The sentiment on Wall Street is souring of late. There is a confluence of headlines that are rattling investor confidence. But that’s nothing to compare to what is occurring with the Chinese equities this year. The local government there is pursuing policies that could have lasting effects on the bottom lines of truly great companies. Stocks like Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU) lost an average of 30% of their values this year. Didi (NYSE:DIDI) stock, being the new kid on the block, is languishing near its lows.
Today we argue that even though there are no sure things, DIDI stock makes for a proper long-term thesis. The idea is to accumulate positions in good stocks that have fallen through no fault of their own.
DIDI should make for an attractive proposition for those who have longer time horizons.
It has been said they don’t ring bells at tops and bottoms. But at least near a bottom I know that I’m not chasing a runaway rally. However, since we don’t know what is really going on behind closed doors in China, we should be cautious.
A Modest Approach
Investors must avoid having absolute confidence in their decisions awaiting more clarity. Therefore, regardless of how good the opportunity seems, conviction should be modest.
This means that traders who take a full-size position now are being somewhat reckless. They leave no room to manage the risks later. Moreover, there’s overall risk from the entire stock market. We are still hovering near all-time highs with deteriorating conditions. So far, companies are not showing any cracks yet. However, the Federal Reserve last week suggested that they will end asset purchases by next year.
This means that the QE will end in about nine months. While I don’t believe we are close to a tightening policy, the topic is scary enough in the headlines. The Fed is likely to be neutral but we still don’t know how stocks will react to that.
DIDI Stock Needs Time to Base
DIDI is not the problem. Its fundamentals are not bad. But it is still too new and investors don’t trust it yet. The stock needs time in order to earn its kudos on Wall Street. Meanwhile, it’s futile to dissect the financial metrics, especially because of the pandemic. Just look at how confusing it is to examine the financials on stocks like Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT). And they’ve had a couple of years head start on DIDI stock.
Total revenues are stagnant just above $20 billion per year. Furthermore, they still lose money but that’s not an issue for startups. The silver lining is that the company generates a net positive cash flow from operations. As a result, they don’t require too much debt to feed the beast so to speak.
The expectations are that DIDI has found a bottom below $8 per share. This was the floor from July and August.
So far, and almost like clockwork, this is happening in September as well. The bears are in control from the standpoint that they are making lower-highs. The bulls have some talking points with the fact that they are holding the floor. This results in a tightening price action coming into a pinpoint. Soon it will have to resolve itself.
Finding Footing Is Step 1
The optimistic in me says that the bulls will prevail but they need the market’s help. They can even spur momentum buyers if they DIDI breaches $9 per share. There is resistance at every round number above. But they can tackle each in turn as long as they maintain progress.
Everything starts by setting a floor, which is ongoing now. This would be a classic case of how a stock finds a bottom in a process, not a “V.” DIDI stock would then have more convicted buyers to build upon that a strong base.
If the bears break into new lows, they could accelerate the breakdown and extend the pain another 20% from there. I remain more optimistic than not that the markets will help DIDI. Therefore, I contend that the upside potential outweighs the downside risk from here.
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.