I’ve had Chinese internet stocks on the brain of late:
New Trade – $CTRP: Trip and Fall?
MorningWord 3/5/15: Bull in a China Shop – $BABA, $BIDU
Name That Trade – $YY Tell ‘Em That It’s Human Nature
As a trader I often look for stories that are misunderstood, have the potential for movement, and said movement is likely mispriced in the market.
There was a trade that just went up in the options market that caught my eye in a sort of YouTube/Hulu video platform in China called Yoku Tudou (YOKU).
When the stock was $16.58 a trader sold the March / April 15 put spread at 15 cents, buying to close 17,000 March 15 puts for .15 and selling 17,000 April 15 puts at .30 cents to open (this traded delta neutral vs selling 136,000 shares of stock, I suspect this was a function of securing better pricing). This trade is a bit odd, as after the roll the trader only stands to gain $255,000 in premium if the stock is above $15 on April expiration. When we see opening put sales in high short interest stocks like YOKU sometimes we assume that a trader is underwriting a short, meaning looking to add some yield to a short position. If the stock was below the short put strike than the trader would have their gains capped and short could get called away at that strike, in this instance this would be down about 10%.
As usual we don’t place a ton of faith in unusual options activity, but in this instance the occurrence of the trade got me looking at the stock. The company has not reported their Q4 results so far and Bloomberg has it estimated at as March 13 (the company reported Feb 27 and 28th over the last two years).
There are a couple things that stick out to me about YOKU from a trade perspective. First and foremost, Alibaba (BABA) is the largest shareholder with a 25% stake. At any moment I suspect BABA could raise its stake or make a bid for the remainder of the company.
And secondly, the stock is very oversold, banging around the 52 week lows and basically aside from a couple short breaks to about $14, hovering above the all time lows, but still above the $12.80 IPO price from 2010:
YOKU has been growing sales briskly from about $140 million in 2011 to about $500 million last year and expected to grow by 30% in 2015, but have still failed to turn a profit.
Lastly, despite the losses, the company might have ensured their survival by doing a secondary offering in May 2011, selling 12 million shares at $48. This, coupled with proceeds from their IPO means they have a cash hoard of $1.3 billion on their balance sheet, with no debt, so about 40% of their market cap in cash.
To be honest, decelerating sales growth in a volatile country like China can lead to a quickly deteriorating earnings outlook and ultimately to cash burn. And for an expensive stock like YOKU that could cause a good deal of volatility.
We’ll keep this one on the radar. The chart is at potentially disastrous breakdown levels and the next move will likely be big either way.