In full disclosure I own these shares in my portfolio. That is because Alibaba (BABA) is the Amazon of China with robust long term prospects that make it an attractive position for most investors.
But lets be honest with ourselves, it hasn’t looked so hot lately which is why it only sports a POWR Rating of C (Neutral). Most of that weakness reflected in the rating has come from poor price action the past several months thanks to the US-China trade dispute.
Below I will do a full POWR Ratings Breakdown of BABA where we review the outlook for shares on 5 different measures of its attractiveness. Afterwards I will give some thoughts of why the prospects for shares may be better than the current modest ratings.
Buy & Hold Grade = C
This is based on a myriad of factors including the price action the past year where we see a fairly weak -16.7%. Plus shares are well off their highs. Not all that weakness can be tied to the US-China trade talks. Unfortunately they had 2 major earnings misses last year which tarnished their earnings outlook. The tide may be turning on that after the earnings beat from last week.
Trade Grade = C
Shares are up nicely on the year at nearly 20% gains. Unfortunately it has been very weak since hitting a high of $195 only a couple weeks back. No doubt it was the renewed trade tensions that sparked that sell off. And BABA is dead money or worse until there are signs of coming to a positive conclusion on those trade talks.
Industry Rank = C
There should be no surprise that their industry group of Chinese stocks is in the middle of the pack (#75 out of 123 industries). In fact, that sounds a touch high for how weak this group of stocks have performed since the trade war first commenced. We also know that in the long run few regions of the world offer more growth potential than the Chinese market. So what is currently a weakness will likely once again become a strength for these shares.
Peer Grade = A
This is the sole positive on shares as they have outperformed their peers of late. A lot of that is because they had one of the best earnings reports for a Chinese company this past quarter. But because of the weakness of the group this A rating is like being called the tallest midget 😉
POWR Rating = C (Neutral)
Is Neutral the worst thing in the world? No…it is saying there is no real catalyst in play to help shares outperform.
Here is why I think the outlook is a touch better than reported above. I am supremely confident that the US and China will reach terms on a trade deal. (I went into more detail on that in my 5/10 commentary). Its not so much a matter of if…but when.
On top of that you have what appears to be a turnaround in their earnings outlook after a rocky slate of reports in 2018. If that continues, and a deal comes together, then shares will easily be over $200 by years end. In fact, the average target price is $208 for shares with a street high of $283.
Waiting for all of this to come together may be too late as the market often acts in advance of things being finalized. Thus, with shares all the way down near $160, then risk/reward is firmly in the corner of investors at this time to own this cornerstone technology stock.
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Alibaba Group Holding Ltd NYSE: BABA shares were trading at $286.33 per share on Tuesday morning, up $2.38 (+0.84%). Year-to-date, has gained 15.07%, versus a % rise in the benchmark S&P 500 index during the same period.
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