With phase one of the trade deal between the U.S. and China signed, some investors can breathe a sigh of relief. A little more stability was restored in the global economy now that China has agreed to step up purchases from U.S. farmers and the U.S. halted plans for additional tariffs on Chinese products.
The deal doesn't signal an end to the tariffs and trade tensions that have been going on for more than a year now, but it is a step in the right direction and that bodes well for a host of Chinese stocks, including JD.com (JD 1.13%), Baidu (BIDU 0.72%), and Lenovo (LNVGY 3.01%). All three have been trading higher since the deal was inked. With hopes of more progress on trade talks in the ensuing months, the stocks are poised to appreciate even further. Here's why.
Image source: Getty Images.
1. JD.com to benefit from an improving economy in China
Both the U.S. and China have been losers in the trade war, but the Chinese economy is getting particularly hurt. That isn't good news for JD.com, one of the country's biggest eCommerce providers. With tariffs making it costlier to do business, the economy slowed down to a pace not seen in years. But with the U.S. and China making progress, that helps the Chinese economy, which means more business for JD.com.
Even during the trade war, the company has been able to post gains, with sales up 28.7% in the third quarter. For the fourth quarter, JD.com projected revenue growth of between 21% and 25% year over year. That growth may be better if there is less pressure on the Chinese economy and China's GDP increases in the second half of this year.
From a valuation perspective, shares may appear to be pricey. After a strong 2019, shares have been gaining in 2020, up 8% since the start of the year. Wall Street expects more upside this year with the average price target for JD.com stock standing at $40.85, implying the stock can increase an additional 11%. As it stands, shares are trading at 25 times earnings, although Wall Street expects earnings growth of 38% in the fiscal year.
2. Baidu's stock soars in 2020
After trading down for much of 2019 thanks to a slowing economy and trade war with the U.S., China's largest internet search company is gaining in 2020. A big reason for that growth in the early part of the new year has to do with phase one of the trade deal. After all, part of the reason Baidu has been struggling is the trade war. An easing of the trade tensions should serve to boost the economy in China which will bode well for Baidu's stock. Also helping Baidu's stock in 2020 is wins in the artificial intelligence market and progress with its efforts related to self-driving vehicles.
Shares of Baidu got a good boost on news of phase one of the trade deal but since then have slumped. Year-to-date, the stock is down 2%, which could present a buying opportunity. Wall Street has a $144.96 price target on shares, which implies Baidu's stock can appreciate nearly 11% in 2020.
3. Lenovo is optimistic now that phase one is inked
Chinese technology companies have been hit particularly hard in the 18-month trade war as tariffs made the cost of business more expensive. It also injected uncertainty into business and weighed on the economy in China. But that all changes now that progress has been made, which benefits Lenovo, the Chinese computer maker. Morgan Stanley analysts recently added Lenovo to a list of 29 stocks that will benefit from phase one of the deal.
"We believe IT/Internet-related and Transportation stocks will benefit the most from any de-escalation of trade tensions -- IT and Internet due to their exposure to tariff impacts and technology bans, while Transportation stocks, especially Airlines, should benefit from an improved global trade outlook and strengthened CNY/USD," Morgan Stanley analysts wrote.
Meanwhile, in a recent interview, Lenovo Chairman and CEO Yang Yuanqing said the signing of phase one of the trade deal is good news as the computer maker thinks it will bring "some certainty" to the relationship between the two countries and that he hopes improvements in the business climate will come as a result of the deal. "For 2020, we are full of expectations," he said. "After the uncertainty is removed, I believe our company and the entire business will be boosted and see a growing trend."
He's not the only one who is optimistic about the prospects for Lenovo. Wall Street has an average price target of $17.19 on shares of Lenovo, implying 21% growth this year.
