Seeking Alpha

China Clouds Recovery Rally, I'm Out Of Alibaba, And Swearing Off China Stocks For Real

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Includes: AAPL, ALGN, BA, BABA, BILL, BOX, DDOG, DKNG, DOCU, FB, GOOG, GOOGL, GSX, HAHA, HOG, LK, NEWR, NTNX, PENN, PLAN, SHOP, SMAR, SPLK, WORK
by: David H. Lerner
David H. Lerner
Short-term horizon, long-term horizon, momentum, Multiple Discipline
Summary

Market is shaking off the China news today. This week the Senate is moving against Chinese-listed public companies in the US. They are justified.

A great example is Luckin Coffee, a darling that allegedly misled about revenue in the 100s of millions. This is not a fluke. Chinese companies are exempt from US reporting standards.

China bans its companies from cooperating with US regulators. More sins, from Beijing, like what they are doing to Hong Kong, or the Uighers, or Tibet. It's a bipartisan issue.

Please keep trimming shares. At some point the Chinese thing will blow up. Right now it's the main dark cloud on the horizon.

I don’t like bearish articles, most of the time they are clickbait

Nothing sells like negativity. “If it bleeds it leads." I can only relate to what I'm doing myself. It's true that I stayed out of Chinese stocks as a rule, but I did trade Alibaba (BABA) extensively and dallied with Luckin Coffee (LK) though thankfully not during the news of alleged fraud. I just didn’t like the way LK was acting and Chinese stocks already had two strikes against. I admit that the way they all trade it’s very tempting. So my announcement about what I'm doing is the best warning I can give.

I also admit that I'm very US-centric in general. The US stock market is the most transparent and liquid in the world. That said there are more issues developing between the two most dynamic economies in the world than snakes on Medusa’s head. There are a few, and this is exhibit numero uno: Luckin Coffee (LK). It's alleged the CEO and CFO manufactured sales. Unfortunately, this is not an uncommon occurrence. Short sellers are calling GSX Techedu (GSX) an alleged scam with bots logged in as taking courses. Of course, this is what the short-sellers are saying, but the guy doing the accusation has a very good track record. On CNBC Carson Block of Muddy Waters said up to 90% of GSX users could be fake. Citron Research also has made similar claims as well. Now we have this crackdown on Hong Kong with sedition laws being enacted by the CCP. I already have talked about the Senate legislation and brought that to you last Sunday. It's still not to late to derisk Chinese stocks if that makes sense to you. The other piece is keeping US chips away from Huawei. Once China does this crackdown on Hong Kong, that could escalate the situation and lead to another trade issue, and talk of a cold war with China.

Step one - de-risk China equities, step two be careful about overall equities. Think about what companies' fortunes are tied up to China. Are they chip stocks and chips users? Could you consider letting go of Apple (AAPL) or Boeing (BA), or maybe AAPL and BA can muscle through? I'm not saying sell either of these, what I'm saying is think through your risk to China.

We had a bipartisan law passed by the Senate and will likely pass in the House were there's even more distrust and dislike of the Chinese Communist Party. The crackdown on Hong Kong will bring up old areas of friction like Tibet, and their treatment of the Dalai Lama, the Uheygirs in concentration camps, and their bullying of Taiwan. This exercise is really against China’s own interests, but for President Xi it's existential. We may see more sanctions, and for once the US could and should get the rest of the free world to push back. Likely the first threat is to pull back on Hong Kong’s trade privileges that are even more favorable that the Mainland. This will certainly find widespread support from the Democrats and even Trump and his brand of Republicanism.

The counter argument is that companies like Alibaba (BABA) are turning in world-leading performance and certainly can pass muster regarding CCP and Chinese Government ownership. That may be, but the headline news and the danger that it will become a company that trades on the pink sheets will hammer the stock.

Still with all that omen of dark clouds ahead the market is basically shrugging off all the negativity, and the indexes for the most part are taking it all in stride. If this was another time, why wouldn’t the Dow be down 1,000 points? Again, this is another data item that tell’s you that right now the market wants to go higher. This is great until it doesn’t. China is now my No. 1 catalyst for a market tumble. Still, I must listen to the message of the market, and that message is? You got, it: Higher!

I clipped this text from Axios. Alphabet (NASDAQ:GOOG) (GOOGL) wins Defense Department Cloud Services

“Google Cloud has landed a deal to help the Defense Department detect, protect against, and respond to cyber threats, Axios has learned. The deal, with the Defense Innovation Unit (DIU), is in the "seven figures," Google said, declining to be more specific.

Why it matters: It's a far cry from the controversial $10 billion JEDI deal, but Google hopes the win will lead to a broader deal down the road as the Pentagon seeks to securely work with multiple public cloud providers.

What they're saying: "Multi-cloud is the future," Google Cloud VP of public sector Mike Daniels told Axios, noting that most businesses use a mix of clouds, including Google, Amazon's AWS and Microsoft Azure. "This is now coming to the federal government as well."

For DIU, Google is helping the agency move to what's known as a "zero trust" environment in which devices are not allocated network resources based on their physical location, but rather granted access based on other factors, such as identity and behavior.

