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Should You Short Alibaba?

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A blog post about Alibaba and Chinese e-commerce companies more broadly by an accounting/auditing blogger has recently made its rounds on the internet. Most investors first became aware of it after is was shared on Twitter by Muddy Waters Research, an investment company specialized in revealing frauds and scams in Chinese companies and then taking short positions in the stock.

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Muddy Waters is a highly respected firm that many traders follow for tips on possible shorts. The company has also made good money in the past by exposing inflated numbers and frauds in the stock market.

On the same day as Muddy Waters sent out the tweet, Barron’s picked up the story and later offered Alibaba to comment on it, but the company declined.

The blogger in the center of all of this, who says he prefers to remain anonymous, points to the sales figures released by Alibaba after the 11/11 shopping spree, aka Single’s Day in China, as ridiculous and too good to be true. For example, he mentions that Alibaba’s sales for just this one day came in a little over K-mart or Sears’ total annual revenue.

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Alibaba vs. Amazon

The best comparison to make to get the numbers in perspective, however, is Amazon. So, let’s take a look at how Amazon’s numbers compare to Alibaba’s so you can make up your own mind on whether you believe them or not:

  • Alibaba Single’s Day revenue (1 day!): US$25 billion
  • Amazon 2016 Q4 revenue (91 days): US$43.7 billion

In other words, Alibaba in just one day sold a little more than half of what Amazon (including AWS) sold in all of Q4 2016.

The blog author, along with Muddy Waters and various people on Twitter, are mocking these numbers and Alibaba by pointing to Alibaba’s logistics system in China as incapable of delivering packages at this scale.

Anyone who has spent some time in Chinese cities have seen how packages are sorted on sidewalks in seemingly random locations around town.

Or as the author puts it, “why invest in all that expensive GPS, scanning, package, tracking automation when you can just dump your packages on the sidewalk and let homeless people figure out how to get them where they are supposed to go?”

Still, most people who have spent time in China would also agree that this seemingly chaotic system in fact works incredibly well, packages rarely get lost, and delivery is unbelievably fast.

Those who know China also know how huge online shopping really is here, not to mention on days like 11/11. Thanks to extremely low shipping fees, fast delivery, and easy-to-use shopping apps for smartphones, online shopping is much bigger in China than in any Western market like the US or Europe. According to available statistics figures, 20% of Chinese retail is online compared to 9.1% in the US.

Also, keep in mind that Alibaba is a massive company, with much more than just Alibaba.com as part of its business. For example, Taobao.com is the number 1 e-commerce platform in China, connecting shoppers with independent sellers. Tmall.com is also a huge player, but is more focused on sales from well-established businesses and brands. Take a look at the full picture below:

Alibaba businesses

Alibaba’s organizational structure is a mess

While I am skeptical of the notion that all of Alibaba’s numbers are somehow made up, the same blogger deserves credit for pointing out some interesting things about the company’s organizational structure in another post on his blog.

Their structure is, to put it mildly, a huge mess. Take a look for yourself in the chart below:

Alibaba organizational structure

Perhaps the most interesting thing about this is the footnote to the chart not shown here. According to the footnote found on the SEC website, there are approximately 120 entities incorporated in China and other countries + about 200 subsidiaries and consolidated entities that are not included in the chart.

One can easily argue that the only possible reason for structuring a company as a labyrinth at this level is to make it effectively un-auditable and eliminate any risk for Jack Ma himself and other key people in the company.

Also, investors should really ask themselves what type of ownership claim they have on Alibaba’s business when buying shares in the Cayman Islands holding company, which what is traded on Wall Street. It is very unclear what, if any, ownership claim they have on the real-world business that Alibaba conducts from its Hangzhou, China headquarters.

As a final point, it also remains unclear who actually audits Alibaba. Officially it is audited by PwC Hong Kong, but the reality may be different. Most likely, Alibaba is audited by PwC on the mainland, and signed off by their colleagues in Hong Kong, who are operating under a completely different set of rules.

To summarize:

  • Alibaba has lots of brand names operating under its umbrella, some in China and some globally.
  • 20% of Chinese retail is online vs. 9% in the US.
  • China’s online population is 751 million people vs. 287 million in the US.
  • Alibaba’s shares traded in the US is for a Cayman Islands holding company, with unclear connections to the real-world business operations in Hangzhou.
  • We know very few details about how Alibaba is audited.

Should you short Alibaba?

My simple answer at this time is still no. While their revenue figures seem extremely high, I don’t necessarily think they are inflated. Other aspects of their business, such as the corporate structure and auditing issue, seem more questionable to me.

Alibaba chart

The stock has gained about 100% so far in 2017, and with momentum like that, shorting can be dangerous. However, if we see clear signs of a slow-down in the Chinese economy going into 2018, Alibaba would be high on my list of potential stocks to sell short.

The next few days will tell us if the recent uptrend in the price will be maintained, or if the price will break down below the trend line. If a break-down does happen, an opportunity to short may present itself even sooner.

Keep a close eye on Alibaba’s stock price in the first few weeks of December for confirmation of where the market is going.

Featured image from Pixabay.

