Last week, I wrote an article about Companhia Siderurgica Nacional (SID), and I wrote a little bit about my experience of writing a newsletter that focused on low-priced stocks. I wanted to present another stock that meets the criteria that I looked for in the stocks I recommended in that newsletter. If readers like these types of articles and recommendations, I will try to make them a regular article.
Something I thought about after the article on SID was published last week was how I use low-priced stocks in my own investment approach. I don’t own SID yet, and I don’t own today’s stock yet, but I do own similar stocks, and I own them in my IRA.
For me, owning these types of stocks within my IRA made sense. If I get a 300% or 400% winner, I don’t have to pay capital gains tax on the gain. I will pay taxes on the money when I withdraw the money, and it will be taxed at my income tax rate at that time.
Don’t get me wrong, I am not a tax expert and would recommend consulting your own tax professional about your investment plan. I am not advocating for everyone to have an entire portfolio of low-priced stocks in their IRA and nothing else. Personally, the bulk of my IRA is in ETFs and a small portion is dedicated to the opportunities like the one from last week and the one from this week. Even though it is a small portion, a few big winners can add considerably to the overall return of the portfolio.
I felt like I should share my thoughts on this portfolio strategy before presenting you with this week’s opportunity.
Vipshop Holdings Ltd.
Vipshop Holdings Ltd. (VIPS) is an online discount retailer in China. The company was founded in 2008 and is headquartered in Guangzhou, China. Through its website, customers can buy everything from apparel to handbags, home furnishings to computers. In other words, you can find almost anything for sale on the site. In addition to the retail operations, Vipshop also has an internet finance business that offers consumer and supplier financing options.
Vipshop is set to release earnings soon, but nothing on the company’s investor relations page indicated when. Investor’s Business Daily and the Wall Street Journal both have the earnings date as May 13. Analysts expect the company to earn $0.16 per share on revenue of $3.04 billion. The company posted EPS of $0.15 in the first quarter of 2018 on revenue of $2.86 billion.
Over the last three years, Vipshop's earnings have grown by 1% per year, but analysts expect an 11% increase in earnings for 2019. The company’s sales have grown at a rate of 28% per year over the last three years, and they were up by 3% in the fourth quarter. Based on the estimated revenue mentioned above, the sales increase for the first quarter would represent an increase of 6.3% on a year-over-year basis.
Vipshop sports a return on equity of 17.4% and the profit margin is 2.5%.
Over the last 15 months, I have had two questions about every Chinese company I have looked at. Are they being impacted by the trade dispute? And are they being impacted by the economic slowdown in China?
In the case of Vipshop, I believe it has been impacted by both. Obviously some of the products it sells are seeing tariffs placed on them or they are becoming harder to get. On the economic slowdown, almost any retailer is going to see a slowdown when the overall economy slows down. In the case of Vipshop, I see it starting to benefit from the stimulus measures the People’s Bank of China has enacted to bolster the economy.
A Trend Channel has Formed Over the Last Six Months
Looking at the daily chart for Vipshop, we see that a trend channel has formed over the last six months, and the stock just hit the lower rail of the channel back in April before bouncing. That lower rail was in close proximity to the 50-day moving average when the stock hit it and that offered a second layer of support for the stock. The selling over the last week has brought the stock back down within range of the lower rail and the 50-day.
On the weekly chart, the channel doesn’t show up as clearly yet, but the move higher last week moved the stock back above its 52-week moving average for the first time since last May when it fell below the trend line. It is also worth noting that the 13-week moving average is making a bullish crossover of the 52-week.
The stock debuted in March 2012, and it traded under $0.50 a share in that first month. It languished under $1 for the first seven months after it was offered here in the states, but it rallied sharply from November 2012 through April 2015. The stock peaked at $30.72 before sliding down to $8 in the fall of 2017. The stock bounced from $8 to $19 in four months, but then started sliding again last January when the trade dispute heated up.
The Sentiment Toward Vipshop
The short interest ratio on Vipshop is only 1.5, but like I said about SID, stocks under $10 tend to see lower short interest ratios. What is really interesting about this situation is that there were 15.27 million shares sold short at the end of March, but that figure dropped to 10.3 million for the mid-April reading. Looking at the volume during that time period, it appears to be increasing ever so slightly, but not by much.
Looking at the analysts’ ratings for Vipshop, we see there are 18 analysts following the stock at this time. Six analysts rate the stock as a “buy”, nine rate it as a “hold”, and four rate it as a “sell”.
My overall take on Vipshop is a bullish one. I see an improving economy helping the company, and I think we are going to see a deal struck between the U.S. and China in the near future. Yes, this week’s rhetoric has hurt global equity markets, but I think it is primarily negotiating tactics by both parties.
An improving economy and a new trade deal should help boost the stock. The fundamentals aren’t great right now, but they are improving and should only get better in the near term. The stock seems to have reversed its downward trend, and the sentiment is still rather bearish.
I have a target of $22 over the next few years, but I would consider selling part of the position at the $19 level as we could see that area act as resistance.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.