2 Ways to Ride Alibaba Stock’s Train Back to Recovery

The equity markets are living up to the old Wall Street adage of “climbing the wall of worry.” Geopolitical risks are at an extreme level, yet the indices have rallied seven out of the last eight days. Alibaba (NYSE:BABA) stock is finally one of the leaders in this charge. From last week’s low to this week’s peak, BABA stock gained 69%. Today my verdict is that investors can still board this train, but from two different stations.

Alibaba Group (BABA) headquarters sign located in Hangzhou China
Source: Kevin Chen Photography / Shutterstock.com

My long-term thesis is that this stock should easily double. Therefore, the entry timing into a position depends on the investor time frame.

I’m not a fan of chasing stocks after such a massive rally. So for now, I suggest waiting out any entries for a bit. I realize that you might miss on some upside in the meantime. However, it’s best to initiate positions on dips.

You won’t need BABA stock to collapse again (it should have never fallen into the two-digit zone). Therefore, a reasonable entry would be closer to $102 per share. This would give it the opportunity to fill the gap made on Tuesday.

Unless the stock market corrects again, I anticipate that Alibaba stock has already bottomed. Patient investors with vast horizons can own it now but not all in. The fundamentals should help lift the stock beyond the bears’ expectations. Investors have a habit of overstaying their welcome in winning trades. Bears will likely miss the opportunity to stop shorting. If so, then the rally back will raise eyebrows.

Either way, the recovery won’t be easy because of big areas of contention. But these will be the pacemaker triggers to provide buying bursts. BABA stock should struggle at $130, $140 and $160 per share. If the near-term dip doesn’t materialize then faster investors can chase the breaches of the resistance lines. The rally should be large enough to allow for substantial rewards.

BABA Stock Is Worth Owning Long Term

Alibaba (BABA) Stock Showing Upside Potential
Source: Charts by TradingView

Equities have been in limbo because of headline risks. The two major ones are the war in the Ukraine and the “war” that the Federal Reserve is waging on inflation. BABA and other Chinese equities have an extra headwind lingering from last year. The government there is still trying to cool its best stocks down.

The long-term chart I shared clearly shows how the bears were in charge. The bulls must respect that fact and book profits along the recovery path back. I also noted the potential target area for reference. When the CBOE Volatility index (INDEXCBOE:VIX) is this high, markets must whipsaw in both directions and often. Therefore, the short-term profits can turn into losses quickly. This is not as important for investors who have a much longer horizon for BABA stock.

Bottom Line on Alibaba

My solution to this is to use options. Using options, we can sell risk below support and not even need a rally to win. If you missed buying BABA under $100, you can sell puts there for the opportunity to own it cheaper. If they don’t assign you the shares, then you would have created income out of thin air. This is a strategy I only reserve for quality companies, and Alibaba qualifies with flying colors.

Revenues grew 10x since 2014, and gross profit 5x. The company also delivered $11 billion of net income last year.

Statistically, and because of the struggles that the stock has had, it has become cheap. The price-to-earnings ratio is 31x and the price-to-sales is 2.5x. Those are humble metrics for such a growth stock. Moreover, BABA delivered $34 billion in cash on operations. Regardless of where interest rates go, the company can feed its own growth and execute its plans. It has earned the benefit of the doubt enough to justify owning the shares long term.

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.


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