We’re in one of the most overvalued markets in history.
In fact, the market we’re in today is more overvalued than it was at the peaks leading to the crashes of 1929, 2000, and 2008…
In such a market, the upside is extremely limited and the downside, unfortunately, is massive.
It seems that the predominant belief right now is that as long as the economy is doing well, prices and fundamentals simply don’t matter. And as the herd continues to flood into S&P 500 ETFs and index funds, the situation becomes more and more dangerous because the growth in the stock market isn’t based on anything sustainable.
It’s natural to want to project the success of the U.S. markets in the past 8 years into the future, and even to say that this is a “new normal,” but the reality is that all trends reverse and when this one does, it will be incredibly painful as the greed that’s fueling today’s market turns to fear overnight.
So what’s there to do?
I took some inspiration this week from Sven Carlin over at Investiv Daily. In his opinion, which I think is right, with the U.S. markets at all-time highs, the best place to look for opportunity now is in emerging markets as that’s where the world’s growth is.
For the past 10 years, emerging markets haven’t gotten much love from investors despite the fact that emerging economies have grown twice as fast in the last decade as the U.S. economy, and compared to the S&P 500, emerging markets are undervalued.
China is a great example. In 2016, the Chinese economy grew at 6.7% while the U.S. economy grew by only 1.6%. But the Chinese stock market is valued at a PE ratio of 7.2 compared to the U.S. at 21.8, and the Chinese price to book value is below 1, while the U.S. is around 3.
If that isn’t telling, I don’t know what is.
Sven, in his article linked to above, also said that the best way to take advantage of the undervalued growth in emerging markets isn’t to buy an ETF, but rather to invest in individual stocks.
So in doing some digging this week, I found a rather interesting opportunity in China.
The company is Autohome, Inc. (NYSE: ATHM), an internet services company that you can think of as the Chinese equivalent to Cars.com or AutoTrader in the U.S.
Autohome is the leading automotive portal in China. Through its two websites—autohome.com.cn (new cars), and che168.com (used cars)—Chinese car dealers list their cars on the site as a digital showroom, and can pay a fee for priority listings and other advertising services.
The company’s websites attract 25 million unique visitors per day. 8 million of those 25 million are visitors to their car forums, which is the largest and most active online community of car consumers in China accounting for 81% of all traffic on Chinese car forums.
Their advertising services include targeted display ads based on user location and automotive preference, as well as offline test driving events on behalf of car manufacturers.
Autohome was founded in 2004 and had its IPO in December of 2013. Last June, Australian telecom company Telstra sold its controlling stake of the company to Ping An Insurance, one of the biggest insurance companies in China.
When Telstra sold its stake to Ping An, Autohome’s founding management resigned causing ATHM’s stock price to drop. But I think the change in management will ultimately be a very good thing.
Autohome’s pervious management had decided to expand their model by taking on inventory and selling cars directly to customers. The problem with this is that Autohome as an actual car dealer didn’t have competitive advantage and they put themselves in direct competition with their dealer customers which would ultimately lead to ATHM’s online marketplaces losing ground.
The new management, however, has shut this program down and is refocusing on its online assets instead, and is increasing investments into big data analytics and enhancing the content experience for both their users and dealers.
This is especially encouraging to me for two reasons.
The first is that car ownership in China has tremendous room for growth. In 2015, there were only around 200 vehicles per 1,000 people in China which is far below the U.S. at 820 per every 1,000, and Europe at 498 per 1,000. As wages in China continue to rise to catch up with developed nations, car ownership should rise right along with it, and therefore, more users will turn online to look for cars. This is very good news for Autohome as the biggest automotive portal in China as it will mean a continued rise in users, and more dealers listing more cars and paying for more advertising.
This brings us to the second reason: advertising. China is the second biggest advertising market on the planet, and advertisers are rapidly shifting to online and mobile advertising and away from more traditional media. Autohome is well positioned for this shift, and with refocusing its efforts to its online business, it will be more attractive to digital advertisers.
While it’s unlikely Autohome will join the current leaders in online advertising in China—the behemoths of Baidu, Alibaba, and Tencent (or BAT for short), which collectively capture 37% of online advertising spending—Autohome can dominate its niche market, which will be very good for their bottom line.
Now that we know a bit about Autohome’s business and history, let’s take a quick look at the fundamentals.
According to Morningstar, ATHM’s earnings per share (EPS) over the last twelve months is 9.85 CNY, or about $1.38 USD. That gives us a P/E ratio of 24 (stock price divided by EPS, or 33.38 divided by 1.38), which isn’t much cheaper than the S&P 500. However, ATHM’s revenue has grown at an incredible rate from 253 M CNY in 2010 to 5,028 M CNY last year, and earnings per share have grown from 1.31 CNY in 2011 to 9.85 CNY over the trailing twelve months.
That’s a 651% earnings growth over the last 5 years. At a price of $33.38 per share (as of this writing on Friday), the stock is incredibly cheap for that kind of growth.
Let’s now look at the technical picture as there’s something really interesting going on on ATHM’s chart.
The annotations I’ve added to the chart above represent an inverse head and shoulders bottom reversal. This is a pattern to look for in technical analysis because it marks a bottom and a reversal of a downtrend.
You can identify this pattern by looking for the price falling to a trough (shoulder) and then rising, then falling below the former trough (head) before rising again, and finally, the price falls again though not as far as the second trough (or head) creating a second shoulder. Once the final trough forms, the price rises upward toward the resistance line created by the tops of the previous troughs. When the price breaks above this resistance line, also called the neckline in this pattern, the new uptrend is confirmed.
To get a minimum price target for this new uptrend, measure the distance between the bottom of the head and the neckline and then add that number to the price starting above the neckline. In the case of ATHM, this gives us a minimum price target of $40, or a minimum 19% upside from where the price is today (Friday) at $33.38.
I say minimum target because this pattern often leads to a complete reversal of a downtrend and beginning of a new long-term uptrend, which is what I suspect is happening here.
Between the fundamental and technical pictures, not to forget that it’s also growing like crazy in one of the fastest growing countries on the planet, ATHM feels like a home run to me.
As always, do your due diligence before jumping in and really dig in to the fundamental side.
Autohome is a great example of how in the search for returns, when the tide turns for the U.S. economy as it always does, you won’t want to be sitting on expensive U.S. growth stocks when you can find the same kind of growth on the cheap in emerging markets.