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Don’t Buy Shares of Alibaba Yet

Over the past several weeks, my phone has been ringing off the hook from clients wanting to get in on the Alibaba IPO. I told each client the same thing, “wait.” There was a lot of hype leading up to the IPO and the situation is the same as when Facebook came public. I told my clients the same thing when Facebook came public, “wait.”

Being patient and waiting are two of the hardest things for investors to do. Legendary investor Warren Buffett likes to compare investing to being a baseball batter at the plate. You won’t like every pitch, but when you get one right down the middle, you swing for the fences.

That’s what we did after the Facebook IPO on May 18, 2012. There was so much hype involved and everyone wanted a piece of the company. Shares were priced at $38 and after an initial jump to $45; shares ended their first day of trading at $38.23.

You see what happened was that as demand increased; the brokerage firms bringing Facebook public increased the number of shares in the IPO. In other words, to meet the demand, they flooded the market with shares. When you had the pop to $45, the investors that got shares at $38 rushed to cash in and book their profits.

After the first day, things only got worse for investors. The stock closed the next day at $34.03 and $31.00 on the third day of trading. After its second full week of trading, shares of Facebook closed at $27.22 and investors had lost a combined $40 billion.

On August 20th of 2012, shares closed at $20. This is when I got interested in shares of Facebook. The business wasn’t broken and the stock market was acting like Facebook was finished. However, as anyone that uses Facebook on a regular basis knows, this wasn’t the case. Investor expectations had been too high and Facebook was still a young company. There were bound to be hiccups along the way.

For investors who bought Facebook it has been one of the best investments over the last two years. Shares are now $79 and more than tripled in price. Waiting for a young company to prove itself is important and requires patience holding onto the stock. Follow Warren Buffett’s advice, wait for the pitch and then swing for the fences.

So far, Alibaba has traded just like Facebook. Shares were priced at $68 and opened at $92.70. After peaking at $99.70, shares closed at $92.14 on their first day of trading. Shares are now trading around $87.

Just like Facebook, you had the pop and then shares sold off as investors that bought on the open are now panicking. They bought between $92.70 and $99.70. As shares have dropped, they’re getting out and the lucky institutions that got stock at the IPO price of $68 are selling as well. We could easily see shares of Alibaba trade down to $68 or below just like Facebook did. That’s why I’m still being patient and not buying Alibaba just yet. There is still a lot of news to digest and we won’t have a better understanding of its business until the company issues its first quarterly earnings report as a public company. Sure it could bolt higher like Google did early on but even Google corrected 50% in the 2008 recession giving my clients a great entry price.

Besides buying shares of Alibaba directly, investors can also buy shares of Yahoo! or Softbank. Both companies have large stakes in Alibaba and got in early. Softbank is actually Alibaba’s largest shareholder with its 32.9% stake. By owning shares of Softbank, you not only get a piece of Alibaba, but you also get Softbank’s ownership of Sprint in the US and its mobile phone business in Japan.

Shares of Yahoo! are trading around $40, yet it owns 383 million shares of Alibaba that currently account for $34 of its $40 share price. That makes its core business worth only $6 a share. That’s why activist investors are now pressuring the company to boost shareholder value. If Yahoo! were broken up, it would be worth more than the $40 it’s currently trading at.

However, if shares of Alibaba head lower, that will take shares of Softbank and Yahoo! lower as well. That’s why I’m still not willing to pull the trigger on any of the three and think we’ll see some more selling pressure in Alibaba just like we did with Facebook. For those interested in Alibaba, feel free to give me a call, email or Skype and we can discuss when the timing is right for all of us.

Don Freeman is president of Freeman Capital Management, an independent US Registered Investment Advisor. He has over 20 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers. Call 089-970-5795 or email: [email protected]

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Don’t Buy Shares of Alibaba Yet