In 2019 the U.S. Fed had already committed to casting a safety net below the stock market. That in itself was an artificial prop giving the bulls a huge advantage. At least back then there was a semblance of fairness and the economic manipulation wasn’t so blatant.
By the second half of 2020, everything had completely changed and the balance broke. The amount of money that is now flowing from governments into the economy is astronomical. As a result stocks went on a bender but not the one we examine today. Alibaba (NYSE:BABA) is barely up 2% in a year when the S&P 500 is up seven times more. Regardless of the lagging statistic, BABA stock is still one to own through adversity.
The amount of stimulus that people are discussing is insanely huge. One trillion is so huge that if you ask most people, they wouldn’t know what comes after it. We should not have an abundance of disposable income as a result, and we do. Recreational vehicle sales are at record highs while American small business is dying. Wall Street is exploding higher. It’s a crazy situation creating even crazier stock price action. This will end one day, until then I focus on opportunities in great companies whose stocks have fallen on hard times.
Every once in a while we come across a stock that develops an interesting story. Through it, people learn about new consequences. Alibaba is having one of those moments. BABA stock fell 35% from top to bottom last year and it was totally avoidable. I could explain the extent of the drop technically, but the trigger was a war of words. In a momentary lapse in judgment, Jack Ma, who cofounded the company, criticized the Chinese regime.
Although the details are not that important, the repercussions were very serious. Alibaba owns a large stake of ANT financial which is Alipay. The company was on track to go public as the largest ever. Then a out of nowhere officials canceled it indefinitely. This directly cost Alibaba billions of dollars. But this also cost BABA stock investors relatively more.
Although it had a recent substantial bounce off $210 per share it’s not out of the woods yet. Headlines aside this is an investment that I would hold for a long time. If I haven’t panicked out of the stock yet, it’s too late to do it now.
There Is Support Below for BABA Stock
Technically there is risk below if prices fall under $210 per share. I don’t think this will happen unless the whole market falls on hard times. Nevertheless, I have to consider the scenario regardless of how unlikely it is. The downside target from this should it happen would be another $50 from there. Losing support is not my forecast but it is a possibility given the right circumstances. The bottom of the weekly ascending channel is just under $200. It’s not that unusual in the long run for stocks to hit that. Even then the bulls would still be in charge and more will join.
Since markets in general are breaking records it doesn’t make sense to risk everything all at once. As much as I would like the opportunity here I would do it in smaller bites. Investors should also consider using options because they allow us to create a buffer between current price and our risk. For example I can sell the BABA July $160 put and collect almost $5 for it. This means that I get paid today for the opportunity to buy shares at a 34% discount through mid-July.
Back in November of last year I wrote about catching the BABA falling knife. I pointed out a big support level around $220 per share. That is playing out to plan here as indeed there were buyers there. Clearly I was early in calling a bottom back then, because prices fell further. However, Alibaba stock is now just 6% lower than my first attempt.
Part of my thesis in that note was that there was no fear on Wall Street. I used the love for frothy stock as an indicator and that was a correct assumption. Unfortunately Alibaba did not follow along the markets.
In the long run a few percentage points variance are not going to make or break this strong fundamental story. There aren’t many companies they can generate the amount of revenue that this one can. Singles Day alone brought $75 billion in 2020 in mere hours. How can that be a bad thing in the long run?
Its earnings power is formidable still regardless of squabble. Being long Alibaba stock makes more sense than shorting it. Over time it’s a smart investment.
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.
