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Alibaba Traders Bet Stock Will Test 2018 Lows By Michael J. Kramer | September 25, 2018 — 6:00 AM EDT
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(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Alibaba’s Group Holdings Ltd.’s (BABA) price is over 23% off its 2018 highs, and options traders are betting shares fall as much as 8% more by the start of the new year. Should that happen, shares of the China-based e-commerce company would be almost 30% off its 2018 highs of almost $211.
Technical analysis also suggests the stock may head lower, back to its 2018 lows over the coming weeks. The stock has been falling as trade tensions between the U.S. and China continue to escalate. Rising cost and margin erosion at the company have also played a hand in the declining stock price. (For more, see also: Alibaba Traders Bet on 15% Rise Despite Red Flags.)
BABA Chart
BABA data by YCharts
An 8% Drop
Options traders are betting the stock falls by options expiration on January 18. There are over 17,000 open put contracts betting the stock will fall, at the $160 strike price. This is versus 11,000 open call contracts betting the stock will rise. To earn a profit, the buyer of the puts would need the stock to fall below $149.80, a drop of almost 8% from the current stock price of approximately $163.00.
Retesting Lows
The technical chart also suggests the stock falls further over the coming weeks after failing to rise above technical resistance around the price of $167. The shares have been declining as part of a longer-term downtrend that started in June. Should the stock continue to drop, it is likely to fall back to technical support around $151. (For more, see also: Why Alibaba’s Stock Faces More Declines Ahead.)
The relative strength index (RSI) has also been heading lower since June, suggesting bullish momentum is leaving the stock. Meanwhile, volume levels have been rising, and above its historical average, as the stock price has dropped. It would suggest more sellers are getting involved in the stock.
Declining Growth
Estimates for the fiscal second quarter of 2019 are deteriorating, with analysts cutting their earnings estimates by almost 10% to $1.27 per share. Analysts now forecast earnings for the quarter to decline by over 2% versus the same period a year ago. Revenue estimates have also dropped by 8% for the upcoming quarter but are forecast to grow by over 56% versus a year ago.
BABA EPS Estimates for Current Fiscal Year Chart
BABA EPS Estimates for Current Fiscal Year data by YCharts
Full-year earnings estimates drop as well and are forecast to rise by 10% in fiscal 2019 to $5.68, versus a prior forecast for growth of 24%. The revenue forecasts for the company have dropped too and are estimated to grow by 48% in 2019 to $58.3 billion, versus a prior forecast of 57%.
Alibaba’s struggles appear to be on multiple fronts. For the stock to turn, investors will need the trade tensions to ease or to see margins improve at the company.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
Read more: Alibaba Traders Bet Stock Will Test 2018 Lows | Investopedia https://www.investopedia.com/news/alibaba-traders-bet-stock-will-test-2018-lows/#ixzz5S7pimIVs
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