What in the world is going on with Alibaba (NYSE:BABA) stock? The same question extends to the entire Chinese tech equity market. They have been in a free fall for months. Just when we think they found a bottom, a new trap door opens.
Yesterday BABA stock fell another 7% on no new headlines. This is on a day where markets the S&P 500 closed green. The fears are the same with fresh booster shots downward. China wants to regulate its internet. This crimps profit potentials.
Being long a quality stock like BABA has never been this painful inside a bullish market. Even though we’ve had a couple of red days this week, the bulls are completely in charge so far. We are still inches away from record highs, yet Alibaba cannot hold a green tick. This is concerning because the business itself is very healthy. Its problems stem from domestic political difficulties.
There Are No Guarantees
The trigger may have been antagonistic comments from co-founder Jack Ma. But I suspect that this was a coming anyway. The government wants what it wants and they won’t stop until they get it. Therein lies the risk, because it is an intangible wildcard variable.
Statistically, the stock is now dirt cheap. It has a 20 price-to-earnings ratio, which is less than half of four years ago. Its price-to-sales is also one-third that of 2017.
After the beatings, the bears have trimmed all the fat off BABA stock. Even now, it is not a guarantee that it won’t fall further. In fact, losing $180 per share may have opened a new trap door with devastating consequences.
Regardless, there should be buyers lurking between $155 and $130 per share. This is all to say that if I own shares now, I would find it hard to panic out. Those who know how to use options can utilize them to mitigate some risk.
BABA Stock Is Still Risky
Initiating new positions in Alibaba now requires a lot of faith and intestinal fortitude. There is no research that we can do to increase our success odds. What the Chinese government has planned is not public knowledge. Therefore, a new position would assume that they close to finished. This is speculation, so the size of it must small so not to break the piggy bank.
Even though Alibaba can generate $75 billion in revenues in one day, it’s still an iffy proposition stock. What if they force them to cancel their singles day this November?
This is a unique scenario that is foreign to us. We’ve seen political pressures but not one that lasted this long. Therefore, experts must accept that they are missing a piece of this puzzle, I do. This by definition requires us to lower the level of enthusiasm, and conviction should be medium at best.
Under normal circumstances I would be pounding the table for BABA stock. I won’t do it here. I have tried it higher yet here we are. If I were to initiate a trade now, I would do it cautiously.
A stock replacement strategy would be appropriate. I would sell puts 30% below current prices out in time. At least this way I would have a large buffer before experiencing losses from holding shares. Alternatively, I would also be OK owning leap call spreads to capture the eventual rebound.
The first method leaves room for more pain. The second makes the out-of-pocket expense minimal. Either of those two strategies are more attractive to me than risking $160 per share with no room to spare.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.