China's latest Covid surge pressures 3 Club stocks, but doesn't change our conviction in each

Published Wed, May 24 20233:36 PM EDT

A surge in Covid-19 cases in China has weighed on the Club's three China-exposed stocks this week — but the temporary setback doesn't shake our confidence in the ability of these holdings to soar higher in the long term. The latest wave of Covid in China, driven 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 senior Chinese health advisor cited in a local media report Monday. The news pressured Chinese markets, with the country's benchmark stock index, the Shanghai Composite, down 1.3% Wednesday, erasing all of its gains this year. The resurgence of Covid cases comes just months after Beijing abandoned its zero-Covid polic y, which was defined by three years of draconian lockdowns and other restrictions. Investor concern has been spilling over into the Club holdings doing the most business in China: Wynn Resorts (WYNN), Estee Lauder (EL), and Starbucks (SBUX). The latter two have seen their share prices fall more than 5% over the last five trading sessions, while Wynn has come down nearly 8% during the same period. China is a growth market for each and we have long predicted that the country's eagerly-awaited economic reopening would allow their businesses — and stock prices — to thrive. And we still do. "I'm not backing away from any of those three," Jim Cramer said Wednesday. "We have to just wait it out," he added. Jim also noted that any further pullback could provide a buying opportunity. China has already seen solid economic growth since the start of the year. The country's gross domestic product grew by 4.5% in the first quarter year-over-year, ahead of market expectations. That ultimately bodes well for Estee Lauder, Starbucks and Wynn, even if increasing consumer demand appeared somewhat uneven in the latest round of quarterly results. Starbucks earlier this month delivered impressive fiscal second-quarter results, boosted by positive growth in China for the first time in almost two years, despite the coffee maker declining to raise its full-year guidance. CEO Laxman Narasimhan described the quarter as a "significant turning point" for Starbucks' operations in China. Casino operator Wynn also reported a better-than-expected March quarter in early May, driven by the recovery in the Chinese gaming hub of Macao that allowed management to reinstate a 25-cent-per-share quarterly dividend. The special administrative region finally flipped to positive territory on the basis of adjusted property earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) after many consecutive quarters of losses caused by Beijing's Covid restrictions. Estee Lauder reported a more mixed quarter , hurt by slower-than-expected recovery in the prestige beauty company's Asia travel-retail business. Management said the post-Covid recovery for travel retail in the region had proved "far more volatile" and "more gradual" than it anticipated, but said this should only be a temporary headwind. The Club's take China's new Covid-19 wave begs more questions around how much longer the country's economic reopening will take and when our Club holdings doing business there will see sustained growth. There hasn't been a lot of coverage yet about China's latest surge of infections, but negative headlines in the days ahead could bring on more sellers. While we acknowledge this group's next move may be down and not up, we think upcoming weakness could allow us to add to our positions. There have been no structural changes regarding how our companies see business in the region over the long term. We like Starbucks for its worldwide growth and its expansion plans to open stores every nine hours in China. Wynn is a great operator in Macao, which should see even more activity as group travel normalizes. The company would not have reinstituted a dividend two weeks ago if it was not confident in its future. And we're expecting Estee Lauder's China business to recover as travel continues to accelerate. We continue to hold Estee Lauder, Wynn and Starbucks because of the presence each has in China. We remain optimistic about the growth trajectory in the country, and see this latest Covid wave as a temporary speedbump. (Jim Cramer's Charitable Trust is long WYNN, 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. 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European nations are looking at new travel requirements from China after Beijing lifted Covid restrictions.

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