For the second consecutive day, China devalued its currency. Alibaba (BABA) the Chinese retail monolith reported results. Despite exceeding analysts estimates by 1 cent and announcing a $4 billion share buyback, investors were disappointed by the company’s revenue growth rate. As a result, traders sold the stock off rather hard. You have to understand that it is difficult to accelerate revenue growth when you are already doing so at a 30% pace. Still, with all the economic headwinds in China, BABA will grow earnings at a 25% plus rate for 2015 and 16. There are not many companies out there selling for 1 times PEG (Price to earnings adjusted for growth) with a high growth rate. So, you have to be patient with BABA and I would go so far as to say you can go against the crowd and add stock. I still maintain my $120 price target for BABA.
Markets Open Lower, Then Turn Around
As a result of all that, coupled with technical damage to the S&P 500 (SPX) the markets opened on a sour note. It was a rather ugly morning for stocks. Then, suddenly without warning, equity markets in the US turned around in the afternoon. By the time the closing bells rang, the SPX and NASDAQ 100 (NDX) posted small gains. However, you could not feel those gains because Chinese stocks and any company doing business in China all got hit hard, except Apple (AAPL), which bounced a little. The buying took place elsewhere.
So what were the big pension funds, who really dictate the direction of the market doing? Selling winners to buy losers. That’s right, they were selling growth to buy the beaten down energy and utility stocks. It was bargain hunting at its finest. Those two sectors bounced just under two percent yesterday. Even so, after the bounce, energy stocks are down about 10 – 12% and utility stocks are off 5 – 6% on average so far this year. We have been looking for opportunities to get back into energy and this might be the first signal.
The other big buyers out there were corporations who stepped up to buy their own stocks which have been pummeled 5 – 10% just in August alone. Also helping to propel stocks in the afternoon, especially in the energy patch, was a decline in the US Dollar (USD), which appears to have fallen for the first time since my Bar Mitzvah. The decline in the US Dollar might be a signal that the conditions in China might put the FOMC back on hold.
Dislocations Will Continue
Overnight China seems to have firmed and is setting up for a bounce. The craziness of August is still here. The dislocation between growth/China and energy/utilities might still play out in the short term. In the long term, growth is alive and well and China will not falter. My strategy remains the same. Keep our hedges on and wait for opportunities to move back into some beaten down growth names, just as we did with Twitter (TWTR) the other day.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, BABA, TWTR & QID — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is also a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
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