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These Nasdaq Stocks Are Leading the Charge Thursday

By Dan Caplinger – Updated Oct 7, 2021 at 5:04PM

Key Points

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Many investors don't even realize they're in a key stock index.

Investors were upbeat about the prospects for stocks on Thursday, and the market roared higher to open the session. As of 10 a.m. EDT, the Nasdaq Composite (^IXIC -2.00%) was up more than 1%, continuing its upward momentum from a nice bounce the previous day.

It's natural for U.S. investors to think of the Nasdaq Composite and its more selective peer, the Nasdaq-100 Index, as being composed of American companies. Yet unlike some other indexes, the methodology for the Nasdaq-100 doesn't discriminate against overseas companies, merely looking at market capitalization. As a result, you'll find several Chinese stocks inside the Nasdaq-100, and it was those stocks that helped lead the way for the overall market on Thursday morning.

Big gains from China

Chinese stocks have seen their share of turbulence lately, but the sentiment among investors this morning was unquestionably positive. Shares of Chinese companies saw some of the biggest gains among Nasdaq-listed stocks. E-commerce company JD.com (JD 1.98%) was up more than 5% just after the open. Internet search giant Baidu (BIDU 0.35%) posted a gain of almost 4%, while Pinduoduo (PDD -1.01%) followed suit with a nearly 5% rise. Video game leader Netease (NTES -1.17%) was also sharply higher, gaining 4.5%, and the online travel website provider Trip.com (TCOM 1.25%) was up more than 2%.

Person looking at screen with stock prices and Chinese flag.

Image source: Getty Images.

Probably the biggest news out of China on Thursday, however, came from New York Stock Exchange-listed Chinese e-commerce giant Alibaba Group Holding (BABA 1.03%). Alibaba's stock gained almost 7% on word that Berkshire Hathaway vice-chair Charlie Munger had boosted the investment that his own company, Daily Journal (DJCO -0.36%), had made in the Chinese company by more than 80%. At this point, Alibaba now makes up roughly a fifth of Daily Journal's entire investment portfolio, marking a vote of confidence from Munger.

Is China a good value -- or a value trap?

Investing in China has always been somewhat challenging, but recently, the obstacles have grown even tougher. After decades of fostering growth in China's high-tech arena, government officials have recently done an about-face and have looked to impose new regulatory requirements and restrictions on successful businesses. Alibaba in particular has faced the brunt of animosity, with founder Jack Ma having made comments that didn't make the Chinese government particularly happy about his stance.

Trade tensions have hurt U.S.-China relations, and legislators in Washington have looked at measures that could have removed Chinese companies from U.S. stock exchanges like the Nasdaq. Concerns about potential delisting legislation led to dramatic declines in Chinese stock prices, arguably creating a value investing opportunity given the fact that legislation wouldn't have had any impact on the fundamentals of their underlying businesses.

However, Chinese government actions can and do have a fundamental impact on businesses within the nation, and that's why shares that look like a good value right now could prove to be a value trap if China continues along the course it has followed lately. It might not make much sense from an economic standpoint to hurt high-growth companies, but ideological factors could have greater weight among Chinese officials than financial ones.

For now, it's important for investors to understand that the Nasdaq includes a small but notable holding of Chinese stocks. That could be a positive if their growth continues, or a negative if something happens to hurt their prospects going forward.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baidu, Berkshire Hathaway (B shares), and JD.com. The Motley Fool recommends NetEase and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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