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Why does Charlie Munger have Alibaba shares?

Recently, there have been a number of reports that Charlie Munger has doubled his investment in Alibaba Group Holding (BABA). The Financial One portal has published a translation of an article by Mark Hayek, in which he explains why Buffett’s long-time partner is buying shares of the Chinese giant.

60% collapse

Charlie Munger is 98 years old and is the Vice Chairman of Berkshire Hathaway. He worked with Warren Buffett for a long time. But Munger also runs his own company, the Daily Journal Corporation. He buys BABA shares for the DJCO portfolio.

Market participants like to keep an eye on the stocks that Buffett or Munger are focusing on, especially when big inverts increase positions. This is exactly what is happening to BABA shares, especially as they are falling.

Alibaba stock peaked in late October 2020 and has been mostly down since then. On October 27, 2020, the company reached $317.14 per ADR (American Depositary Receipt).

However, by January 10, 2022, the stock had fallen to $127.65. This means that the value has fallen by almost 60% compared to the peak reached in October 2020. And from its mini-peak of $217.82 in early February 2021, BABA shares are down about 40% year-to-date.

But somehow that didn’t stop Charlie Munger, head of DJCO. His company continues to buy BABA shares.

Munger loves Alibaba

At the end of 2021, DJCO had 602 thousand Alibaba ADRs. According to Barron’s magazine, in the fourth quarter the company purchased 300,000 ADRs of the Chinese company. At the end of the third quarter, DJCO had 302,000 Alibaba ADRs (the company bought another 136,000 ADRs in the third quarter). Overall, it’s clear that Manger likes Alibaba stock a lot, despite the rather dismal dynamics.

What is the reason? The answer is simple. Munger is known as a long-term value investor, and BABA shares are trading at an all-time low in terms of valuations.

Analysts expect the company to earn $8.39 earnings per share (EPS) in 2022 and $9.51 in 2023. Estimates are based on a survey of analysts by Refinitiv, according to Yahoo! Finance.

So, as of January 10, BABA shares were worth 15.2 times the company’s 2022 earnings ($127.65/$8.39) and 13.4 times 2023 earnings ($127.65/9.51) ). These are pretty good numbers.

Historically, these numbers are also low relative to previous P/E ratios. For example, Morningstar reports that Alibaba’s average forward P/E over the past 5 years was 25.7. This is a lot more than 15 and 13.

In fact, even averaging the last 4 years, including 2021, when Alibaba was cheap all year, the average forward P/E ratio is 18.6. That means this year’s figure of 15.2 looks low. The growth potential is 22.3% (18.6/15.2−1). Based on forecasted earnings for 2023, the stock should be worth at least 38.8% more (18.6/13.4−1).

What to do with BABA shares

The company’s shares are cheap for a reason. There are many fears that all Chinese stocks will be delisted. Barron’s experts believe that investors should not buy BABA shares.

My attitude to the situation is very simple. You can always find good reasons to explain the low value of papers. But if a company isn’t going out of business, has plenty of free cash flow and little debt, as in this case, then there’s usually no reason to worry. Even the issue of delisting is not a particular problem, since the shares will most likely be traded on a foreign exchange.