Key Takeaways

• We address the evolving risk/reward tradeoff of Alibaba (BABA 0.55% ) after the stock has broken through the three-year low. We expect it to be an opportunity in the future, but right now too many risks surround the name, including being potentially de-listed from the NYSE.
  
• We go over the prospects for the red-headed step child of our Signal From Noise picks, RealNetworks (RNWK). We believe the timeline for its growth has likely been pushed back.
  
• We discuss the prospects for the two airlines we have recommended in this column, Jet Blue and Alaska Airlines. We picked these two names for their unique characteristics which make them, in our view, better able to withstand a prolonged healthcare crisis than large international airlines.
  
• We discuss the “Cisco Kid”, Nvidia (NVDA 6.25% ) to assess whether this is one you can feel comfortable continuing to own, or whether you should lock in gains.
  
• We discuss another major winner from this column, Ford (F -1.61% ), and whether or not you have already seen the best from the company, and if it is time to take profits.

“Despite standard investment advice to the contrary, individuals often engage in panic selling, liquidating significant positions of their risk assets in response to large losses.” -From “When Do Investors Freak Out? Machine Learning Predictions of Panic Selling”

Freaking out is never a good look. We certainly understand how a cascading tape makes people feel, and we understand that every bone and intuition you have may be telling you to sell. However, the body of research on the issue is clear: the less selling you do, as long as you have a long enough time-horizon, the better your performance tends to be.

Remember, Fidelity did an analysis of which retail accounts were the most successful and what they found is a pretty profound statement on the best activity to take when it seems like the world is falling: do nothing. In 2014, the financial behemoth found that their most successful retail accounts were those where people simply forgot they had an account, and thus did none of the panic selling that is usually the downfall of retail investors.

Another consideration is taxes. If you hold a stock for less than a year, you will take a bigger hit on capital gains taxes. So, you should always take this into consideration when deciding whether to sell. Always be sure to consider tax implications. Also consider another thing that our Head of Research, Tom Lee, regularly tells our clients and subscribers: machines will almost always beat you in the short-term trading game. Those who want to generate long-term wealth from equities should always remember the saying, especially applicable in this case: less is more.

We understand since Omicron has reared its head, markets have been chaotic and volatile. However, we do think this is an interruption in a continuing bull market, and our First Word notes have been not only ahead of the crowd but have been based on key data considerations. By some measures of VIX activity, the market panic has nearly matched the panic in March 2020. Does that make much sense given that lockdowns are off the table and the population is immeasurably safer and better prepared than in that chaotic time? We think not.

2021 Signal From Noise Stocks With Gains from Nov. 1 to Dec. 1

November was a pretty brutal month and of the 38 stocks we recommended in this column prior to the beginning of the month, only seven experienced positive price action. The names that were already doing poorly endured particularly devastating price declines, such as BABA 0.55%  and RNWK. For both these names, we’re not going to give you specific entry and exits as that is outside the purview of this column, but we do think headwinds might trump tailwinds for the foreseeable future, given the specifics of both names.

On the other hand, NVDA 6.25%  and F -1.61%  have bucked the larger trend and continued their price appreciation in the face of serious volatility and headwinds. We still believe that both these names should not be sold, and that the best is yet to come. We believe both these companies have not only excellent long-term strategies that poise them for above-market growth, but also are run by exceptional CEOs and management teams that have proven their mettle in navigating treacherous waters.

While airlines have taken a major hit, we specifically selected JBLU 1.05%  and ALK -1.32%  because of unique characteristics that we thought made them less susceptible to potential bankruptcy than the larger internationally dependent legacy carriers. In our view, their concentration in short-haul international travel, and reliance on domestic travel as their primary revenue source, gives them greater survivability than the large legacy carriers who are more dependent on international and business travel.

Alibaba (BABA 0.55% )

We covered Alibaba on July 1^st, 2021. We were incorrect in our assertion that pressure from the Chinese government had reached a peak and would be short-lived. We had mentioned in our last update that we would revisit the name if its price collapsed beneath the $129 level that we saw as an area of technical support. It has since fallen through this support level. Our Technical Strategy department has advised us that the next level of support will likely be around $114, and that the stock may approach this level within the next three weeks.

An additional risk has emerged since we last updated the name—there is a growing risk that the Alibaba American Depository Receipts (ADRs) could be de-listed from the NYSE. This would be a majorly bearish event that could put significant additional price pressure on the stock. ADRs are the primary way American investors get exposure to Alibaba, despite the shares also being listed on the Hong Kong exchange. The thinking is that recent revelations that the Chinese Cyberspace Administration asked ride-hailing firm DiDi to prepare to de-list its ADRs from the NYSE, which should give all holders of Chinese ADRs a pause.

