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Why 2017 Could Be Alibaba’s Breakout Year

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Alibaba Group Holding could be a standout stock in 2017, a year most banks expect the broad stock market will post only incremental gains.

Analysts are starting to conclude that the Chinese technology giant may surge in the coming year. Just recently, Morgan Stanley told clients that the $92 stock (ticker: BABA) has about 40% upside. This will strike some investors as an example of Wall Street tailoring a narrative to sell stock to investors who are worried that President-elect Donald Trump’s expected protectionist policies could hamper China’s market, but that view is too cynical.

While Trump’s policies are a risk, Alibaba is far more than a Chinese version of eBay(EBAY) that sells stuff online. The company stands to dominate China’s e-commerce market, cloud computing, and perhaps even financial-services markets.

“We believe that Alibaba is in the early stages of unlocking the value from what we view as its most valuable asset – a rich database that continues to accumulate from its well-controlled and extensive closed-loop ecosystem, through advancements in data technology,” Morgan Stanley’s Grace Chen and her team said in a Dec. 7 report.

According to the bank, Alibaba is worth $130, a price target that reflects $114.90 for its e-commerce business, $7.80 to its strategic investments, and $7.70 for its Ant Financial unit.

Intrigued investors can consider two trading strategies.

With the stock around $92, investors can simply sell put options to position to buy the stock on a pullback. The February $85 put could recently be sold for $1.82. If the stock keeps advancing – shares are up about 15% this year – investors can keep the put premium. Should shares trade below the strike price at expiration, investors should buy the stock rather than cover the put because the stock has a bright future.

Holding Out for Dow 21,000 – and Beyond

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We can’t blame pundits for trumpeting the approaching 20,000 level on the Dow Jones Industrial Average. After all, such huge round numbers are rarities in the stock market, and readers eat up those headlines. Still, I prefer to look at the charts, make my projections, and then live or die by my work.

Right now, Dow 21,000 looks to be the far more important target.

While there is an argument that round numbers act as support and resistance on the charts, I wouldn’t bet the house on them. Few traders make decisions this way because they know that if everyone looks at a big price level, it’s not going to be that effective.

Why? Because people will jump the gun and trade ahead of them, hoping to get an edge on everyone else. That is why the end-of-year Santa Claus rally now starts in November, the current Trump rally notwithstanding.

Here’s how I get to the 21,000 level, and it starts with a measure of the giant trading range that ended in July (see Chart 1).

AT&T Stock Yields 4.9%; Can Ring Up More Gains

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AT&T investors are getting the best of both worlds today. The stock’s 4.85% dividend yield is almost twice that of the 10-year Treasury and well above the 2% paid by the S&P 500. And with AT&T’s (ticker: T) stock trading at 13 times forward earnings, its valuation looks attractive.

AT&T also offers growth potential. Under a President Trump, the telecom giant should benefit from a kinder regulatory environment and lower taxes. The company should also profit from its continuing move into media, particularly its proposed $106 billion purchase of Time Warner (TWX), now awaiting regulatory approval.

Earlier today, Baird Equity Research analyst William Power upgraded AT&T stock to Outperform. This upgrade was especially notable given that Baird’s opinion of AT&T had been stuck at Neutral since 2012.

The upgrade lifted AT&T’s share price more than 2% to a recent $41.19. The stock, up 11% since the presidential election, could generate a double-digit total return in the next 12 months.

“After many years of avoiding the telcos due to competitive concerns, we are upgrading AT&T following a confluence of events that we believe significantly improve the company’s prospects over the coming years,” says Power.

In short, Ma Bell is becoming what Power calls “Ma Media,” meaning it’s no longer your parent’s telephone company.

Earlier this year, AT&T, like other telecom stocks, attracted income-hungry investors fleeing global market turmoil. Shares hit a multi-year high in July at $43.89 then fell as investors dumped pricey dividend stocks and Trump savaged the Time Warner acquisition after it was unveiled in October.

The post-election environment has been far kinder. The FCC is expected to be much more accommodative under Trump, especially regarding Net Neutrality rules. And with lower taxes, Baird’s Power anticipates “a business investment tailwind not seen in years.”

If Trump Wins: Expect a Swift Selloff in U.S. Stocks

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Moments after the surprise news broke on Oct. 28 that the Federal Bureau of Investigation was renewing its investigation into Hillary Clinton’s use of a private email server, the Democratic presidential candidate’s seemingly solid five-point lead in the polls started to erode, opponent Donald Trump’s star began to rise, and stocks began to slide.

The Standard & Poor’s 500 index fell a full percentage point in the hour following reports of FBI Director James Comey’s controversial letter to Congress—and stocks have continued to slip. The Dow Jones Industrial Average, which closed at 18169.68 on Oct. 27, has given up 1.55% since then, to finish last week at 17888.28.

