Over the last couple of months, many Chinese internet stocks have been exhibiting remarkable amounts of relative strength. They were among the first to bounce back during the sell-off and now are breaking out to all-time highs or are very close.

This development is especially interesting because it's happening despite some negative newsflow for Chinese companies listed in the U.S. There are increasing tensions between the countries, and some are saying that Chinese companies in the U.S. may delist and move to exchanges in China or Hong Kong. Bullish price action during a period of negative newsflow is always noteworthy.

Laggards to Leaders

The most liquid and interesting stocks to watch are Alibaba (BABA  ), JD.com (JD  ), and Vipshop Holdings (VIPS  ). Global markets were quite strong from February 2016 to January 2018, and this group was one of the strongest gainers. However, as the trade war began in earnest in early-2018, they sold-off on supply chain concerns. Additionally, there was some profit-taking given that the stocks had huge runs and had rich valuations.

They bottomed in December 2018. During the next leg higher in markets from December 2018 to February 2020, they clawed back these losses. And, in the current move higher, they are clear leaders as one of the first group of stocks to make new, all-time highs.

Strengthening Fundamentals

The recent catalyst has been the coronavirus which has led to more online transactions for these businesses. However, even prior to the coronavirus, these stocks were growing at impressive rates. For example, Vipshop grew sales from $700 million to $11 billion over the last 8 years. Like Amazon (AMZN  ), they've been able to grow from selling products online to becoming conglomerates selling all types of products and services. China has also been ahead of the U.S. in terms of people shifting their shopping online. In 2020, 700 million Chinese people bought something online, compared to 150 million in the U.S.

During the two-year period from February 2018 to February 2020 when Chinese e-commerce stocks were flat, they continued to execute and hit growth targets. Valuations compressed. The stocks are actually cheap when taking into account their growth rates. Currently, the S&P 500's (SPY  ) price to earnings ratio is 22, and the average company is growing revenue at 5.4%. Compare this to Alibaba which has a price to earnings ratio of 27 and is growing sales at 22%. Gross margins are also significantly higher.