Alibaba [BABA] creates more IPO shares. Facebook redux?
WASHINGTON, September 15, 2014 – Alibaba’s [BABA’s] incoming IPO really seems to have a head of steam going into its scheduled Thursday evening (September 18) pricing and Friday morning opening trading which will likely start quite late. But the Maven still doesn’t think you and I are going to get any of these shares, whatever the final offering price. It’s the way the business works.
We observed last week that hot shares like these almost always go to each brokerage house’s biggest and most important customers (not you or moi). None of the dudes on either side of this trade really give a damn about sharing the wealth, which is why our system is imploding.
But that’s a different rant.
As we’ve noted before, our answer to not being able to get any BABA shares was to start building a position in Yahoo! (YHOO) when that serial-disappointer of a stock was moping around in one of its typical low ebbs near the end of July.
Yahoo! owns somewhere in the neighborhood of 20% of Alibaba give or take, and will be dumping some of these shares as part of the IPO. That means this dog of a U.S. Internet pioneer will actually deliver uncommonly fabulous numbers during the current quarter as it books an obscene (but deserved) profit on its BABA shares.
YHOO says it will return a chunk of that profit to its long-suffering investors (including YHOO insiders, you betcha). It’s still not clear, however, whether that will be in the form of a fat special dividend (unlikely) or a big stock buyback (probable).
Anyhow, the position we built in YHOO has served as a proxy for the BABA shares we won’t get, although this game looks like it might be nearing its end, as YHOO shares are looking toppy today. Which means we’ll have to dump YHOO shares at some point this week, perhaps prior to the BABA IPO. We think.
If BABA issues too many shares on the IPO, they might suck up some of the currently left-out buyers like you and the Prudent Man. That’s what Facebook did in the final days before its IPO. But after an initial pop when FB opened for trading, as the insiders made plenty of money by flipping their shares, pathetically dumb retail investors bought into the opening hype and lost their shirts, trousers, and in some cases, crucial body parts.
The general lesson here is this: if little guys like you and the Prudent Man can all of a sudden get all the shares we want of a hot issue that’s been hogging business headlines for weeks, it’s a really good idea not to take down any. Facebook proved that point, as we’ll rehash here for those who missed the fun.
In a premeditated experiment, the Maven was actually one of those hapless rubes purchasing FB shares after the new IPO opened for public trading. We invested in a mere 100 FB shares to see whether we’d luck out and cop a few bucks in the green zone or get hosed and sent to the penalty box in the red zone.
We got hosed. But not badly. The numbers looked so awful after the trade that we dumped FB early in its swoon, thus avoiding the pummeling the optimists took as they rode FB down, and down, and down. It’s a little like our photo above of Discovery Channel survivalist star Bear Grylls who’s stuck in quicksand. Except that Bear knows how to get out.
The rule is that whatever the stock, if you’re taking a whupping, put an end to it early. Small investors tend to have a lot of “hope” in their investments.
But on Wall Street, there is no hope. The bigger the “hope” the bigger your eventual loss. So if you’re sinking into the investing quicksand, just get out if your trade is not working according to plan. Losing a little is preferable to losing a lot, as that still leaves you with some chips to play with rather than having to fold. And explain it to the spousal unit.
There’s really no room for ego in this game. Sometimes you win. And sometimes you get creamed.
As we noted briefly above, the action in YHOO today seems to support some increased nervousness concerning BABA’s potential pop. YHOO is down about a dime at 1:30 p.m. EDT after jumping about 20 cents when the market opened this morning, indicating that speculators think it might be peaking here, though they could be wrong.
What we’ll likely do is dump part of our YHOO shortly so that we’re effectively playing the rest with the house’s money. If things really go swimmingly, we might regret having done these things. But if BABA is another FB, we’ll bail quickly and still laugh all the way to the bank, so to speak.
Then again, you never know. Never bet the rent on stuff like this.
Could we play options in this game you ask? Yes we could, again with YHOO shares as a proxy.
But as we get older, we find this kind of leverage can get treacherous. Plus, to work options strategies on hot stocks, you need to stay at your machine during the entire trading day. And that’s tough if you have other things to do.
Anyway, we’ll keep you posted on this week’s Alibaba adventures or misadventures as they occur.