Here’s a Way to Own Alibaba’s Stock Without Company Specific Risk

Alibaba (NYSE:BABA) has been on a downward slide since hitting a 2021 high of $274.29 on Feb. 16.  As I write this, BABA stock is down 6.9% on the day and almost 9% over the past month through May 26, to $212.05. 

A photo of the Alibaba (BABA) app on a smartphone.
Source: BigTunaOnline / Shutterstock.com

To say Alibaba is in a funk would be an understatement. Even its winning cloud formula is gaining skeptics and naysayers. The last time I wrote about China’s largest e-commerce was in late April when I said history suggested it would start moving up to $300 very soon.

Nope. It went the other way, instead. No one seems to want to own a tainted stock. And by tainted, I mean it’s a Chinese stock that regulators there want to control. Despite this reality, I said it should hit $300 within 12-18 months. Despite heading in the opposite direction, I still believe $300 is a realistic price target. 

Someone else thinks so, too. They just bought almost $38 million of Alibaba stock. Even better, it’s a new position. They haven’t added to it. 

Read on and I’ll tell you who.

Charlie Munger Just Bought BABA Stock

I’m stretching the truth a wee bit. 

Munger, the vice-chairman of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), is also the chairman of Daily Journal Corp. (NASDAQ:DJCO), a Los Angeles-based publisher of several newspapers in California and Arizona. It also owns a company that supplies case management software systems for courts, prosecutors, and other justice-related agencies.  

So, Munger, along with partner Rick Geurin, acquired a venture capital fund in 1972. They renamed it the New America Fund. One of its holdings was the Daily Journal. In 1986, the fund was liquidated, and shares in Daily Journal were distributed to shareholders. Munger has been chairman ever since. 

The New America Fund acquired The Daily Journal for $2.5 million in the late 1970s. It then went on a buying spree. Today, the company has a market capitalization of $428 million and an enterprise value of just $166 million.  

The big discrepancy between its market value and enterprise value is due to its large net cash position. At the end of the first quarter ended March 31, it had net cash of approximately $262 million, most of it invested in common stocks.

In the first quarter, DJCO acquired  165,320 shares of Alibaba at $226.73 a share. Based on where it’s trading today, the company’s lost a few thousand on its bet. DJCO’s portfolio consists of five stocks, and three of them are banks. BABA stock is the third-largest holding. It’s also its newest investment.

Why Did Daily Journal Buy?

The $37 million investment in Alibaba represented 19% of its investment portfolio. At first blush, BABA might not seem like a value play Munger is known for favoring. However, as The Motley Fool’s Billy Duberstein pointed out in early April, it’s cheaper — 25x trailing earnings and 19x the 2021 estimate — than all of the FAANG stocks. 

Value is in the eye of the beholder. 

Alibaba grew its revenue in the fourth quarter ended March 31 by 64% to $28.6 billion. Excluding its acquisition of Sun Art, an operator of retail hypermarkets, its sales grew by 40% to $24.4 billion. The entire year, excluding Sun Art, grew by 32% to $102.9 billion.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 25% over last year to $30.0 billion. Its free cash flow was $26.4 billion for an FCF yield of 5.2%. 

Add in the company’s large cash position, investments in public and private companies, and you get $135 billion versus less than $20 billion in debt.

Like Alibaba, Daily Journal has more cash than it knows what to do with. That’s why it bought $37 million in Alibaba stock.

Should you buy DJCO rather than BABA? That’s an interesting question.

Bottom Line on BABA Stock

At the end of 2020, Daily Journal hit an all-time high of $416.69. It has since lost about one-quarter of its value from that high. Should it fall into the $200s, DJCO would be a steal. 

Of course, you could say the same about BABA if it fell below $200. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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