It was bound to happen. After its IPO, iQIYI (NASDAQ: IQ) topped $46.23 last week only to tumble below $40 a share. Is the rally over in Chinese stocks like IQ?
iQIYI is already nearly triple from its bottom at $15 in May. The company reported no real fundamental changes in that time. It appointed Baidu (NASDAQ: BIDU) and CTrip executives to the board. The addition is positive for the company but still not a solid catalyst to justify the rally. Unfortunately, the stock may have found too many buyers in too short a time. After, Baidu is a success story much like that of Alibaba (NYSE: BABA) and JD.COM (NASDAQ: JD).
Under normal circumstances, all of those China-based stocks will have solid returns for the next few quarters but risks ahead could derail that. China and U.S. are battling head-to-head and neither country wants to "lose face" in the trade war.
For now, each country will levy tariffs against each other, hurting trade. IQ and the others will not get hurt directly but an economic slowdown and lower trading activities in the region will take a toll on local spending. That dampens euphoria over holding JD stock at a 25x forward P/E or BABA stock at a P/E of over 50 times.
Takeaway
The 'trade war' is an ongoing risk factor in holding high-flying Chinese stocks. Speculative investors should minimize their exposure to holding IQ stock.