(See related story: “Millennial Companies Favor Clinton Over Trump 50 to 1.”

The CBOE Volatility Index, or VIX, Wall Street’s fear gauge, shot up more than 20% within hours of the announcement, to 17.2, and now stands at 22.5. And the cost of insuring an investment portfolio with 5% out-of-the money one-month put options on the S&P 500 index has risen 75% in the past week, according to Goldman Sachs.

Active Stockpickers Are Outpacing Passive Funds

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Passive investing had been declared the winner in the race for returns, beating stockpickers. But the race is still on, and suddenly, the stockpickers are surging ahead. After a slow start to the year, 60% of actively managed funds are beating the Standard & Poor’s 500 index since July 1, the highest level in nearly two decades. This at a time when money has been pouring into index funds at record rates.

Granted, passive investing has outpaced active in 22 of the past 26 years, in large part because of fees—1.14% for the average actively managed large-cap fund, compared with less than half that for passively managed funds, going as low as 0.03% for some broad-market exchange-traded funds. Then there are years like 2015, when the S&P returned 1.4%, entirely on the backs of a handful of super-performing stocks. Managers who didn’t own Facebook (ticker: FB), Amazon.com (AMZN), Netflix (NFLX), andAlphabet (GOOGL) found themselves lagging—just 39% of all active large-company funds beat the market that year. But that anomaly has passed, and active management is back.

Netflix and Comcast Are Together At Last

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It’s not quite world peace, but Comcast and Netflix, long rivals in the battle over TV’s future, are finding common ground.

On Friday, the companies announced that Netflix’s streaming TV service would be available on Comcast’s X1 cable boxes across the country — starting next week. It’s a big moment for TV, given that Netflix has spent much of its life fighting the cable establishment.

Stocks Offering Investors Trump-Like Tax Shields

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This year’s presidential race will set records for crotch talk, crime accusations and apocalyptic warnings — records that hopefully won’t soon be broken. It also briefly put a spotlight on tax loss carryforwards, with reports that Donald Trump declared a loss of more than $900 million in 1995, and speculation that he used it to avoid personal taxes for many years afterward.

Stock investors can benefit from carryforwards, too, and not just the kind that involve offsetting portfolio winners with losers. Consider two pending deals on Wall Street. One will pair a movie studio and its accumulated losses with a cash-generating pay-television business. In the other, a telecom with plenty of cash flow and a massive dividend, but little growth, is buying another telecom whose gigantic tax losses will make those dividend payments more affordable.

Freeport-McMoRan Director Bets on Copper, Oil, Gold

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Copper is a metal that can take a hammering. Copper stocks are, as well, with the commodity’s downturn.

Take Freeport-McMoRan (ticker: FCX), the world’s largest publicly traded copper producer. Over the last five years through Wednesday’s close, the stock is down 68%, adjusted for dividends.

Speaking of dividends, Freeport-McMoRan ended such payments in December. The company emphasized the bright side of the suspension: It would save about $240 million in cash per year “and further enhance Freeport-McMoRan’s liquidity during this period of weak market conditions.”

We were skeptical of the copper rally that seemed to materialize earlier this year, and the per-pound price remains almost as cheap as rotisserie chicken at about $2.25.

Sirius XM Shares Seen With 10% Upside

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We reaffirm an Outperform rating and 2016-based price target of $4.60 on Sirius XM Holdings.

The step-up for 2017 offers further upside, factoring in continued, solid earnings before interest, taxes, depreciation and amortization (Ebitda) growth. Liberty Media SiriusXM tracking stocks ( series A (ticker: LSXMA), series B (LSXMB) and series C (LSXMK)) provide another way to participate, and at a discount. Liberty’s interest in Sirius XM (SIRI) is roughly two-thirds. Yield on the newly declared dividend is 1.0%.

Blue Hills Bancorp Can Rise by at Least 20%

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In my column in this week’s Barron’s, I recommended three small bank stocks. Another one to add to the list is Norwood, Mass.-based Blue Hills Bancorp (ticker: BHBK).

Blue Hills, with $2.3 billion in assets, operates 11 branches in the Boston area, including in Brookline, Dedham, Westwood, and on Nantucket. In July 2014, Blue Hills converted from a mutual structure to full stock ownership in a $280 million offering.

At a recent $15.55, its shares have climbed 50% since the bank’s 2014 offering. Yet they still look cheap. They trade for just 1.1 times the bank’s $14.05 a share tangible book value.

In a client report published last week, Compass Point analyst Laurie Havener Hunsicker pointed out that same-sized New England peers trade for 1.6 times tangible book. Hunsicker puts Blue Hills’ fair value at $19 a share, or more than 20% above its recent price.

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