One of the hottest sectors in the stock market is ecommerce. Because of the coronavirus shutdown, ordering products online has exploded.
Still, most ecommerce stocks are now technically very overbought. Fundamentally, their valuations are too stretched to justify new buying.
None of this is a problem for momentum investors, who do not care about analysis. For prudent investors, there is an opportunity in one of the biggest ecommerce stocks in the world that has not been run up by momentum investors. It is not Amazon; it is Alibaba.
Let’s explore with the help of a chart.
Note the following:
• The chart compares the S&P 500 to the Dow Jones Industrial Average ETF DIA, +0.09%, which tracks the Dow Jones Industrial Average DJIA, +0.10% and stocks of Amazon AMZN, +0.03%, Alibaba BABA, +0.43% and JD.com JD, +2.15%.
• Amazon is dominant in the U.S. Alibaba and JD.com are big in China. Amazon’s revenue in the three months through December was $87.4 billion. For Alibaba it was $23.2 billion, and for JD.com it was $24.5 billion.
• The chart shows that Amazon stock is up about 27% year to date and JD.com stock is up about 24%. In contrast, Alibaba stock is down about 7%.
• From a fundamental perspective, it is best to look at the five-year price-to-earnings-to-growth (PEG) ratio. It is 0.94 for JD.com, 1.22 for Alibaba and 2.21 for Amazon. In plain English, this means that Amazon is expensive relative to its growth rate. In contrast, the valuation of Alibaba is reasonable.
• The forward price-to-earnings ratio (P/E) of JD.com is 35.84, while Alibaba is 23.81 and Amazon is 66.23.
• Amazon has earned a lot of fans during this coronavirus crisis. Before you send me hate mail, know that all three stocks are in The Arora Report portfolio.
• The chart shows that Alibaba dipped into the Arora buy zone, giving investors an excellent opportunity to buy at a lower price.
• Smart money flows are positive in Alibaba. Please see “In these confusing times, X-rays of the biggest tech stocks show the strength of the stock market.”
• As a note of caution, there is some China-related risk in all Chines stocks. It is important for investors to properly size their positions.
When and how to buy
For those who are itching to buy an ecommerce stock, the stock to consider is Alibaba. For those who have the patience, it is better to wait for a dip into the buy zone.
Answers to your questions
Answers to some of your questions are in my previous writings. Please click here for details.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.