The Sky Is Falling … Buy Alibaba Stock
Sunday night, S&P futures fell off a cliff, foretelling Monday morning doom. President Trump tweeted Sunday that there will likely be more tariffs coming this Friday. And the talks between China and the U.S. have apparently taken a step backward.
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Surprisingly, the Monday session was stronger than it should have been. We saw a sharp bounce off the morning lows and some stocks even closed green. So traders are still playing chicken with the headlines. The tariff talk hiccups affect some stocks more than others. Alibaba (NASDAQ:BABA) is one that is squarely in the line of fire. BABA stock closed Monday down almost 4% and that’s even after a $3 bounce off the overnight low. This morning, it’s revisiting those lows.
The opportunity today is that BABA stock is one to own for the long term, regardless of these headlines here. So these dips are buyable.
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While the short-term price action is violent, it should not affect BABA’s long-term bullish thesis. This is a company that is China-centric and not so much dependent on the commerce between two nations.
Even then, Alibaba has too much momentum going for it to let one feud kill its prospects forever. BABA’s management team has proven itself worthy of its reputation as they have delivered on promises for years and they will continue to do so for many more to come.
In its earlier days, we would have called BABA the Amazon (NASDAQ:AMZN) of China. Fundamentally, it’s almost twice as cheap as AMZN from the price-to-earnings ratio. To be fair, AMZN has better fundamentals when we consider the price-to-sales ratio and other income sources. But conceptually, it goes to show that BABA is not bloated and it has a prosperous future ahead of it.
Year-to-date, Alibaba stock is up 37% … even after Monday’s dip. But it has lagged for the past 12 months, as it has had a tough time breaking out from important trend lines. Last week it took a big step toward filling an upside target to $210 only to suffer the setback this week back below the neckline.
How to Approach BABA Stock Amid Growing Concerns
Therefore, the bullish thesis on owning BABA shares must be for the long term. This is a stock that is worth owning here, so if you own shares already, do not worry about these minute-to-minute tariff headlines.
But if you need to start a new position in Alibaba stock, the headline threats have opened the door to at least start buying shares. I wouldn’t suggest taking a full position all at once, so I’d leave room to add to it if the price goes against BABA’s favor in the next few weeks. This is especially important since the company will report earnings soon enough. Those events are completely binary, thereby adding to the short-term guesswork.
While BABA stock has failed to sustain the breakout opportunities of late, it has support below. The area around $177 per share has been a point of interest for three years. So on the way down, it will be support as both bulls and bears fight hard to determine the price.
BABA stock can continue to attempt breaking out until it finally does. Management has done it before — twice in 2017, in fact, where it reset the bar higher. The stock took major leaps higher before and it can do it again.
Having the support below gives investors fortitude to hold through the rough noisy patches like these. I am not saying it will be a moonshot. In fact, I expect more turbulence this week as it seems that the Chinese talks are dead and we will have an additional tariff by Friday morning.
But in the long term, owning BABA stock will deliver profits to its investors. So this is a trade that could turn into an investment without much tweaking. I can buy shares now and protect them by selling covered calls and/or buying puts for temporary peace of mind.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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