The macroeconomic situation makes China probably more vulnerable to a prolonged healthcare situation (lockdowns, etc.) than other Pacific countries. Additionally, problems in the Chinese property market, and a recently disappointing earnings report from Alibaba give us pause, and we’d advise to wait until the dust settles on these issues. We think this stock is fundamentally undervalued when compared to technology peers, but we believe there is likely more price weakness on the immediate horizon. We will provide an update if we change our thinking. If you have a long-term time horizon, we still do consider this a potentially interesting opportunity once more clarity is gained.

Our Head of Technical Strategy, Mark Newton, was also kind enough to provide some additional analysis to help folks understand the tactical situation a little better. His thoughts are below:

“Technically BABA 0.55%  looks to be getting closer to a tradable low, yet insufficient evidence of trend stabilization is in place at this time to make the case for a compelling buying opportunity.

The stock has now given up over 61% of its all-time highs from February peaks or, seen another way, it’s trading near a 38.2% Fibonacci absolute retracement of its all-time highs. 

Unfortunately, structurally speaking, BABA 0.55%  has just undercut 2018 lows after accelerating on the break of it is five-year uptrend.  Momentum, despite rebounding a bit from oversold levels, remains quite negative, and trends have been bearish for nearly 10 months. Downside technical targets lie near 113-115, or still possibly 8-10% lower, into late December.

However, there are some lights on the horizon, as for the first time in this steep decline, momentum has begun to show some evidence of positive divergence over the last few months. The recent breakdown under $140 was not followed by a similar move in momentum when eyeing both RSI and MACD. While this is an intermediate-term positive, it’s a starting process for how investors can begin to watch BABA 0.55%  more carefully for evidence of trends starting to stabilize. 

Overall, BABA 0.55%  should present some opportunity for an attractive risk/reward to buy dips heading into 2022. However, at present, trends and momentum remain bearish until price shows signs of getting back above $140, an initial encouraging development (but more importantly, breaking its severe downtrend—for now this would require a move above $165), then it’s difficult from a tactical standpoint to suggest that buying immediately would be proper from either a price or time standpoint.  Technically it will be right to give this a second look on movement under $120 for dip buyers, and the weeks ahead could bring about opportunity if technical targets near $115 are reached.”

RealNetworks (RNWK)

We have received a lot of requests on this name, and we understand that the thesis we initially introduced has not materialized thus far. We are constantly monitoring the technology situation, but the headwinds of being a microcap that has long since burned many bridges with institutional investors does appear to be trumping the AI-oriented growth initiatives of SAFR and KONTXT for the time being. We don’t see a lot of tailwinds for the name in the immediate future unless small caps in general begin rising.

The company is making progress on its AI-oriented growth initiatives and was one of two foreign providers that recently landed a contract with the Japanese government, which should contribute to the value of the SAFR product. However, a lot of the best uses for SAFR, given its embedded nature, is for government and military clients and the product vetting, acquisition, and contracting process all move to the beat of their own drums. Another setback for the name is that in prior earnings periods, it followed the strategy of using legacy businesses to fund its AI growth initiatives.

There has been a recent wrinkle in this strategy. The company has had disappointing results from the gaming segment and has hired a new CEO to right the ship. While this is probably the right move, it does jeopardize the initial timeline we had set to take advantage of this name.

From our analysis, it does appear the company is making steady progress on turning its AI initiatives into high-growth products that create value for shareholders. However, without the price support, and with an unclear timeline we definitely see other names with a better risk/reward tradeoff. If you’re still holding the stock and have a long time-horizon, we do think the embedded nature of safer and recent progress in expanding the data set is positive, but we recognize that this pick has not managed to entice the investor support necessary to expand market-cap and achieve more price support. Nobody bats 1,000.

That being said, we do think there is long-term potential in both the SAFR and KONTXT products. But the stock’s micro-cap status and recent setbacks in earnings make us think it will be a long ride if this occurs, and there’s a litany of risks that could derail the company’s strategy. We always recommend that you appropriately size and tailor positions in any small companies to properly account for the greater risk inherent in companies that are smaller on the capitalization scale.

Alaska Airlines (ALK -1.32% ) and JetBlue (JBLU 1.05% )

A major reason why we initially picked these airlines over some of their larger legacy competitors and some of the other low-cost Carriers like Spirit and Southwest was because we believed their sources of revenue—short-haul leisure, international destinations, and primarily domestic air traffic on thick routes—insulated them better from the existential risk that COVID has posed to many airlines.

