My mother-in-law, God rest her soul, always said that "You take the good with the bad." Seems simple. I got along very well with my mother-in-law. She has been gone for more than 20 years now, but I can still hear that phrase spoken in her voice. As if she were in the room with me. She was offering this advice as a coping mechanism for life in general.
Long-term shareholders of Alibaba (BABA) know a thing or two about taking the good with the bad. Lately, it has been mostly bad. Often spoken of as the Amazon (AMZN) of China, it's what really amounts to a holding company does through its subsidiaries... have a lot in common with Amazon such as e-commerce, cloud computing, mobile media, and entertainment are concerned.
Not Exactly Twins
Yes, Alibaba does have a great deal in common with Amazon... except maybe in performance... as the trade conflict between the U.S. and China has developed, and as the Chinese economy has seen growth deteriorate rapidly enough for that central bank to resort to cutting their Reserve Ratio Requirement for the fourth time this year. As the yuan falls in value, tempting the flight of capital from that nation, everything Chinese has, at least in our world of equities, become toxic. BABA is -13% year to date. or nearly -30% since mid-June. AMZN though in decline with everything tech of late, is still +61% year to date. How's that for divergence?
There Is Hope
Hope? Yes, even with Jack Ma having announced that he will step down as Chair next year. Even with Ma having recanted on his pledge to bring a million jobs to the U.S. that was made back when the two countries seemed to have a chance to avoid this trade conflict. Goldman Sachs (GS) defended BABA last week. Goldman reiterated the firm's "Buy" rating and even jacked the firm's target price from a lofty $241 to an even loftier $247. The purpose of that $6 change is lost on me to be honest. Still, Goldman analyst Piyush Mubayi expects to see continued growth for both Alibaba's cloud business, and it's financial businesses as well. I can see this. I can also see how valuable the firm's position is within China for retail. That population is not getting smaller, and the Chinese middle class continues to grow as well.
When asked about the trade war back in September, Jack Ma's comments were sobering. He warned that this condition could last 20 years. Ma added "If Alibaba cannot grow, no company can grow." Sounds like Ma thinks his firm can live in a semi-protectionist world if it has to. That is the value that shareholders have seen priced out over the past four months.
This is not pretty. The firm is expected to report their Q2 earnings in few weeks. The Q1 numbers were alarming to say the least. Operating Margin contracted to 9% from 34% a year earlier. Sure, the firm's cash position grew, but so did the debt load. Interest expense ballooned, while Interest coverage fell out of bed. No, the firm is not in any kind of trouble, but there are sound reasons to invest elsewhere.
Yes, I know you can see the weak Relative Strength, the sloppy looking daily MACD,and the dreadful state of Money Flow. The last sale has been riding the central line of the descending Pitchfork Model for quite some time. It has been pierced to the downside a couple of times, but never held there, so the line is more of a guide than it is crucial.
What You Can Do
Door Number One: If Flat: Buy Something Else
Door Number Two: If Already Long 100 shares:
-Protect your downside with a purchase of one $135 December put (last: 4.17)
-Finance that purchase through the sale of one $165 December call (last 4.20)
This option protects the trader's downside cost free.
Door Number Three: If Feeling Your Oats:
-Purchase one December Straddle consisting of one December $150 call, and one December $150 put (Combined last sales: $19.87)
This last option will require a $20 move in the last sale of the equity by December 21st in order for the trader to break even, any more movement than that is profit, any less... well, that is a loss.
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