By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 12/15/14 Sign up for Cabot Wealth Advisory—it’s free!
Alibaba (BABA) is the biggest online retailer in China, roughly a combination of Amazon and eBay and PayPal. More than that, because China has no national chains, Alibaba is also the biggest retailer of any kind in China!
The company made a big splash when it came public on September 19, raising $21.8 billion for the company and early investors. Today, with a market capitalization of $274 billion, Alibaba has roughly the same market cap as Wal-Mart, which has revenues of $484 billion (47 times as big as Alibaba’s $10.3 billion)!
Trouble is, Wal-Mart is a mature company growing revenues at less than 3%, while Alibaba is still a spring chicken (though a huge one), which grew revenues at 53% in the third quarter.
Looking at my four criteria for revolutionary stocks, here’s how Alibaba stacks up.
PE ratio. Alibaba’s PE ratio is 53, roughly on a par with its revenue growth rate. It seems fair in the short term, but it doesn’t matter. Criteria #1 says “Ignore PE.”
Imagination. Using my imagination, I can see Alibaba expanding into virtually any business in the world. If it earns the trust of people in China as a vendor, anything is possible, from banking to housing to education. Furthermore, the story is not limited to China; Alibaba is already moving fast to diversity around the globe.
Management. The founder and stem-winder of Alibaba is Jack Ma, a visionary entrepreneur who not only started the company but continues to move it forward. He’s selling the dream, to both employees and customers, that Alibaba can make life better for all of them.
Perception. While Alibaba is already the most valuable company in China, it’s still not a household word (like McDonalds, Coca-Cola, Toyota, etc) in most of the world. Furthermore, it’s still a very young stock, with many more potential buyers than sellers.
Thus, I think the odds are very good that a long-term investment in BABA—say 10 years—will work out very well.
Also, the stock’s chart says it’s at a decent buying point, sitting above its uptrending 50-day moving average.
So you could simply buy it here and put it away. But if you want a little guidance along the way-perhaps a shorter-term perspective-I suggest you consult Cabot’s emerging markets expert, Paul Goodwin, who recommended BABA in Cabot China & Emerging Markets Report and updates his readers every week on the stock ‘s status and prospects. Click here for more information.
My stock pick today is one that I’ve talked about before. It’s Alibaba (BABA), the giant Chinese e-commerce company that came public just two months ago. I recommended it to my subscribers during the first week of November.
I was pleased to see BABA show up in Cabot Top Ten Trader, our weekly publication that features the 10 strongest stocks of the previous week. Here’s what the description of BABA’s strength in Cabot Top Ten Trader had to say on November 10.
“Alibaba is the world’s largest e-commerce company, and is based in China, which is the world’s fastest-growing e-commerce market. The company operates many separate divisions, each with its own website, and is constantly expanding into new lines of business. Taobao Marketplace is the company’s biggest site, a place for seven million merchants to sell everything in the world. Listing on Taobao is free, but sellers who want to stand out can buy ads to improve their visibility. Tmall is Alibaba’s third-party platform for top quality branded merchandise. Alibaba.com is a global wholesale platform that lets small manufacturers sell to foreign customers. Ali Express is a global retail marketplace aimed at shoppers outside China, offering direct sales from Chinese wholesalers and manufacturers. Alibaba also has Alipay, an online payment system similar to PayPal. Like Amazon, Alibaba has grown revenue quickly, with fiscal 2014 growth at 56%. Unlike Amazon, Alibaba has been consistently profitable, without a loss in years. EPS is forecast to grow from $1.83 in fiscal 2014 to an estimated $2.22 in 2015 and $3.02 in 2016. With a huge war chest from its stunning IPO, the company has the capital to expand in as many directions as it wants. In its first quarterly report since coming public, Alibaba revealed 53% revenue growth, with plenty of growth from mobile devices. At this point, Alibaba hasn’t put its foot wrong with investors and with Singles Day coming up tomorrow (the largest shopping day of the year in China), the future looks rosy.”
By the way, Alibaba delivered a massive $9.3 billion in sales on Singles Day, which is greater than the entire market caps of some substantial U.S. businesses. BABA has been digesting its early November gains over the past week, slipping from around 120 last Thursday to around 112 today. That’s a normal correction for a stock that’s as much in the public eye as Alibaba’s. I think BABA is buyable here and has huge potential. You can use a mental stop at 103, just a hair above the stock’s rising 25-day moving average.
For more updates on BABA and an additional 10 momentum stocks each week, take a risk-free subscription to Cabot Top Ten Trader. This year, we grabbed many double and triple-digit winners, including 303% gains in Vipshop Holdings, 126% gains in Canadian Solar and 133% gains in Netflix, and we see many more strong stocks that have the possibility to be the next year’s winners. For details, click here.
My stock pick for today should be no surprise. Alibaba (BABA) reported earnings this morning and the results were strong, with sales rising 54%. The stock’s earnings of 45 cents per share beat expectations by two cents and the number of active users of the company’s various online retail outlets grew to 307 million, up 105 million from last year.
BABA spent a few days last week idling under 100, and today’s breakout to new highs looks convincing.
Where to buy? Well, the combination of a strong market and a hot stock does create some challenges. Ideally, you would wait for a dip of a couple of points as some investors take a little profit. That may happen and it may not.
I’m recommending taking a small position in BABA, maybe half of what you would usually invest in a new stock. Hold it until you get a profit cushion of 10% or so and then buy another quarter of a position. If the stock gives you another 10%, fill the position.
As for the mental stop, I would set it at about 90. That was resistance back in September and October and it’s about 10% down from last week’s mini-base.
To receive further updates on Alibaba and additional fast growing stocks, take a risk-free trial subscription to Cabot China & Emerging Markets Report. Our market timer has turned positive and we’re keeping an eye on many stocks that have characteristics of the double-digit winners. Click here for more information.
By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 11/3/14 Sign up for Cabot Wealth Advisory—it’s free!
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.
|Alibaba Group Holding Limited (BABA)
969 West Wen Yi Road
Yu Hang District
Hangzhou, 311121 China
86 571 8502 2077
|Index Membership: N/A
Industry: Specialty Retail, Other
Full Time Employees: 22,072