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Alibaba Stock Is Falling. It’s Time to Pounce on It.

Posted November 6, 2020 at 11:15 am
Steven M. Sears
Barron's

If stock-market forecasting exists to make necromancy seem like a respectable profession, political pollsters might just definitively prove the old maxim that figures lie and liars figure.

Despite their widespread conviction that former Vice President Joe Biden would trounce President Donald Trump in a landslide, the election results are still far from clear, leaving the world in a state of suspended animation over the outcome.

The race is so close that a clear victor still isn’t apparent, and votes were still being counted on Thursday. Trump, who is lagging behind Biden’s electoral college votes, tweeted that the Democrats are trying to steal the election, as votes were being counted after the polls closed. Biden has urged voters to be patient until all votes were counted.

The uncertainty of the outcome doesn’t seem to bother the financial markets. Stocks have been surging all week, and the implied volatility of put and call options on stocks largely declined. The action suggests a love of gridlock and dysfunction in Washington. Regardless of who wins the White House, a Republican-controlled Senate mutes, if not nullifies, the odds of any dramatic changes to the tax code that could hurt wealthy Americans and corporations.

Anticipating that the stock market would make a sharp move in reaction to election news, regardless of outcome, we advised investors to focus on buying stocks that they want to own by selling cash-secured put options to exploit stock declines. We also recommended a risk-reversal strategy—selling a put and buying a call with a higher strike price but same expiration—on the S&P 500 index, which would pay investors for agreeing to buy stocks if the market declined on election news, while producing profits if stocks advanced.

Both approaches have worked well—and still make sense during the interregnum.

Because it is hard to have an informational advantage amid political chaos, investors who can handle volatility and who have long-term time horizons might find some interesting opportunities—especially in stocks that have recently been hammered lower—including PayPal Holdings (ticker: PYPL), Alibaba Group Holding (BABA), and even major technology stocks like Alphabet (GOOGL), Apple (AAPL), Amazon. com (AMZN), and Netflix (NFLX).

Consider Alibaba, a company we have championed in this column since its initial public offering in 2014. Earlier in the week, the Chinese government surprisingly canceled the IPO of Ant Group, an Alibaba spinoff of which Alibaba still owns a significant stake. Alibaba’s stock was hit as investors adjusted to the absence of an expected windfall.

The machinations of the China’s Communist Party are arguably harder to understand than U.S. politics, but this is a fact: The continuing rise of China’s middle class is a profound economic event. Alibaba remains a key way for investors to monetize the thesis, and any weakness in the stock is enticing.

With Alibaba’s U.S.-listed stock around $285, investors can sell the December $285 put and buy the December $290 call. The risk reversal pays investors $2.40 to buy the stock at $285 and participate in rallies above $290. The expiration covers Alibaba’s Nov. 11 Singles Day sales event.

Alibaba reported robust earnings early Thursday, though the stock dipped on the news. Its price is likely to remain volatile, so be prepared to adjust strike prices as needed. The stock’s weakness is provocative.

During the past 52 weeks, Alibaba’s stock has ranged from $169.95 to $319.32. This year the stock is up 35%, and it’s up 53% over the past year.

There’s no way around it: The aborted Ant IPO—probably a delay to deal with new regulations—is disappointing. What we do know, however, is that Alibaba remains well positioned to profit from the rising middle class even if risks of government interference are currently elevated.

Originally Posted on November 5, 2020 – Alibaba Stock Is Falling. It’s Time to Pounce on It.

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