Things are changing in Japan, however, and Warren Buffett has made several large investments there. This, combined with a very high starting valuation explained 30 years of sideways returns for the Nikkei. The companies often were run to benefit their employees and management rather than to benefit shareholders. Japanese companies are a good example of this issue, historically they paid little to no dividends and hoarded cash on their balance sheet. This is historically an issue when investing in Asian markets, as stock market returns have badly lagged GDP growth.

Cash payments are hard to fake, after all! International high dividend yield funds like Vanguard's ( VYMI) are another nice shortcut to find companies with good corporate governance. There are often great value plays to be found abroad, but buying indices tend to offer poor risk/reward.

For this reason, I do not recommend any investors to put money in emerging market ETFs as they consistently fail to hold up to my qualitative and quantitative tests. The strongest correlation I could find was the correlation between rule of law, property rights, and corporate governance on one hand and stock market returns on the other. The research I've done over the years has indicated to me that GDP growth has little to no correlation with stock market returns for any given country. I generally trust Alibaba's accounting, but the corporate governance issue is thorny. A two-sided discussion on Alibaba's accounting can be found in Julian Lin's recent Alibaba article and in the comment section for said article. This doesn't necessarily mean that Alibaba's books are problematic per se, but it does help explain the discount to Alibaba's apparent fair value.

A simple look at CCP statistics like GDP numbers or coronavirus case statistics tells you that their numbers are often implausible. Chinese stocks in general have a poor reputation for accounting quality. Hypothesis 2: Alibaba's accounting and/or corporate governance cannot be trusted and the stock is not undervalued. The market typically doesn't offer up softball pitches like this, especially in the current bull market, which forces us to consider hypothesis 2. All else being equal, this implies a total return of nearly 25 percent annually for BABA shareholders. Then if you look at Alibaba's earnings estimates for the next couple of years, you see a stock that trades for around 21x current fiscal years' earnings and has earnings growth estimates of close to 20 percent annually. If you take Alibaba's income statement at face value, the growth in earnings is simply incredible. Hypothesis 1: Alibaba stock is extremely undervalued.

Something has to give with the valuation, which in my mind offers up a couple of hypotheses regarding Alibaba. When you look at Alibaba's financial statements, the valuation immediately seems low compared to its explosive growth of revenue, earnings, and cash flow. Yet amidst this, Alibaba has fallen from its peak of over $300 per share to under $240 per share as of my writing this. The company has a charismatic billionaire founder, business operations focused on China's rapidly growing internet economy, and strong and growing cash flow.

Photo by Andrew Burton/Getty Images News via Getty ImagesĪlibaba Group ( NYSE: BABA) has all the makings of a great story stock.

Alibaba stock forecast next 12 months