Quelle: online.barrons.com
By Steven M. Sears
March 24, 2015
Get long Alibaba.
Wall Street’s sales traders are increasingly telling clients to buy Alibaba Group Holdings (ticker: BABA ) at a time when the stock and associated implied volatility are trading near lows.
The recommendation is gaining vigor since the passing of last week’s lock-up phase that allowed some pre-IPO investors to sell shares.
But a funny thing has happened. Early investors seem to be keeping their shares. This is likely because Alibaba’s stock is below where it closed on IPO day.
But the removal of this expected selling pressure is proving attractive to some investors who are buying stock. This makes Alibaba’s late April to early May earnings report a key trading opportunity.
Investor sentiment is so negative going into earnings that the stock could rally on the slightest bit of good news. And it is hard to see the stock taking a big hit if the quarter is bad.
Meanwhile, the implied volatility of Alibaba’s options plummeted over the past few days.
One-month implied volatility – essentially the options market’s equivalent of stock - fell to 25% from 33.5%, indicating the options market has re-priced the risk of owning Alibaba’s stock. Three-month implied volatility is at 29%, a hair away from the February low of 28%.
The volatility declines enable investors to buy options on Alibaba’s stock without a fear or greed premium. This is the options market’s equivalent of a free trade.
With analysts largely negative, as indicated by earnings estimates coming down over the past 90 days, investors can buy Alibaba’s May $85 call that was offered at $4.10 when the stock was around $85. To lower the price of the call, sell the May $82.50 put that was recently bid at $3.05. The risk reversal – short put, long call with different strike prices but the same expiration – lowers the trade price to 60 cents.
The position expresses a view that Alibaba’s stock will rally into and after earnings. The trade is profitable above $85.60. Below $82.50, investors are obligated to buy the stock.
To be sure, investor sentiment is so negative on Alibaba – despite the bullish sales talk - that it is hard to be anything but bullish. Alibaba is now expected to earn 44 cents a share on revenue of about $3 billion. Ninety-days ago, Alibaba was expected to earn 49 cents a share.
Investor positioning is equally dour. Average daily stock trading volume has trended lower since the September stock offering, and now stands around 10 million shares.
At the same time, Alibaba’s short interest – which represents investors betting the stock declines – is at an all-time high. With 10 million shares sold short, it would take about five days to cover, or buy back the shares. If the stock rallies on a bit of good news, short sellers would be forced to chase the stock and buy back higher shares sold lower.
In the option market, Alibaba’s options are experiencing something of a renaissance. Alibaba increasingly appears on the top-10 most traded list that includes momentum names like Apple ( AAPL ), Facebook ( FB ), Twitter ( TWTR ) and special situation like Bank of America ( BAC ). On most days, bullish calls exceed bearish put action.
Outside the options market, it seems stock analysts are looking for a chance to say something good about Alibaba. Consider J.P. Morgan’s Alex Yao and Doug Anmuth. Last week, they lowered Alibaba’s price target to $117 from $109. At the same time, they reiterated an overweight rating, essentially telegraphing to investors to be patient and keep buying stock.
Though they acknowledge the stock has traded weakly, they think Alibaba will work out its short-term kinks, including recently reporting weak third-quarter revenue, concerns about the sale of counterfeit products, and management changes.
“We think near-term headwinds stem primarily from Alibaba’s efforts to enhance the health of its eco-system and we think these changes should pay dividends in the long term,” they averred in a recent note.
We agree, and advise investors to avoid the navel gazing that accompanies every twist and turn of a hot stock like Alibaba.
Alibaba has a leading market position in China. It is operationally and financially strong. It is, however, inexperienced dealing with the intense pressure of shareholders and analysts, and arguably even a Chinese government that is sensitive to Alibaba as a high-profile representative of the nation’s financial system.
In many ways, Alibaba’s current experiences are similar to Facebook’s similarly volatile post-IPO trading. For a while, Facebook was loudly criticized as a hyped stock as it struggled to find its capital-market sea legs. Now, Facebook is widely regarded as a great way to play rising mobile advertising.
Time will tell if Alibaba will be as well regarded as Facebook. But these facts are hard to argue: successful investors always manage risk and limit losses and they finance positions that have fallen from favor and are experiencing growing pains. The recommended Alibaba trades lets investors do just that.
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