Bottom line: A spike in short-selling of China e-commerce stocks led by JD.com (NASDAQ:JD) and Alibaba (NYSE:BABA) is cyclical and unrelated to their longer-term prospects, and a bounce-back is likely by year-end.
It seems even a new partnership with global retailing giant Wal-Mart (NYSE:WMT) can't help sagging shares of JD.com, China's second largest e-commerce company, which has recently become flavor of the day among short sellers. That's the word coming from a new Bloomberg report which says short seller interest in JD's stock reached a record high in mid June, after already doubling over the previous month. This story isn't really new as I wrote about a similar short-selling boom for shares of JD rival Alibaba a couple of weeks ago also.
The bottom line is that stock categories go through this kind of cycle frequently, becoming investor favorites one day and then pariahs the next. It doesn't really say too much about the companies' actual prospects since these cycles typically occur over just a few months. By comparison, Alibaba, JD and other Chinese e-commerce firms look at business trends in terms of years.
I'll discuss the latest bearish sentiment and what it means for these companies' stocks shortly, but first let's review the actual news. In this case the news is actual stock prices, which have tanked in recent months for JD and Alibaba, as well as China's two other major listed e-commerce companies, Vipshop (NYSE:VIPS) and Dangdang (NYSE:DANG).
Vipshop has suffered the worst, with its shares losing half their value from a peak last November. JD isn't far behind, losing 38 percent of its value since the start of this year, while Dangdang is off 21 percent from an April peak. Alibaba is faring the best, down just 12 percent since late last year. But it's worth noting Alibaba's shares were battered from a scandal last year involving trafficking in pirated goods in its online marketplaces.
Bloomberg's report cites a number of reasons for the spike in JD short selling, and notes that former hedge fund fans of the stock including Tiger Management and Lone Pine Capital have been dumping their positions recently. The cited reasons aren't really anything new and are mostly centered on the fact that JD continues to lose big money even as its revenues grow. The company most recently made headlines last week when it announced it would buy Yihaodian, the online grocer that was Wal-Mart's main e-commerce presence in China (previous post).
Despite that piece of upbeat news, short selling interest in JD stock has surged to 50 million shares in mid June from 22 million at the end of April. Bloomberg reported a similar surge in short selling of Alibaba stock earlier this month, saying such interest had peaked at a record 124 million shares (previous post).
We'll close with a look at some fundamentals for these companies and my prediction of what the future holds. Of the four e-commerce companies I've mentioned, Dangdang trades at the highest price-to-earnings (NYSE:PE) multiple of 36, which is slightly ironic because it's the weakest performer of the group. Vipshop trades at a very realistic 24, while Alibaba looks like a bargain at 18. JD's PE is negative because it's still losing money, including a $141 million loss in its latest quarterly report.
In terms of price, Alibaba now trades just 10 percent above its IPO price from nearly a year ago, while JD trades at an even more paltry 6.5 percent above its IPO price. I personally think both stocks are a bit oversold at this point, even though each could face big challenges from China's rapidly slowing economy. But at the end of the day, JD is likely to turn profitable in the next couple of years and Alibaba will continue to take business from traditional retailers. That should provide plenty of positive news to fuel an eventual recovery in both companies' shares, with a bounce-back likely by year end.