The big picture: The deal comes as Amazon (NASDAQ:AMZN) contests the Pentagon's award of the giant JEDI contract to Microsoft (NASDAQ:MSFT) last year.

Google dropped out of vying for that wide-ranging contract before bidding began in earnest, but has been stepping up its public-sector effort, for which it aims to triple staffing over the next few years.”

My Take: Why did I quote the above in its entirety from Axios? I wanted to point out that it really didn’t answer its own huge question. Saying that Google Cloud Services believes in the Multi-Cloud is not an answer. The implication is that the Defense Department believes in it too. They do they just have to have a reason to hire GCS. Here's my point, and it’s important for tech investors. GCS has the best AI/ML development and production environment in the world bar none. Better than Microsoft, better than AWS, better than the Chinese, better than IBM (NYSE:IBM) which is decades-old tech. The point is, if you want to say that Google is just about advertising, yeah maybe 18 months ago. But you’d be making a mistake with that thought now. Sure, advertising is the main revenue, but GCS is a major piece of Alphabet now, and I expect them to make acquisitions to round out their services, to expand beyond AI. If they believe in the multi-cloud, they should buy Nutanix (NTNX), or buy Splunk (SPLK), or NewRelic (NEWR) or Datadog (DDOG). My point is, Alphabet is not afraid of acquisition and they should do it now.

Great Mention in Barrons in one my Enterprise social network stocks -- Anaplan (PLAN)

Anaplan reports April quarter earnings next Tuesday. Materne says the company will reduce its January 2021 fiscal year revenue and billings guidance to reflect the impact of the pandemic. But the analyst also says Anaplan’s software will likely be in greater demand coming away from the crisis, because of “ the need to make faster business decisions given the economic uncertainty.”

My Take: I think that with everyone working from home a enterprise planning tool that has networking and sharing as a first principle is a trend that's happening now. I call it the socialization of the enterprise. Other names in this space is Slack (WORK), Smartsheets (SMAR), Box(BOX), and there are others. Look for names that offer enterprise functionality and collaboration. Names like Docusign (DOCU), and Bill.com (BILL) are also about collaboration but I see them more for small biz. Probably I'm wrong since these probably work for anyone remote.

Facebook (FB) joins with Shopify (SHOP)

Quote from article in the The Information:

"Facebook is making its strongest push yet into e-commerce with a slew of features to help businesses facilitate purchases across its apps.

The company introduced a new hub for businesses to list their goods called Facebook Shops on both the main Facebook app and Instagram."

My take: They buried the lead... the title didn't even mention the real news… only in the third paragraph do they give you this nugget: FB is partnering with Shopify and big commerce to let businesses manage their inventory and fulfillment," FB is doing what it does best, and they leave competing with Amazon up to SHOP. I have said this several hundred points ago, SHOP is the next FAANG name. It will become a big cap, that plays nice with small businesses. They are nice because they are from Canada...

Insider Corner

5/13/2020 Penn National Gaming (PENN) Jane Scaccetti Director Buys $49,986.00 in shares and Jay A Snowden CEO Buys $499,986.00

My take: PENN is reopening their venues. A lot of other casinos are opening. I think PENN has the added the “Bar Stool Sports” sports betting app play, and that might be interesting. I am still on board with Draft Kings (DKNG). If you know the space, you might do very well with casino stocks. If you want to play the sports gambling, I own DKNG.

5/8/2020 Harley Davidson (HOG) Jochen Zeitz Chairman Buys $2,080,291.00

My take: first buy of a HOG insider in years. This also tells me that the leisure craft businesses like boats and motor homes makes a lot of sense. People are not traveling overseas for a while. Stay in the states maybe not staying at a hotel. It has the same impulse from the PENN insider, people want to get out of the house!

Analyst Corner

Align Technology (ALGN) Stifel Nicolaus Boost Price Target Buy $230.00 ➝ $275.00 16.5% Upside

My take: I believe in the idea that elective medical and dental will see a lot of backlog work. People who go on Zoom have to notice they have snaggle teeth and need some work. Just like there is all this talk about seeing hair roots, you have noticed people’s teeth, you are just too polite to talk about it. Well, you’re welcome. You see something out of place and ask yourself what do I have that needs some help. Look Align was a $300 stock, there is plenty of upside.

My trades: I own Nutanix (NTNX), and NewRelic (NEWR), I would have bought Data Dog as well. I still own BILL but it has not treated me well. I own ALGN, and want to own more. As I said before I own Draft King (DKNG) in a call spread, so I don’t mind a little weakness on DKNG right now.

Please keep trimming shares. At some point the Chinese thing will blow up. Right now it is the main dark cloud on the horizon

Disclosure: I am/we are long NTNX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: NewRelic (NEWR), Bill.com (BILL) ALGN, Draft King (DKNG)

The information contained in this writing should not be construed as financial or investment advice on any subject matter. I am telling you what I am doing, not what you should do. Before you trade or invest educate yourself thoroughly on the company and stock you are trading or investing in.