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New economic data out of China on Wednesday shows the world’s second-largest economy is still struggling to bounce back from the pandemic. Until its government gets serious about announcing a consumption-driven stimulus plan, it could spell more bad news for U.S. companies that generate lots of sales in China, including three in the portfolio: Starbucks , Estee Lauder and Wynn Resorts . China’s GDP for the last three months of 2023 grew by 5.2%, according to China’s National Bureau of Statistics. That missed the 5.3% growth estimate in a Reuter’s poll . GDP growth for the full year was also 5.2%, which met the Chinese government’s expectations. Retail sales also missed, rising 7.4% for the fourth quarter, below the 8% target in the Reuters poll. The economic picture isn’t expected to brighten any time soon. GDP growth is forecasted to slow to 4.6% in 2024, Reuters reported. Meanwhile, youth unemployment remains stubbornly high, at 14.9% for people aged 16 to 24 years old, excluding college students. China’s central bank has tried to stimulate economic activity by cutting its lending benchmark loan prime rate a couple times in 2023 . But the latest disappointing economic data puts pressure on policymakers to act again to boost the economy. Things may have to first get worse before they get better. What does that mean for our three stocks that are very tied to China’s recovery? Not surprisingly, shares of Starbucks, Estee Lauder and Wynn Resorts fell Wednesday, by 1%, 2.6% and 3.5%, respectively. However, we are not day traders. The 2023 bounce back from Covid-19 restrictions did not go as expected, but we believe the stocks’ declines already reflect China headwinds and that the Chinese economy will regain its footing in time. We are also focused on the fundamentals of our holdings and ask ourselves: Has anything else changed significantly enough for us to cut bait here? Starbucks is a tough to own right now. The coffee giant is taking arrows from all sides , including the weaker Chinese consumer and additional competition there, protests in the U.S. accusing Starbucks of taking sides in the Middle East conflict and continued battles with its workers’ union. We recognize these headwinds could make it hard for Starbucks to deliver its quarterly results. Roughly 8% of total revenue comes from Mainland China, according to data from FactSet. That figure is expected to grow: Starbucks operates more than 6,200 locations in the country and is on track to meeting its goal of opening 9,000 stores by 2025. As Morgan Stanley recently put it in a note to clients: China concerns are likely to continue for now but are “fully priced in” the stock, and added that economic stimulus could be an “upside surprise.” We agree with this assessment on SBUX’s valuation. In the case of luxury cosmetics maker Estee Lauder, much has changed — and not for the better. It remains a problem child after posting three terrible quarters in a row, no doubt weighed down by weak travel retail in China, which represents about one third of the company’s revenue. But more discouragingly, management has failed to recognize how poorly the company is doing, as evidenced by the repeated cuts to its full year outlook. If the company can make the number and maintain its guide next quarter– a simple task for many companies– the stock could finally start to stabilize. The action in Wynn Resorts’ stock remains puzzling to us. The stock tends to get thrown out with other China-centric equities, yet Macao gaming has made significant strides in its recovery back to 2019 levels. We simply can’t sell this casino operator because once it’s clear the Chinese economy has stabilized, the stock is going to rally. It’s also trading at XX times forward earnings, well below its pre-pandemic PE of XX. It’s also the third-smallest position in our portfolio. We are starting to see positive signs: Recent strong gambling revenue in the Chinese territory of Macao, where Wynn has a luxury resort, was closing in on 2019 levels. Meanwhile, Wynn’s Las Vegas property continues to outperform, as shown in the company’s third quarter results — another reason we like the stock. (Jim Cramer’s Charitable Trust is long SBUX, EL, WYNN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
MEISHAN, CHINA – JANUARY 15: A textile worker works at the workshop of Sichuan Renshou Jin’e Textile Co., Ltd. on January 15, 2024 in Meishan, Sichuan Province of China. (Photo by Pan Jianyong/VCG via Getty Images)
Vcg | Visual China Group | Getty Images
New economic data out of China on Wednesday shows the world’s second-largest economy is still struggling to bounce back from the pandemic. Until its government gets serious about announcing a consumption-driven stimulus plan, it could spell more bad news for U.S. companies that generate lots of sales in China, including three in the portfolio: Starbucks, Estee Lauder and Wynn Resorts.
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