Every now and then, institutional investors really sell a big hype.
Over the last five years, there may be no bigger hype than investment in China.
Yes, bigger than cannabis. Bigger than gambling. Bigger than cryptocurrency.
And there was a good thesis for this rampant speculation around China.
The nation has an estimated population of 1.44 billion people — about four times the size of the U.S. population. It has a rising middle class. It is the world’s second-largest economy, and it’s poised to overtake the United States economy in scope and scale by the end of the decade.
And — if you squint hard enough — there is a massive tech company comparable to the biggest and baddest members of the Silicon Valley elite.
None stands bigger than Alibaba Group Holding (BABA), an e-commerce and technology titan that rivals Amazon in its mission and stands as the largest Chinese company listed on the U.S. stock markets.
But recently… things have gone sideways. If this is a stock in your portfolio, you need to read the cold, hard truth that I’m about to tell you. And if analysts are trying to convince you that now is the time to buy Alibaba… you also need to read this.
It’s not time to touch this stock yet. Here’s why.
At the start of January 2020, Alibaba was the largest company on the New York Stock Exchange by market capitalization at $591.59 billion. That figure surpassed the size of Warren Buffett’s Berkshire Hathaway, JPMorgan Chase, Visa, and Johnson & Johnson.
At one point last year, the stock traded at a market cap of $868.11 billion. But Alibaba has been in retreat since last October.
Today, the market capitalization sits at roughly $496.64 billion, and the stock remains in a free fall.
The Chinese government began a significant crackdown of its technology sector over the last nine months. The government has released statements that it is concerned about consumer privacy and monopolies.
Let’s be honest about this. The Chinese government is worried about competition. At a time that the communist government is expanding its influence across the world, it remains very worried about companies that rival its power and influence.
It looks at the strength of Amazon, Apple, Facebook, and other Silicon Valley giants in the United States, and it worries about the influence of their leaders on society.
Last year, Alibaba founder Jack Ma mysteriously disappeared from public view for three months.
Ma is a member of the Chinese Communist Party. He is worth billions. But he dared to revolutionize banking through a company called Ant Group. In October 2020, Ant Group — an offshoot of Alibaba — had prepared to introduce an IPO. Ma, eager to bring change to the financial system in China, gave a speech that criticized the nation’s banking system. The comments reportedly reached President Xi Jinping’s desk.
It didn’t go over well with leadership. Ma didn’t appear in public again until January 2021. Some people wondered if he was even alive. The Ant Group IPO was canceled by the government.
Worries About China
The ongoing issue with Chinese companies is fascinating.
Is the government really interested in consumer privacy? Or is it just paranoid?
The soft adoption of “capitalism” — or at least the permission to let businesses exist — has been a driver of the Chinese economy over the last few decades. But the Communist Party risks killing the golden goose. The government’s ongoing crackdown of technology companies is a massive geopolitical risk that doesn’t inspire much confidence.
The government has issued reports suggesting that the concerns about this crackdown are overblown.
But if we follow the institutional investors, we’re seeing massive outflows from the market. If this continues, it will be very difficult for the Chinese government to attract investment.
Alibaba appears to be the biggest victim of this crackdown. And despite the company’s huge potential and massive consumer base, investors have chosen to stand on the sideline.
When to Buy Alibaba?
Will there come a point when Alibaba is a buy?
But you shouldn’t rely on guesswork to try to time the buying point or call a bottom on the stock. That’s what TradeSmith Finance is for.
We’ll be looking for some institutional buying pressure to help lift the stock. We’ll be looking for insight into the insiders and whether the CEO and other executives are purchasing their own stock. And we’ll be looking for BABA to enter the Green Zone and carry upward momentum.
This might take a lot longer than expected. But, as I’ve promised, I will revisit this stock once again and tell you the moment that it enters the Green Zone. For now, let’s avoid this company and focus more on the best-of-breed stocks that our signals have offered.
A lot of investors fell in love with Alibaba when the stock was trading at $300.
They were convinced that the company would achieve a $1 trillion valuation and continue to climb from there. However, the stock has lost nearly half its value since its peak, and these investors are holding on — hoping and praying that it will one day get back to those historic levels.
Tomorrow and Thursday, I’m going to explain why this mentality is a huge mistake.