Recently a number of reports emerged, including a Jan. 5 article in Barron’s magazine, that Charlie Munger has “doubled down” into shares of Alibaba Group Holding (NYSE:BABA). In the past, I have written why BABA stock looks cheap. But I wanted to write about why he might see Alibaba as a worthwhile investment to buy more shares.
Charlie Munger is 98 years old and is the Vice Chairman of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). He has worked with Warren Buffett for a long time.
But Munger also runs his own public company, Daily Journal Corporation (NASDAQ:DJCO). Munger has been buying more BABA shares for the securities portfolio of DJCO.
The Stock Has Been Falling
People love it when they can identify a particular stock that either Buffett or Munger seems to focus on, especially when they increase their position. That is what is going on with BABA stock, especially since it has been falling.
For example, in the past three months, Alibaba basically peaked in late Oct. 2020 and has been sliding ever since then. It hit $317.14 per ADR (American Depository Receipt) on Oct. 27, 2020, and also had an interim peak of $217.83 on Feb. 17, 2021.
However, by Jan. 10, 2022, it was down to $127.65. It even had a trough price of $112.09 on Dec. 29, 2021. This means that the stock is now down almost 60% from its peak in Oct. 2020. From its mini-peak of $217.82 in early Feb. 2021, BABA stock is still down just over 41% at $127.65.
But for some reason, this hasn’t deterred Charlie Munger as Chairman of DJCO. His company is still buying more BABA stock.
Munger Loves Alibaba
A recent filing by DJCO showed that it ended 2021 with 602,060 Alibaba ADRs. According to Barron’s magazine, this means it bought a net 300,000 ADRs during Q4 of the Chinese company. It had owned 302,060 Alibaba ADRs at Q3 end. Moreover, according to Barron’s, it had bought 136,740 more ADRs during Q3. So, in effect, DJCO has been averaging down in its cost.
Moreover, Daily Journal didn’t make changes in other investments during Q4. So, it’s clear that Munger et al really like Alibaba stock, even though it has been falling.
What could be the reason for this? Well, as Munger is known as a long-term value buyer, BABA shares trade at a historical low in terms of its valuation metrics.
BABA Stock Is Cheap Historically
For example, right now analysts estimate that the company will earn $8.39 in earnings per share (EPS) in 2022 and $9.51 for 2023. These estimates are from Refinitiv’s analyst surveys, as shown on the Yahoo! Finance analysis page.
S0, at Jan. 10’s price, BABA stock is at 15.2 times 2022 earnings (i.e., $127.65/$8.39) and 13.4 times (i.e., $127.65/9.51). This is a cheap valuation situation on an absolute basis.
But on a historical basis, these metrics are also cheap relative to past P/E ratios. For example, Morningstar shows that the average forward P/E for the past 5 years has been 25.7 times. That is well over the 15x and 13x.
In fact, even if you average the past 4 years, including 2021 when Alibaba was cheap all year, the average forward P/E ratio is 18.6x. This implies that even this year’s 15.2 times metric is too cheap. The potential upside is 22.3% (i.e., 18.6/15.2-1). Compared to 2023 forward earnings, the stock is 38.8% too cheap (i.e., 18.6/13.4 – 1).
What to Do With BABA Stock
The stock is cheap for a reason. There is a lot of fear out there that all Chinese stocks will get delisted. In fact, Barron’s magazine has written that investors should not buy BABA stock.
My attitude about this is very simple. There are always good reasons for a stock to be cheap. If the company is not going out of business, has lots of free cash flow and little debt, which is the case here, there is usually not too much to worry about. Even the delisting issue is not much of an issue, since it would likely trade on a foreign exchange. That should never deter you from buying a stock that is cheap.
So my take is that, if you can afford to copy Munger, you will probably do well in the long term.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.