After a long stint stuck under $200 per share, Alibaba (NASDAQ:BABA) stock finally broke out past that level in November of last year. The rally went 20% before hitting the pandemic wall. The good news is that BABA stock managed to stay above 2019’s September levels. Eventually, it recovered the February level and tacked on another 30% more upside.
Today’s thesis is that this is a strong stock to own for the long term. It will also be important for investors to ignore the negative rhetoric.
The rallies are coming in bursts, which suggests that investors don’t give it too much benefit of the doubt. It stalls at certain levels, then goes bashing through the resistance to establish a new higher plateau. Most recently, it has been stuck in a tight range between $265 and $280 per share. The opportunity for the bulls is to breakout of it to set a new all time high.
Meanwhile, if the sellers can force prices below the range, it would present another buying opportunity. The downside target for that could take BABA stock to retest the $245 footing level from August. Even if that happens, it won’t change the upside trajectory.
Believe in the BABA Stock Performance
In addition to the mess that the pandemic brought this year, Chinese stocks have to deal with the politicians. The U.S. regulators are threatening to restrict foreign stocks from listing in U.S. markets. Although it doesn’t name China specifically, consensus is that Chinese companies are indeed the target. The excuse is that they want to save the investors here from fraud like what happened with Luckin Coffee (OTCMKTS:LKNCY).
One thing is for sure — Alibaba is not the target of these efforts. This is a legitimate company successfully competing with the U.S. giga-cap counterparts. Wall Street has vetted its financials for many years, so they are beyond reproach. There is no way that BABA stock is just a scheme.
This could explain some of the lack of respect it gets here. However, the stock is not cheap. It carries a nearly 30 forward price-earnings ratio and 9 times full year sales. Value alone will not save it from a serious downturn if one comes this year.
The Charts Suggest There Is Plenty of Support
Fundamentals aside, the technicals also suggest that owning BABA stock for the long term makes sense. In the last five years, it has rewarded its investors with more than 270% returns. While there is no guarantee that the next five will be as fruitful, that likelihood is real.
In 2017, investors realized that they had underestimated the stock, so it sprang 60%. It spent the almost three years since then consolidating and establish a wide base near $200 per share. It would take extremely big changes in the thesis to break below that wide band of support. The bulls are confident that they have a bulletproof floor below their feet.
This explains why the buyers step into it on every dip even this year. The result is a series of higher lows as they systematically attack resistance lines. The sellers have had no luck sustaining their bearish efforts, so they will need a black swan headline. This can come from within, but it’s highly unlikely.
This team has proven itself worthy time and again. It is more likely that without a new market-wide shoe to drop, this one continues its long term ascent. In early August I suggested getting long and it quickly paid. This is a recurring theme, so stick with it.
Better be Safe than Sorry
We’ve made the point that the bullish thesis to own BABA stock is viable. But this is 2020, after all — we have to expect the unexpected. The U.S. election uncertainty just got more real with the start of the presidential debates. Investors need to account for more risk than the normal fall season. Those who own Alibaba for the long term can stay in their positions. Selling covered calls could help them weather the fall fears. Taking new positions requires some extra precautions here. Starters positions should be partial so that investors leave room for error.
There are tools in the options markets that would allow investors to create buffers. Selling naked puts 20% below current prices is one way. Buying new shares and selling calls against them immediately is another. Doing all three at the same time also makes sense for savvy options traders.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
