Alibaba (BABA): The Stock I Like Today

Your Questions Answered

The Market Bounce

The Stock I Like Today: Alibaba (BABA)

Today we start with questions from readers, and answers from me. Much of this addresses misconceptions commonly held by beginning investors but hopefully, there’s something here to help everyone.

Hi Timothy,

I was wondering if you could write a piece on Short ETFs for your Cabot Wealth Advisory. In the current correction I am thinking about trying out something like that. I have no experience with shorting and I know Cabot doesn’t really ever suggest short positions but I thought it might be a relevant topic for your readers (even if you advise them against it.)

Kevin T.
Kelowna, British Columbia

(This question came before the market’s recent strong rebound, but it’s still worth answering.)

Kevin,

You are correct that we seldom recommend short sales (betting that the market will go down), and there are three main reasons.

The first reason is that the timing is especially tricky. You’re essentially betting against the market’s long-term trend. Sure, you might succeed from time to time with short ETFs, but they won’t be big successes, and sometimes you’ll lose (as many did who went short at the bottom of the recent selloff).

The second reason is that the math is not in your favor. When you go long, your potential gains are infinite, while your potential losses are limited to 100%. Contrarily, when you go short, your gains are limited to 100%, while your potential losses are infinite.

The third reason is psychological. I believe it’s best to focus on the positive, not only because the market’s long-term trend is up, but because even when the environment is negative, I believe it’s best to focus on building a Watch List of growing companies and other possible winners, so that when the trend does turn positive again, you’re mentally ready to join it, and you know what to buy as well.

However, I do think selling short is appropriate occasionally, and here’s my ideal scenario. After the end of a long bull market, when short- and long-term trends have definitely turned down, focus on liquid stocks that were favorites of growth investors in the final phase of that bull market, and which are now being unloaded. If the market had rolled over for real this time, candidates might have been Twitter (TWTR) and GoPro (GPRO). As it is, they’re still under a bit of pressure, but the market environment is not conducive to shorting.

Tim

Dear Mr. Cabot,

My question is about your last month’s pick, Twitter. I was pretty shocked at the quick turnaround from a pick of the month to a sell within one month. This stock was one that was more in my price range, as opposed to Tesla and others you have chosen before I became a member on 9/28/14. To be honest I am not a person that has a lot of money. With that said, I know you have now put a sell recommendation on Twitter, however, I bought it for around 50.00, do you think that if I hold on to it long enough it might come back to around that price so I can get my money back? Or do you think it may keep falling and never get back to 50.00?

Granville A.
Bel Air, Maryland

Granville,

You have a lot of questions in here, but they all revolve around my recommendation of Twitter (TWTR) to Cabot Stock of the Month subscribers.

First is your “shock” at my quick reversal from a buy on TWTR to a sell recommendation. In fact, that was an easy call. The story changed, and the stock’s action told us to sell. Specifically, the company’s quarterly report revealed that user growth was up just 5% from the previous quarter, and the stock sold off (gapped down) on big volume in response. Such a gap down on big volume in response to an earnings report tends to be an excellent short-term sell signal.

Second is the idea that TWTR, priced in the 40s now, is in your price range while a stock like Tesla Motors (TSLA), priced above 200, is not. It’s not how many shares you own that matters, it’s how much money you invest. If you want to invest in TSLA, you should just buy a fifth the number of shares.

Third is the idea of holding on to try to get out even. Getting out even is not the goal, and recovering from losses is not the goal. The goal is to make money by always having your assets in the most promising stocks. And doing that means selling stocks that are no longer in uptrends and moving on to greener pastures. (See below about CELG.)

Tim

Mr. Lutts,

It seems you guys wait for a big jump before you recommend a Stock of the Month.

Celgene (CELG) is up 20 points and THEN you recommend it. Great call.

We missed a big jump.

Thanks

Ron B.
New Fairfield, CT.

Ron,

Growth investing is about owning growing companies whose stocks are in uptrends. The existence of the uptrend is important, because trends tend to continue. If there’s no uptrend, the odds are not favorable that one will start soon.

Value investors, on the other hand, buy stocks that are “cheap” and then wait patiently. Sometimes they’re rewarded quickly, sometimes not; it varies. If you want to be that kind of investor, then Cabot Benjamin Graham Value Investor or Cabot Small-Cap Confidential will steer you toward plenty of investments.

But if you want to invest in growth stocks, you’ve got to recognize that you will always “miss” a big jump, and that’s okay.

Just as my sell advice on TWTR was triggered by a major breakdown, my buy recommendation on CELG was triggered by a major breakout to the upside.

And from today’s perspective, the sell on TWTR was good, because the stock is lower now than when it was sold, and the shift of money to CELG was good because that stock is now higher than when it was recommended.

Tim

Hi Tim,

I just sold my position in VOO (Vanguard S&P 500). I made 9% in a year but feel a bit stupid as now it looks like the fund is on the way back up!

Thoughts?

Basil S.
Beverly, MA

Perfection is not possible. You sold because at the time, the market was breaking down in a big way. But now the market-and thus the fund-has reversed course.

First, you should be happy that you made 9% in a year.

Second, you should ask yourself if buying it back is advisable given the more supportive market today. Maybe the answer is yes.

Third, you should ask yourself if the system that caused you to sell VOO can be improved. Perhaps not, because this was an unusually sharp shakeout, but it’s important to ask-and then answer for yourself.

Tim

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So what do I think of the market now?

I’m quite optimistic that between now and the end of the year, a lot of money will be made! Here’s why.

One. The divergences that had plagued the market from April through October are history. Since that major bottom two weeks ago, when a huge 620 stocks on the NYSE hit new lows in one day, the charts have been universally strong.

Two. Oil prices continue to fall, which puts more money in the pockets of Americans, who will both spend it on other goods and invest it.

Three. Interest rates remain very low, despite all the talk about the end of the Fed’s repurchasing. If you want to make money, the stock market is the place to be.

Four. The U.S. economy grew at a rate of 3.5% in the third quarter, which is a very healthy rate.

Five. Europe is in the doldrums, which is even more reason for money to come into U.S. stocks.

Five. (Looking farther ahead) 2015 is the third year of the Presidential cycle, which is typically the best of the four for the stock market.

So what stocks do I like? One stock to keep your eye on is Alibaba (BABA), the Chinese company that’s touted as a combination of Amazon and eBay on steroids.

When BABA came public in September, I was leery, because such a high-profile IPO after a long but fragmenting bull market (accompanied by lots of other IPOs and deals) smelled like a top.

Short-term, it was. The stock peaked at 99.70 on its first day of trading, and four weeks later, in the depths of the market’s correction, it was down 17%.

But BABA has come though the shakeout with flying colors, rebounding in fine style, and last week it started to build a nice base just under 100, which is a natural psychological level for such action.

As for the company, the future is bright, not least because the future is bright for the growth of China. Alibaba saw revenues grow 45% in the third quarter, while earnings jumped 60%. Analysts are looking for earnings growth of 21% in 205 and 33% in 2016, but there’s little doubt in my mind that those figures are conservative.

So, you could simply buy BABA here.

Alternatively (trying to be a little smarter), you could wait for the stock’s current base to be positively resolved, ideally with a high-volume breakout above 100.

But what I really recommend is that you listen to the advice of Cabot’s China expert, Paul Goodwin, who for the past decade has built an unparalleled record investing in Chinese stocks and will give you his latest opinion on BABA in every issue of his Cabot China & Emerging Markets Report.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Analyst, Cabot Stock of the Month and
Publisher, Cabot Wealth Advisory

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