Chinese equities have been back in favor as the trade-war rhetoric between the U.S. and China continues to improve. While Huya (NYSE:HUYA) has been enjoying a rebound, it’s not climbing as much as its peers. As Huya stock rallies into the end of the year, should investors buy the shares before it’s too late?
Look at the one- and three-month returns for a handful of Chinese equities in the table below. It’s pretty clear that Huya stock is continuing to struggle, even after its latest rebound. Worse, the stock’s technicals do not favor the bulls at the moment, unless it suddenly gets a large burst of momentum that will send it over its resistance.
| Stock | 1M Return | 3M Return |
| (NYSE:BABA) | 14.6% | 20.8% |
| IQ | 15.7% | 17.6% |
| (NASDAQ:JD) | 13.3% | 19.5% |
| BILI | 11.2% | 22.3% |
| (NASDAQ:BIDU) | 9% | 25.3% |
| (NASDAQ:YY) | (8.7%) | (10.6%) |
| HUYA | (18%) | (34.2%) |
As you can see, this stock has been displaying relative weakness at a time when its peers, Chinese stocks, and the overall markets are rallying. That’s worrisome for the owners of Huya stock. Given the price action, it’s hard to get overly bullish on the name. Let’s look at the charts, which also aren’t too encouraging.
Trading Huya Stock
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For much of 2019, Huya stock was trapped between range support near $19 to $19.50 and range resistance around $26. When the stock failed to overcome its resistance in November, Huya sank below all of its major moving averages. Instead of Huya Inc finding buyers at range support, though, the sellers of the shares stepped on the gas.
Huya stock cascaded through the $19 to $19.50 support area and bottomed at $16.40. The stock has since found its footing around $17 and has broken through its steep downtrend resistance (depicted by the blue line).
So now what?
The charts look ever-so-slightly more constructive at the moment. A short-term bottom has been reached, while a short-term uptrend (depicted by the purple line) is in place. Further, the MACD (depicted by the blue circle) is rotating into bulls’ favor as the momentum of Huya stock begins to turn more positive. That said, the sellers remain in control.
Bulls’ first hurdle is the 20-day moving average. If they can push HUYA through this mark, there’s a much larger hurdle overhead. Prior support at $19 to $19.50 is likely to act as resistance. If that’s the case, the tone will shift to a much more bearish note for Huya stock.
If the bulls can reclaim the former range support, higher targets would become realistic. But before we can even begin discussing those, the following test will prove most notable. Long story short, the bears need to defend $19, turning former range support into resistance, while the bulls need to defend the $17 level and avoid making new lows.
The Fundamentals
Huya stock has been lagging its peers, and its technicals do not favor the bulls. Because of that, the stock should not be bought until it clears some vital levels. That said, Huya Inc is still a quality company.
Analysts, on average, predict that its revenue will surge 71% this year and another 36% in 2020. Unlike some of its peers, including iQiyi (NASDAQ:IQ) and BiliBili (NASDAQ:BILI), HUYA is actually profitable.
Average forecasts call for earnings of 45 cents per share this year, up 50% from last year. For 2020, the mean estimate calls for an acceleration up to 75% earnings growth, good for earnings of 79 cents per share. That’s lofty, but if the company can achieve it, Huya stock would currently be trading at just 22 times its forward earnings.
That valuation would look cheap to many investors, given the company’s strong growth and profitability, even if Huya stock is far from being a blue-chip name.
Finally, its balance sheet is solid. The company’s cash and short-term investments of 9.53 billion CNY easily outweigh all of its current liabilities, which stand at just 2.17 billion CNY. Further, Huya Inc does not carry any long-term debt.
The Bottom Line on Huya
When the fundamentals and technicals do not align, some investors (like me) are in a tough spot. There is a solution, though.
Technical investors can wait for the charts to confirm that bulls are back in control with a move over $19. Fundamental investors can take a long position near current levels, but use a stop-loss below the recent low of $16.40. If Huya Inc falls below that mark, it could reach the all-time low of $14.44.
Investors should not get caught in a plunge. even if the company’s fundamentals are good. Remember, risk can be defined and if investors sell due to a stop-loss being triggered, they can always get back in. Finally, some investors may find it best to take a partial position, while using proper risk controls on a decline and adding to the position if the technicals begin to look more favorable.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