ALK -1.32%  and JBLU 1.05%  are better equipped for the game of “bankruptcy dodge ball”, given these idiosyncratic features of their business, versus the larger airlines more dependent on business and consistent international air traffic. We think that despite the recent price weakness in these names, they are still better equipped in an environment where healthcare issues are more persistently affecting air travel over a prolonged period.

Alaska Airlines is the only legacy American airline to have never gone into bankruptcy. We think this counts for a lot in today’s world. It is also likely that Alaska Airlines will be one of the only airlines to remain profitable in Q4 because of its successful pivot toward short- and medium-haul leisure. JetBlue, as we pointed out, was already heavily tilted toward leisure, and thus became more attractive relative to legacy carriers as COVID changed the industry forever. We still think this is the case.

As our Head of Research, Tom Lee, has noted, we believe that Omicron will likely not significantly delay the economic recovery. We also believe that the big story is still the radical cost-cutting and increase in operating leverage that many Epicenter companies have undergone in response to the unprecedent situation we’ve faced over the last 20 months or so. The structural differences in where these airlines earn the bulk of the revenue compared to others makes us think they are still worth owning, and we suspect that this recent weakness in price will be an opportunity.

We do not want to understate the healthcare risks from the Omicron variant, as hyperbolic as initial coverage may have been, it does have the potential to cause continued price weakness across the sector. Winter also brings a natural seasonal slowdown in leisure demand. However, the TSA traffic from Thanksgiving nearly matched pre-COVID levels. We still think the key story here is pent-up leisure demand converging with more efficient airlines concentrating on the lowest risk kind of air traffic. We believe this thesis is intact for these two names, despite volatility.

Nvidia (NVDA 6.25% )

We titled our article “The Cisco Kid” when we covered Nvidia because in the show, the main character Cisco, always got the girl and always vanquished his foe. Nvidia’s performance since we wrote about it has proven this thesis to be prescient. Long gone are the days where Nvidia traded in tandem with cryptocurrency because of the mining-adjacent nature of the stock. It is pretty undisputable at this point that Nvidia will likely be a lynchpin in the coming artificial intelligence revolution that will revolutionize commerce across the economy.

There was a high bar for Nvidia coming into Q3 earnings given the prodigious pace of price appreciation in the stock. However, it didn’t fail to disappoint, and the key metrics for the stock accelerated. Another tailwind for Nvidia is that the company will likely significantly benefit from the rise of the Metaverse, but is not solely dependent on success in that area. Jenson Huang continues to be one of our favorite CEOs on Wall Street, and as we mentioned in the article, the substantial price appreciation the stock has undergone often creates a virtuous cycle in Silicon Valley as it works to attract and retain the best talent around!

There are also very few companies that are so essential to a constellation of emerging trends across various industries. Nvidia’s chips and know-how are required for most advanced artificial intelligence applications, as well as self-driving, gaming, crypto-currency mining, and data centers. It has many growth opportunities and has proven itself capable of pressing advantages effectively. One upcoming negative catalyst could be a rejection of the proposed ARM merger by European and British regulators.

Ford (F -1.61% )

Ford has been this column’s top-performer and it was also our first selection of the year. This drives home another important point of stock ownership—the longer you own a stock, the higher the likelihood that it will make you money. Ford’s new models have been enjoying very strong demand and markups at many dealerships. All indicators are that the lending arm is still booming and default rates remain very low, although we will continue to keep an eye on this.

One recent development was that Ford cancelled its proposed collaboration with Rivian, a hot EV startup in which the company had invested half a billion. We believe this decision was made from a position of strength and reflects Ford’s own increasing prowess and confidence in the EV space. Ford’s immense success with both the Mach-E and F-150 Lightning are key reasons why Ford may not feel like it needs a partner in the EV space after developing its own premier ability and, more importantly, having those abilities result in commercial blockbusters.

The company is also building two new battery factories in Kentucky that will help it realize its ambitious EV goals. Our view is that Ford, like some other legacy automakers, has made significantly more progress in EV than expected, and still has great internal combustion engine products like the Ford Bronco. Despite the ending of the collaboration with Rivian, Ford is still poised to benefit from Rivian’s success. It owns about 12% of Rivian and on the day of the IPO, its stake was worth more than $10 billion, a pretty significant chunk of Ford’s own market cap.

In addition, we still believe Jim Farley is one of the most capable managers in the auto business. We recently covered Tesla as well, a company that is likely to define the auto industry going forward. However, we think Ford is doing the best so far at responding to the brave new world we live in. Jim Farley eats, sleeps and breathes cars and understands better than most the unique interplay between these essential products and the consumers who want to buy them.