Wait For News of a Signed Trade Deal Before Buying Alibaba Stock

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Alibaba (NYSE:BABA) stock has surged in recent days. The debut of Alibaba stock in Hong Kong and progress in the trade war have lifted BABA in recent days. This appears to clear the way for BABA stock to move higher without the obstacles that have hampered its performance in past months.

Wait for a Signed Trade Deal Before Buying Alibaba Stock
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However, both the size of Alibaba Group and ties to its home country of China have become a double-edged sword for the company. This leaves Alibaba stock vulnerable to a decline. For this reason, traders should wait for definitive news on a trade deal before considering a purchase of BABA stock.

Hong Kong, Trade Help BABA Stock

Alibaba stock has benefitted from good news recently. The long-awaited initial public offering on the Stock Exchange of Hong Kong finally became a reality on Nov. 26. The debut, initially delayed by the protests, saw the stock rise by nearly 7% on its first day of trading.

Moreover, indications point to the U.S. and China overcoming a significant hurdle in their trade dispute. Alibaba Group does little business in the U.S. However, investors dumped Alibaba stock and peers such as JD.Com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD) when these talks experienced setbacks. As a result of the recent good news, the New York listing of Alibaba stock rose by over 9% within a one-week period.

Nonetheless, Alibaba stock has long remained more complicated than it looks. Its forward price-earnings (PE) ratio of 22.3 is a huge bargain, especially compared to its U.S.-based counterpart, Amazon (NASDAQ:AMZN). Projected earnings increases of 28.7% this year and 24.1% the next make it even more compelling. The long-term potential for BABA as more Chinese consumers move into the middle class makes it a long-term winner by itself.

Investors Should Remain Cautious

However, Alibaba stock continues to face undue influence from geopolitical pressures. I see some justification for this. Chinese prohibitions on foreign investors make BABA stock not a direct investment in Alibaba Group. Hence, the Cayman Islands-based holding company representing Alibaba trades at a discount.

Moreover, despite a negligible presence in the U.S., investors sold BABA stock off as the U.S.-China trade war intensified and many potential agreements have fallen apart.

That is where my concerns lie.

While I want to recommend a buy right now, images of Lucy pulling the football away from Charlie Brown at the last second keep appearing in my head. Since the trade war began, we have heard many times that an agreement was imminent. When they eventually fell apart, Chinese equities — including Alibaba stock — fell back.

Unfortunately, what I think we currently see is a repeat of the buy the rumor, sell the news phenomenon. Except, the previous history points to investors selling news of no agreement, which will likely make the selloff worse.

For this reason, I recommended not buying Alibaba stock for now. Instead, wait for the news. Should no agreement happen, or if a “sell the news” reaction occurs after a signed deal, investors can probably buy BABA stock at a lower price. If I guess wrongly, and Alibaba stock rallies on a signed trade deal, investors can also see profits shorter term.

In the end, waiting not only opens investors to the long-term growth of Alibaba Group, but it also allows them to minimize the impact of a long-time external threat, geopolitics.

Final Thoughts on Alibaba Stock

Traders who want to buy Alibaba stock should wait. The recent spike in BABA might tempt investors. With the Hong Kong listing a reality and the positive sentiments on trade, Alibaba has surged. A low PE ratio measured against significant profit growth also offers longer-term reasons to buy.

However, numerous trade agreements have fallen apart at the last minute. Moreover, even if both the U.S. and China sign a deal, traders could decide to sell the news.

Alibaba stock will succeed long term as more Chinese consumers join the middle class. Still, traders should wait for less geopolitical uncertainty or hold out for a lower stock price.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/wait-for-deal-before-buying-alibaba-stock/.

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