The rise in Covid-19 cases in China has hit three of the club’s China-exposed shares this week – but the temporary setback won’t shake our confidence in the stock’s ability to move higher over the long term. The latest wave of Covid in China, fueled by a new variant known as XBB, is expected to peak at 65 million infections a week by the end of June, according to a top Chinese health adviser quoted in a local media report on Monday. The news weighed on Chinese markets, with the country’s benchmark stock index, the Shanghai Composite, falling 1.3% on Wednesday, erasing all of its gains this year. The resurgence in Covid cases comes just months after Beijing abandoned its zero-Covid policy, defined by three years of draconian blockades and other restrictions. Investor concerns spilled over into the club holdings that do the most business in China: Wynn Resorts (WYNN), Estee Lauder (EL) and Starbucks (SBUX). The latter two groups have seen their share prices fall more than 5% over the past five trading sessions, while Wynn has fallen nearly 8% over the same period. China is a growth market for everyone, and we’ve long predicted that the eagerly awaited reopening of the country’s economy would allow their businesses – and share prices – to flourish. And we still do. “I’m not backing down from any of those three,” Jim Cramer said Wednesday. “We have to wait for that,” he added. Jim also noted that any further pullback could provide a buying opportunity. China has seen solid economic growth since the beginning of the year. The country’s gross domestic product rose 4.5% year-on-year in the first quarter, beating market expectations. That ultimately bodes well for Estee Lauder, Starbucks and Wynn, even if growing consumer demand appeared somewhat uneven in the latest round of quarterly results. Starbucks reported impressive fiscal second-quarter results earlier this month, boosted by positive growth in China, for the first time in nearly two years, despite the coffee maker declining to raise its full-year outlook. CEO Laxman Narasimhan described the quarter as a “significant turning point” for Starbucks’ China operations. Casino operator Wynn also reported a better-than-expected March quarter in early May, driven by a recovery in China’s gaming hub Macau that allowed management to reinstate a quarterly dividend of 25 cents a share. The special administrative region finally flipped into positive territory on adjusted real estate earnings before interest, taxes, depreciation, amortization and restructuring or rental costs (EBITDAR) after many consecutive quarters of losses due to Beijing’s Covid restrictions. Estee Lauder reported a more mixed quarter, hurt by a slower-than-expected recovery in the prestige beauty company’s travel and retail sales in Asia. Management said the region’s post-Covid tourism retail recovery had proved “much more volatile” and “slower” than anticipated, but said it should only be a temporary headwind. The new wave of COVID-19 in China is raising further questions about how long it will take to reopen the country’s economy and when our club holdings doing business there will see sustained growth. There hasn’t been much talk about the latest spike in infections in China so far, but negative headlines in the coming days could bring in more sellers. While we recognize that this group’s next move may be down rather than up, we think the upcoming weakness could allow us to increase our positions. In the long term, there have been no structural changes in how our companies see doing business in the region. We like Starbucks for its global growth and its expansive plans to open stores every nine hours in China. Wynn is a great operator in Macau, which should see even more activity as group travel normalizes. The company wouldn’t have reinstated the dividend two weeks ago if it wasn’t confident about its future. And we expect Estee Lauder’s China business to recover as travel continues to pick up. We continue to hold Estee Lauder, Wynn and Starbucks for China presence. We remain bullish on the country’s growth trajectory and view this latest wave of Covid as a temporary blip. (Jim Cramer’s Charitable Trust is long WYNN, EL, SBUX. See the full list of stocks here.) As a CNBC Investing Club with Jim Cramer subscriber, you will receive a trade alert before Jim executes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in his charitable trust’s portfolio. If Jim was talking about stocks on CNBC TV, he waits 72 hours after the trade alert is issued before he executes the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO FIDUCIARY OBLIGATION SHALL EXIST OR CREATE BY YOUR ACCEPTANCE OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO PARTICULAR RESULT OR PROFIT IS GUARANTEED.
European nations are eyeing new travel requirements from China after Beijing lifted Covid restrictions.
Chinese Intelligence Service | Chinese Intelligence Service | Getty Images
The surge in Covid-19 cases in China has hit three of the club’s China-exposed shares this week – but the temporary setback won’t shake our confidence in the stock’s ability to move higher over the long term.
