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Here’s todays rundown

• 2 minute case study on value vs. growth investing, using a live news story

• Tonnes of learning and financial literacy packed in

Let’s get into it!

Case study: Are Chinese Tech Stocks Value Plays Now? - Originally Posted by The Wall Street Journal

Key takeaways

• The article points out a major shift in Chinese tech stocks, like Alibaba and Tencent, from rapid growth to what’s now seen as value investment territory.

• These companies, once the epitome of growth stocks, are now attracting investors with their lower earnings multiples, increased dividends, and substantial cash reserves.

• For example, Alibaba now trades at 8.6 times forward earnings, a significant drop from its five-year average. However, the trade-off is slower growth and increased market uncertainty.

Earnings Multiples and Stock Valuation 

• Earnings multiples, like the one Alibaba is trading at, help investors assess whether a stock is overvalued or undervalued compared to its earnings.

• A lower multiple often indicates a potential undervaluation, making it an attractive pick for value investors.

• It’s essential to consider why the multiple is low – in this case, due to slower growth and regulatory concerns.

From Growth to Value: What This Means

• In investing, growth stocks are associated with companies expected to grow significantly faster than the market average, while value stocks are those that appear to be trading for less than their intrinsic or book value.

• The shift from growth to value in Chinese tech stocks reflects a change in investor expectations and market sentiment, impacted by regulatory changes and competitive pressures.

Risk, Reward, and Investor Strategy 

• The article suggests that the lower valuations of Chinese tech stocks might present a buying opportunity for those willing to accept the risks for potential rewards.

• This requires an investment strategy focused on long-term potential and risk assessment, considering factors like market volatility and the global economic environment.

Jargon Explained:

• Earnings Multiple: Often referred to as the price-to-earnings (P/E) ratio, this figure is calculated by dividing a company's stock price by its earnings per share. It gives investors an idea of what the market is willing to pay for a company’s earnings. The lower the number, the less expensive the stock is relative to its earnings.

• Value Investment: This is an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors look for stocks that they believe are undervalued by the market.

• Intrinsic Value: This is the perceived or calculated true value of a company or asset. It may or may not be the same as the current market value. In value investing, the goal is to find stocks trading for less than their intrinsic value.

• Dividends: These are payments made by a corporation to its shareholders, usually as a distribution of profits. When a company earns a profit, it can reinvest it in the business (called retained earnings) or distribute it to shareholders as a dividend.

• Cash Reserves: This refers to the money a company has saved up, often used for investment, as a buffer for financial challenges, or to return value to shareholders.

• Growth Stocks: These are stocks from companies that are expected to grow at an above-average rate compared to other companies in the market. They usually do not pay dividends, as most profits are reinvested back into the company for growth.

• Book Value: The net value of a company's assets, found by subtracting liabilities from the assets. This is often used in value investing to determine the potential true value of a company.

• Market Sentiment: This term describes the overall attitude of investors toward a particular security or financial market. It is the feeling or tone of a market or its crowd psychology, as revealed through the activity and price movement of the securities.

• Risk Tolerance: This is the degree of variability in investment returns that an investor is willing to withstand in their investment portfolio.

• Investment Horizon: The total length of time that an investor expects to hold a security or a portfolio.