Disclaimer: The author does not hold any positions in Alibaba or related companies.

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Trade Recommendation: Buy EVHC and EQT on Selling Exhaustion

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The S&P 500 Index (SPX) continues its ascent as it knocks on immediate resistance at 2,660. Currently, the index is traversing overbought territory. Ideally, it takes a dip now and fill the gap between 2,640 and 2,646 which was created on December 8, 2017. That should take the RSI below 70, and give the index room to break 2,660 by next week.   

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Nevertheless, SPX remains aggressively bullish as long as it is above 2,600. For this edition, let’s look at stocks that appears to have found their bottom.

EVHC – Envision Corporation

EVHC has suffered massive losses in value since it made its 3-year high of 137.57 back in 2015. The stock went on a downtrend when it created a bearish pattern and failed to hold critical support at 110. Bears sent it back to as low as 23.77 which is an astronomical 82.72% drop in value.  It’s all gloom and doom, but the charts show a promising picture.

Technical analysis show that the stock may have recently bottomed out. EVHC generated a massive volume of 50.45 million on November 1st which was coupled by a big gap down. In addition, volume has been decreasing day by day. Lastly, weekly RSI shows recovery from extreme overselling. These indicators tell us that the stock may have found its new support level.

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The strategy is to trade the range by buying as close to 25 and selling as close to 80. Keep in mind, the stock has not flashed any sign of reversal so officially, it’s still on a downtrend. However, there’s opportunity to generate profits here by taking advantage of the consolidation period. Buy low and sell high.

Weekly EVHC Chart

Monthly EVHC Chart

As of December 11, 2017 close, the stock is at 32.90.

Summary of Strategy

Buy: between 25 and 35

Support: 25

Target: 80 but consider lightening positions at 45 and 60

Stop: A close below 23.77 negates this trade call

EQT – EQT Corporation

Just like EVHC, EQT suffered massive losses in value after it dropped to 47.10 from a 5-year high of 111.47. The stock went on a downtrend when critical support at 82 broke down. It lost 57.75% in value before the bulls took strong action and defended support at 50. Since then, EQT has shown signs of life which may prove to be profitable to those who invest in the stock.

Technical analysis show that the stock has found its bottom at 50. Weekly chart reveal that the stock generated volume of over 60 million on June when the average volume was just below 13 million. This signals selling exhaustion. During the same period, the stock created a hammer which indicates the presence of buyers at 50. More importantly, EQT has tested and successfully defended support level at 50 twice already. This increases the probability that the stock will no longer go below that level.

Similar to EVHC, the strategy here is to trade the range. Buy between 50 and 60 with the intention of selling at 80. As always, buy low and sell high.

Weekly EQT Chart

Monthly EQT Chart

As of December 11, 2017 close, the stock is at 57.13.

Summary of Strategy

Buy: between 50 and 60

Support: 50

Target: 80

Stop: A close below 50 invalidates this trade call

Featured image courtesy of Shutterstock.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Trade Recommendation: Ride ETN and EW on Breakout

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The S&P 500 Index (SPX) flexed its muscles on Friday, December 8, as it gapped up, opening nearly 10 points higher than its previous close. With volume going below its 20-day average, the market’s telling us that sellers are running out of ammunition. The slowdown in selling has enabled bulls to push the index up, closing almost the same level as the day’s high.

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The price action on December 8 affirms our bullish view. With that sentiment, let’s continue trading stocks that are on the verge of breaking out.

ETN – Eaton Corporation

The stock has suffered as much as a 42.25% loss in value during the course of its 3-year downtrend. It almost touched a high of 80 back in 2014, but bears claimed that level and sent the stock to as low as 46.19 in 2016. Fortunately for the bulls, the stock respected that support and used it to generate one higher low after another. The consecutive rallies has given ETN momentum to beach resistance at 80, albeit briefly.

While the bears continue to own that resistance level, technical analysis reveals that it’s only a matter of time before bulls conquer that level with conviction. Weekly and monthly charts reveal a large bullish reversal pattern that can take ETN to a new five-year high. Breach 80 with heavy volume of 11 million in the daily chart should attract momentum traders and give the stock a clear path to our target of 120. More importantly, breakout of this three-year resistance level should restart the uptrend for ETN.

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Weekly ETN Chart

Monthly ETN Chart

Summary of Strategy

Buy: breach of 80 with volume of 11 million

Support: 76 and 72

Target: 120

Stop: A close below 72 negates this trade call.

EW – Edwards LifeSciences Corporation

While EW technically remains in an uptrend, it suffered as much as a 33.37% loss in value as it went through a massive corrective phase. It went as high as 121.75 in late 2016 before getting sent back by bears to as low as 81.12 in under two months. Just like ETN, however, EW used that support level to rally and post a series of higher lows. Currently, the stock is threatening to finally breach resistance at 120.

Technical analysis reveals a large bullish continuation pattern that can signal the end of EW’s corrective phase. In addition, indicators show that bulls are in a good position to take out 120. The last candlestick on the weekly chart is a hammer which indicates the presence of buyers above 110. In addition, RSI shows that the stock is far from oversold territory, giving it room to make a move up. Lastly, volume has picked up which hints that a significant number of market participants are showing interest in the stock.

