There weren't any S&P 500 earnings reactions on Monday, but one of the largest Chinese stocks delivered a reaction that caught our attention.
China is printing fresh multi-year highs, and most investors couldn’t care less. U.S. megacaps continue to dominate the conversation while these stocks have been left for dead, dismissed as uninvestable.
But markets don’t stay hated forever... Cycles turn when nobody expects them to.
One of the biggest tells came Monday morning when PDD Holdings $PDD reported a double beat and rallied 0.9%.
Revenues topped forecasts by a sliver, while earnings per share beat by over 40%.
In other words, this wasn’t a miss or a disappointment - it was a clean double beat. Yet, the stock barely moved, finishing the day higher by less than 1%.
That kind of muted reaction is worth paying attention to. It was an incredible report, yet the stock barely budged. That kind of muted reaction tells us investors are still sleeping on PDD - and that’s when the biggest moves tend to begin.
When the fundamentals keep improving but the crowd still isn’t buying in, it usually sets the stage for much larger moves once sentiment turns.
The backdrop is shifting in their favor.
Look no further than the China Technology ETF $CQQQ:
This is where the story really comes together.
The Nasdaq 100 of China is decisively resolving a textbook multi-year bearish-to-bullish reversal pattern.
This is the kind of setup that marks the beginning of brand-new primary uptrends, the ones that often last years.
This is where serious capital goes when investors want exposure to Chinese tech. In bull markets, CQQQ becomes the vehicle of choice with its high-beta components.
Sitting near the top of the portfolio is PDD. This means that if the China Technology ETF continues to climb, there is a built-in tailwind for the largest holdings.
ETF flows push money straight into the stock, whether investors like it or not.
Right now, it's pretty clear that investors don't like PDD Holdings:
Take a look at the five biggest names in China.
These stocks are dirt cheap, and they make US megacaps look bloated by comparison.
For example, Microsoft $MSFT is trading for a forward earnings multiple of 28x, and the analyst consensus estimate is calling for them to grow earnings by 18% over the next year.
Meanwhile, Alibaba $BABA sells for 12x forward earnings, and it's expected to grow earnings by 19% over the next year.
In other words, you're getting the same amount of earnings growth for less than half the price. China has bargains that you won't find in the United States.
Despite growing faster than most of its peers, PDD is the only one of the top five Chinese stocks with a negative return over the past year, down 12% while BABA is up 50%.
That disconnect won’t last forever.
Attractive valuations don’t give us a buy signal on their own. We still need the technicals to confirm, but we expect this to happen soon.
Here's the setup for PDD:
PDD Holdings bottomed in early 2022, well before most Chinese stocks. Over the next 2 years, it rallied nearly 600% in a relentless uptrend.
Since then, it has been grinding sideways, carving out a textbook base-on-base pattern. Buyers are quietly soaking up overhead supply while the stock builds energy for its next leg higher.
We're looking for a breakout above 155 to confirm that a new leg higher is underway in PDD. A breakout would likely carry prices to fresh all-time highs.
The stock is cheap, hated, and ignored. But it’s also growing faster than most of its large-cap Chinese peers.
The crowd still thinks China is uninvestable. The market is telling a different story, and PDD is right at the center of it.
Ignore this at your own risk.
Thank you for reading
-The Beat Team
P.S. Don’t miss Jeff Macke and JC LIVE Tuesday at 1 p.m. ET.
They will cover earnings insights, M&A rumors, and a peek at the brand-new Macke 30 Index.
