Chinese internet stocks in 2014 have been a story of have and have nots. Some of the early chortals like SINA and SOHU have woefully underperformed the broad market and many of their peers in 2014. Both stocks have seen significant market cap declines, with SINA being cut in half and now sitting at $2.8 billion, despite having $2.3 billion in cash on their balance sheet ($1.5billion net of cash). SINA reports their Q3 results tonight and the options market is implying about a 7% one day move tomorrow, which is shy of its 4 qtr avg move of about 8.75%.
On a near term basis the stock appears a bit oversold but still has formidable overheard technical resistance up at $50 (the breakdown level from this past April) which also corresponds with the stock’s declining 200 day moving avg (yellow line below):
I had a great question from a reader (JohnM), who owns the stock from $49 (just before the breakdown) and I thought I’d share some of my commentary on stock repair. First, JohnM’s view on the stock:
I’m long stock at $49 (pre market selloff) and picked up 100 Jan 2015 $45 calls during selloff… today I bought 50 Dec $50 calls as a punt. The discount on assets seems wrong. 1.7B EV and has publicly trading assets worth 3-4B, plus portal business and other businesses it has been investing in. Discount to SOTP is excessive and not sure why market has discounted it so much. Just want to make sure I’m not missing anything because the price action this year has been ugly.
Obviously, those like myself who see the stock in a positive light are missing something as the stock is down 50% year to date. But if I were long the stock at $49, and was optimistic about tonight’s earnings event being a positive catalyst, this is how I would look to leverage my existing position and possibly get back to even over the next few weeks, my response:
If I were long stock at $49 I would consider buying a 1×2 call spread against it. for instance with stock currently $42, if bought one dec 45 call for 1.10, and sold two dec 50 calls at .30 each (.60 total) would have the potential to make up to 4.40 between 45.60 and 50 on the call spread, and up to 5 on the stock owned from $49. so if the stock was 50 or higher or Dec expiration then long stock called away at $50, but made 1 on stock position and 4.40 on options overlay.
very important though that you do this one up, meaning if you were long 100 shares you would buy 1 Dec 45 call and sell 2 Dec 50 calls, you would NOT want to be naked short calls in a name like this, as you say if it were to be taken over for 65 that would be painful.
So this strategy is one to get some money back on your shares if the stock returns to the level you bought. It that move happens back to that level you would then have a profitable trade instead of just getting back to breakeven. If a massive gap higher happened it’s probably not the best strategy as you’d be called away in those shares for an effective price a bit higher than your initial cost basis, but any realistic move probably only gets the stock back to the entry level. And a 1×2 is a great way to recoup some of those losses and possibly turn a losing trade into a profitable one.