In early January I wrote about the uncanny ability of Alibaba Group Holding Ltd (NYSE:BABA) stock to take a swan dive at the beginning of every calendar year only to recover those losses later in the year.
I was convinced that BABA stock was going to do it again in 2017.
Well, one-quarter of the year is already in the books and Alibaba stock is up 22.8% through March 31, 275% better than the S&P 500. More importantly, BABA stock so far in 2017 is beating my alternative recommendation, First Trust International IPO ETF (NASDAQ:FPXI), by more than 10 percentage points.
As part of my recommendation, I suggested investors consider selling half their Alibaba stock to be prepared for the inevitable swan dive, using the proceeds to buy FPXI as a safer holding until BABA stock bottomed out.
Well, that hasn’t happened and I’m not sure if it will until the beginning of 2018, if ever, because Alibaba is on a roll.
BABA Stock Breaks the Trend
If you bought Alibaba near the end of 2016 and want to take some profits, you might consider doing so replacing BABA with ADRE, an ETF that holds 50 ADRs of prominent emerging markets’ companies, including Alibaba, the second-largest holding at 11.7%. Nothing wrong with hedging your bets.
However, the other side of the coin at this point is whether it will ever make sense to sell BABA stock. After all, they also wondered about Jeff Bezos’s business plan back in the early days of Amazon.com, Inc. (NASDAQ:AMZN), something you rarely hear today.
“To say Amazon’s original business plan was unorthodox is an understatement — it explicitly said there would be no profit for at least four years. Dubbed ‘slow growth,’ it made stockholders wary and they complained often,” wrote digital consultant John Boitnott in a 2014 Inc. magazine article.
In the past 15 years, AMZN stock has delivered an annualized total return of 32.1% to shareholders. Not bad for a company that didn’t make an operating profit until 2002, nine years into its existence.
Alibaba was founded five years after Amazon, in late 1999. It didn’t make an operating profit until fiscal 2011, 11 years into its corporate history. However, since then, Alibaba has really stepped on the gas, lapping Amazon several times in recent years when it comes to operating margins, albeit much of that is because Amazon actually owns the stuff it sells rather than just acting as the middleman.
Where Alibaba Stands
That said, I believe investors are wise to at least consider whether BABA stock is the only stock to own when it comes to emerging markets, because if Jack Ma’s master plan plays out anywhere near as successfully as Jeff Bezos’, you’re depriving yourself of a possible 1,000-bagger.
Focused portfolios can do better than diversified ones; Warren Buffett and other successful investors have demonstrated this over the years. Lazard Asset Management published a study in 2015 that made a case for concentrated portfolios, arguing less is more.
“By design, concentrated strategies facilitate investing in the highest-conviction ideas and therefore limit overlap with an index — leading to high active share, which in turn, is linked to potential outperformance,” concluded Lazard Asset Management in its 2015 report. “In our view, both theory and evidence support the notion that concentrated portfolios are well-positioned to generate alpha. In conclusion, we believe investors should focus on concentrated portfolios, where fundamental analysis shines.”
Should you own anything else other than Alibaba stock?
Well, I wouldn’t recommend it being your only holding, but if you own 10 high-quality stocks, I don’t see why BABA shouldn’t be one of them.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.