In a bold move that has caught the attention of investors worldwide, billionaire hedge fund manager Michael Burry, known for his prescient call on the 2008 housing crisis, has made Alibaba Group (NYSE: BABA) the largest holding in his portfolio. This strategic investment in the Chinese e-commerce giant comes at a time when the country’s stock market has experienced a significant downturn, dropping to five-year lows.
Burry’s decision to double down on Alibaba shares isn’t an isolated one. Legendary investor Ray Dalio, the founder of Bridgewater Associates, has also been actively buying into Chinese stocks through the iShares MSCI China ETF (NASDAQ: MCHI). These moves by two high-profile investors have sparked speculation about the underlying reasons behind their conviction in Chinese equities.
Understanding Burry’s Rationale: Growth, Cycles, and Undervaluation
Michael Burry’s investment philosophy centers around identifying growth opportunities in undervalued assets that have fallen out of favor with the broader market. His decision to make Alibaba his fund’s biggest position seems to be guided by this principle.
Over the past twelve months, the Technology Select Sector SPDR Fund (NSYEARCA: XLK) has outperformed the S&P 500 by a staggering 21%. In contrast, Alibaba’s stock has lagged behind technology stocks by a whopping 60%. This widening performance gap has created an attractive entry point for savvy investors like Burry, who recognize the cyclical nature of markets and the potential for undervalued stocks to eventually catch up.
One of the key factors driving Burry’s interest in Alibaba is the company’s ability to generate substantial cash flow, which is often reinvested into other businesses and equities. Despite reporting a 77% contraction in net income over the past year, Alibaba’s true earning power may have been understated due to a significant impairment charge of roughly $7.4 billion.
Burry, renowned for his analytical prowess, likely recognized that such charges are often added back to a company’s figures to reflect its underlying performance. This insight may have led him to conclude that Alibaba’s stock is currently undervalued, presenting an opportunity for long-term growth.
Seeking Growth in a Challenging Environment
The decision by Burry and Dalio to invest in Chinese equities during a market downturn highlights their shared belief in the potential for growth in the region. As seasoned investors, they understand that capital tends to gravitate towards areas where growth prospects are most promising.
During the peak months of the COVID-19 pandemic, when the S&P 500 paid out a dividend yield of 2.5% (its highest since 2008) while the U.S. ten-year bond yields stood at a dismal 0.5%, investors shifted their focus towards stocks, which offered higher returns compared to bonds. This same scenario is now unfolding in China, where the CSI 300 (the country’s equivalent of the S&P 500) is yielding up to 5.5% amid a five-year low in prices, while bonds are hovering around 2.5%.
Faced with this disparity in yields, Burry and Dalio have recognized an opportunity to allocate capital to the best-performing companies in China, where stocks are outperforming bonds by a significant margin. Their investments in Alibaba and the broader Chinese market reflect a belief that money will eventually flow towards undervalued assets with strong growth potential.
Alibaba’s Competitive Advantages and Valuation
Burry’s decision to focus primarily on Alibaba, with a smaller position in JD.com (NASDAQ: JD), underscores his confidence in the former’s competitive advantages and valuation. Despite underperforming the technology sector, Alibaba trades at a more favorable level of 71% of its 52-week high price, compared to JD.com’s 45%.
This outperformance can be attributed to Alibaba’s status as a conglomerate in China, which allows the company to benefit from its diverse business holdings and investments. During the recent market downturn, when many Chinese companies suffered losses, Alibaba’s balance sheet was not immune. However, the impairment charge mentioned earlier may have obscured the company’s true earning potential, leading seasoned analysts like Burry to conclude that Alibaba is currently undervalued.
Further evidence of Alibaba’s attractiveness can be found in its valuation compared to JD.com. While JD.com trades at a 0.77x multiple on a price-to-book basis (a discount to its book value), Alibaba is valued at a more favorable 1.2x P/B. This higher valuation suggests that investors are willing to pay a premium for Alibaba’s shares, likely due to its competitive advantages and growth prospects.
Wall Street analysts have also taken note of Alibaba’s potential, setting a $115.4 per share price target for the stock, implying a 54.1% rally from current levels. This optimistic outlook reinforces the belief that the market has recognized Alibaba’s strengths and potential for future gains.
Navigating Turbulent Waters: Burry and Dalio’s Contrarian Bets
Michael Burry and Ray Dalio’s contrarian investments in Chinese equities during a market downturn are bold moves that highlight their ability to navigate turbulent waters. By going against the grain and investing in undervalued assets with strong long-term growth prospects, these investors have demonstrated their commitment to identifying opportunities where others see risk.
Alibaba’s current valuation, competitive advantages, and potential for future growth have made it an attractive target for Burry and Dalio. As the Chinese market continues to evolve, their investments will be closely watched by the investment community, with many eager to see if their contrarian bets will pay off.
In the world of investing, where opportunities often arise in unexpected places, the actions of these seasoned investors serve as a reminder that identifying undervalued assets with strong fundamentals can lead to significant returns. As the market cycles continue to turn, the strategic investments made by Burry and Dalio in Alibaba and the broader Chinese market may prove to be a masterclass in contrarian investing.
