How China’s slower post-Covid recovery is playing out for our Club stocks this earnings season

Published Thu, May 4 20233:09 PM EDTUpdated Thu, May 4 20233:17 PM EDT

A slower-than-expected recovery in China is proving to be a challenge for some of our Club holdings that do lots of business there. But, we believe it's only a matter of time until a post-Covid reopening accelerates the world's second-largest economy — and ultimately, benefits our stocks tied to the Chinese consumer. China had been held down by Beijing's strict zero-Covid policy for nearly three years. It's only in the past few months that things are approaching normal. The Chinese economy has seen modest growth since the government started rolling back pandemic restrictions in December 2022, one of the last countries to do so. But, unlike other nations and regions that recovered quickly post-Covid, the bounce back in China and in the Asia/Pacific part of the world has not been as swift. That's manifested as a headwind for many American multinational companies in the January to March quarter. For example, China has become a difficult market for semiconductor maker Qualcomm (QCOM), which reported mixed second-quarter earnings after the closing bell Wednesday. A weaker handset forecast due to softer-than-expected China demand sent the stock sharply lower. Since we have a few China consumer plays in our portfolio, we're choosing to concentrate our resources on companies that have better growth prospects. That's why we decided to exit our small remaining Qualcomm position Thursday morning. Estee Lauder (EL) and Starbucks (SBUX) are two of our Club names tied to China that also suffered this week following earnings but we think can prevail in the long run. Both companies offered encouraging signs of improved spending habits in China that are expected to accelerate as the Asia/Pacific recovery gains more steam. EL YTD mountain Estee Lauder's stock year to date performance. The news: Estee Lauder's fiscal 2023 third-quarter results were mixed. But what really crushed the stock Wednesday was the horrendous Q4 guide. The company blamed a slower post-Covid recovery in its Asia travel retail business for the dismal outlook. Management said on the post-earnings call that international flights in China and Korea were "subdued" and group tours were "slower to start." However, in a somewhat promising sign, the team is starting to see traffic recover in Hainan province, often called the Hawaii of China. Additionally, Estee Lauder reported resilient retail traffic in Hong Kong, Macao, Europe, and the Americas. Shares were down another 1% on Thursday. The Club's take: While expecting a softer Estee Lauder quarter, we were disappointed by the magnitude of the miss and just how slow the company's Asia travel retail businsess has been to recover post-Covid. Despite near-term pressures, which seem a bit out of the company's control, we think it's only a matter of time before consumer spending in China and the Asia/Pacific region picks up. The results don't change our investment case, which centers on the luxury makeup, fragrance and skin care brand being one of the best China reopening stocks. Jim Cramer has said he views this week's sell-off in Estee Lauder stock as a buying opportunity. (Our Club trading restrictions, detailed below, are preventing us from buying at this time.) SBUX YTD mountain Starbucks' stock year to date performance. Starbucks delivered an impressive fiscal second quarter , with beats on the top and bottom lines along with stronger-than-expected margins supported by positive same-store sales in China for the first time in nearly two years. China marked a "significant turning point" during the quarter, management said during its post-earnings call, while touting a "faster than expected recovery" there. Despite the Q2 beat and optimism from management, Starbucks maintained its full-year 2023 guidance citing continued economic uncertainty and the ongoing recovery in China. That conservative guidance sent shares 6% lower Wednesday. The stock gained more than 1% on Thursday. The Club's take: Starbucks' strong fiscal quarter, bolstered by better-than-expected China sales, is welcome news for investors like us who own the stock in order to capitalize on the full recovery of the Chinese economy and consumer spending there. The positive results show the risks of doing business in China are starting to dissipate for less expensive products and signal room for growth in the quarters to come and in the years ahead. The fact that new CEO Laxman Narasimhan did not raise estimates disappointed investors and hurt the stock. But it's too early for Narasimhan to raise guidance this early on in his tenure. The upcoming fiscal Q3 will be Narasimhan's first full quarter, so why would he raise the bar on himself. This provides a solid set up for the company to beat and raise next quarter. Despite this week's pullback, Starbucks remains close to a 52-week high. Maybe wait for this one to come down some to buy. (Jim Cramer's Charitable Trust is long EL, SBUX. 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.

A Starbucks location in Shenzhen, China.

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