The strategy is to wait for the chart to break resistance at 120 with over 9 million in volume in the daily chart. Breach of this level will attract momentum traders and may lift the stock to our target of 160. It is also important to note that there is no known resistance above 120. Hence, the stock may reach our target without much of a struggle.

Weekly EW Chart

Monthly EW Chart

Summary of Strategy

Buy: breach of 120 with volume of 9 million

Support: 112 and 110

Target: 160

Stop: A close below 10 invalidates this trade view.

Featured image courtesy of Shutterstock.

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Trade Recommendation: Buy BBY, ZNH, CLX, and USCR

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The S&P 500 made a new intraday lifetime high on Monday of last week, but it could not sustain the gains. Over the next two days, the index declined, however, the bulls stepped in at 2624.75 levels, as the news flow turned positive. The index gained ground in the last two days of the week and made a new lifetime high on a closing basis.

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Important points

  1. Bulls continue to buy the dips, which suggests further upside to the US markets
  2. We want to ride the move higher through our trading positions
  3. Buy BBY, ZNH, CLX, and USCR

We believe that the bulls will want to end the year on a strong note, hence, the rally is likely to continue in the remaining few days of the year. After all, the index has closed positively in all the first eleven months of the year.

We, therefore, continue to look for trading opportunities on the long side. Notwithstanding, at the current levels, any adverse news, especially on the tax front can start a sharp fall. Therefore, please use a trailing stop loss to protect the position once it moves in our favor.

BBY – Buy 64.2, SL 60, Target 71

Weekly chart

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The stock had risen to a high of $59.5 in April 2006, following which it plunged to $12 by end-2012. Since then, the stock has been on a path to recovery. In May of this year, the stock made a new lifetime high, however, it could not sustain the levels. The bears again pushed the stock lower. In the last few months, the stock made a bearish head and shoulders pattern on the weekly chart.

However, last week, the stock broke out to new highs, thereby invalidating the bearish pattern. This is a bullish development, which suggests further upside. Let’s see the critical levels on it.

Daily chart

On the daily chart, we find that the stock had been range bound since end-May of this year, between $53 on the lower end and $61.95 on the upper end. A couple of attempts to break out of the range faced stiff resistance from the bears. However, on Friday, the stock broke out to new highs with force. This is a bullish sign. We expect the stock to now move towards its pattern target of $71. Hence, we suggest buying it at $64.2, above Friday’s intraday highs with a SL of $60.

ZNH – Buy 46.5, SL 42, Target 53, 59

Weekly chart

The stock has not done much in the past decade. After rallying to dizzying heights a decade earlier, the stock plunged during the global financial crisis. Thereafter, it has been in recovery mode, but it has not been able to make new lifetime highs. Nevertheless, the pattern suggests that a retest of the highs is possible. Therefore, we want to enter this trade.

Daily chart

The stock had been range-bound between $25.6 and $42.6 for about two years. It broke out of the range on November 20. Thereafter, the bulls successfully held on to the $42.6 levels during the pullback. This shows demand for the stock at higher levels. The pattern target following the breakout of the range is $59. Therefore, we propose buying the stock at the current levels of $46.5 with a stop loss of $42.

There is a small resistance at the $53 mark, where traders can book partial profits if the stock struggles to break out of it.

CLX – Buy 146, SL 138, Target 168

Weekly chart

The stock has been in a long-term uptrend since 2009. It entered a period of consolidation/correction in July of last year. Since then, $140.5 had been acting as a stiff resistance. Three attempts to break out of the overhead resistance failed. The stock formed a bullish ascending triangle pattern and the bulls broke out above the overhead resistance last week. Hence, we want to buy the stock, as we expect it to move higher.

Daily chart

The bulls managed to breakout of the ascending triangle pattern on December 04 and have managed to sustain above $140.5 levels for a week, which is a bullish sign. The stock now has a pattern target of $168. Therefore, we want to buy 50% of the allocation at $146 and the rest on a successful retest of the $141 levels. Our stop loss for the trade can be kept at $138. We don’t want to hang on to the stock if it falls back into the triangle.

USCR – Buy 85.25, SL 80, Target 92

Weekly chart

The stock has been in an uptrend since 2012. It has been rising inside an ascending channel for more than a year. Just two weeks back, it had fallen to the trendline support of the channel, which held. We can now expect the stock to rally towards the resistance line of the channel, which is at the $92 levels.

Daily chart

On the daily chart, we find that the stock had been facing stiff resistance at the $80 mark. It broke out of the overhead resistance in end-August of this year, but could not sustain above it. Subsequently, it declined to the lower end of the range at $70. On November 30, the stock again broke out of $80 levels.

The bears again attempted to stem the rally at the $84 levels. However, the stock found support at $80 and rallied to new highs on Friday of last week. We, now, expect the uptrend to continue. Therefore, we recommend a buy at the current levels of $85.25, with a stop loss of $80 and a target objective of $92.

Featured image courtesy of Shutterstock. 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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