Don’t be alarmed by the apocryphal headline. Alibaba Group Holding Ltd (NYSE:BABA) is not going out of business anytime soon. No, the downfall I speak of is BABA stock’s subconscious need to take a swan dive at the beginning of each calendar year only to rise steadily throughout the rest of the year to challenge $100.
Public since September 2014, BABA stock has seen a lot of volatility in its brief 27-month history trading on the New York Stock Exchange.
I believe the odds are good that it will do it again in 2017.
If you read InvestorPlace contributor Lucas Hahn’s article the other day, “4 Big Reasons Alibaba Stock is a No-Go,” you’ll have a better idea why I think so. In it, Hahn cites Alibaba’s valuation problem, currency risk, regulatory risk and accounting risk as four valid reasons why you don’t want to go anywhere near shares of Alibaba.
I wasn’t swayed entirely by his argument — I still view BABA stock as a buy — but the mere mention of both Jim Chanos and Herb Greenberg in the accounting risk section of his article has at the very least made me sit up and take notice.
BABA Stock: Not Your Everyday E-Commerce Stock
Alibaba stock is definitely not your standard ordinary e-commerce equity. It comes equipped with all sorts of peculiarities that you don’t find in other companies based in the U.S. It’s a big reason why the BABA stock price is so volatile.
Let’s assume for a second that BABA drops to $59 by the end of the second quarter … What’s a current shareholder to do? The simple answer, if you’re truly long, is to wait until it hits the $50s and load up the truck with as many shares of BABA stock as you can possibly afford without excessively overweighting your portfolio. If you’ve held BABA stock for more than a year and have seen decent appreciation, but aren’t solidly in that camp, you might want to take some profits off the table.
Lastly, you could sell covered call options to hedge against the decline of your actual stock position, but I’m not going to elaborate on that because I’m hardly an options expert and don’t use them myself. These are the typical solutions for a stock you own that’s very much in flux.
Now, let’s look at a possible alternative that keeps you in the game, but hedges your bet on BABA stock.
Hedge Your Bets on Alibaba
A year ago, I might have suggested buying Yahoo! Inc. (NASDAQ:YHOO) which owns 16.3% of Alibaba’s stock, but two hacks later it seems painfully clear that Marissa Mayer is incapable of delivering any value to Yahoo shareholders.
The next possible route is to sell your Alibaba position, use the proceeds to buy an exchange-traded fund that owns BABA stock, and then hold that ETF until BABA drops into the $50s when you repurchase Alibaba with the proceeds from the sale of the ETF.
The ETF in question is the First Trust International IPO ETF (NASDAQ:FPXI), which currently has 50 non-U.S. holdings that track the performance of the IPOX International Index — Alibaba being its largest holding at 10.17% of the portfolio. While it hasn’t done well since its inception in November 2014, it’s only meant to be held for three to six months, or until Alibaba hits the $50s.
And what happens should BABA stock instead head higher by $30 or $40? FPXI would benefit from Alibaba’s appreciation, but not to the extent you would if you had still directly owned the company’s stock.
Therefore, it probably makes sense to sell half your position in Alibaba rather than a full one — a compromise that should account for most inevitabilities … or you can throw Alibaba stock in a drawer and forget about it until it’s $200 or more in two to three years. Just remember, out of 41 analysts covering BABA stock, 34 are firmly in the “buy” camp, none have a “sell” rating and the average 12-month target price is about $122.
It’s your choice.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
