That’s very bullish stuff here. The stock was looking really good.

So this move to the highs here to yesterday was about a 37% move. Now that’s a big move.

But this – if you look further – is what I want you to concentrate on. This is why I would choose Alibaba over Baidu… because the stock was already performing. Where can it go? We can look on a three-year basis and we can say it’s got some room to go. That’s probably around 65%.

If you get in now – and very few of us caught that move right before it happened and participated in that roughly 37% pop in Alibaba – there’s more to go. Why? Because I think Chinese are going to look at what the government is doing, and it’s going to feel like the 2014, 2015 pop the Chinese equities had.

They were up 100% in six months, and that was driven by – I’m going to call it what it was – illegal margin lending. So there was tremendous speculation given cheap margin that wasn’t really through the proper channels. This time, the leverage for margin purchases is being provided by the government.

So if Chinese look at this as a 2014, 2015 scenario where stocks could double in six months, then there’s plenty of room to go for Alibaba.

I like Alibaba better, particularly because of this chart. So you got a lot of room to go up here, but this initial move that we saw last week really was excellent because the stock was already starting to perform.

Baidu looks like this on a one-year basis.

And the reason I wouldn’t be looking at Baidu even prior to the pop is the stock just looks terrible. The 50-day is way below the 200-day here on a one-year chart, and, yes, it’s not even getting close to turning around and having that positive golden cross where the 50-day crosses above the 200-day. We’re a long way away from that.

Yes, it’s had a nice move. It’s about a 29% pop off of its medium range right down here to the highs yesterday.

That’s not as much as Alibaba popped. I think Baidu is going to have a harder time getting a little more momentum, whereas I think Alibaba is going to pick up momentum.

And again, based on its business model, and if the Chinese government’s going to continue to try to stimulate, it can stimulate consumption, and that really benefits Alibaba, the Amazon of China, more than it will Baidu, the Google of China.

So in terms of Buy This, Not That, Baidu is a Not.

I’ll catch you guys next week. Cheers.