We’ve had three interesting stock-specific inquiries from members over the last few days, so we are taking a moment to share. First, Doug from Antioch, Illinois notes Snap has fallen dramatically from its IPO highs, and wonders if now is a good time to buy. Next, Benjamin from France asked for our views on 2019 Alibaba Call Options. And finally, Michael from Lincoln, Nebraska asked about a new wood chip play, Enviva (EVA) as a biomass coal substitute (it’s a big distribution MLP). This article gives our brief views on all three of these opportunities.
If you are not aware, Snap had its initial public offering (IPO) last week, and the shares quickly soared like an eagle, and then crashed something ugly.
If you don't know, Snap’s main business is an application called “snapchat” whereby users communicate through short videos and images known as a “Snap.” Blue Harbinger member, Doug A. from Antioch, Illinois informed us that he bought in shortly after the IPO, then quickly sold his shares for a sizeable profit. And now that the shares have fallen dramatically in the last few days, Doug asks…
"Should I buy if it goes down to $10 a share?"
First of all, congrats Doug on your quick profit! You have succeed in an area where others often fail. But regarding your question about re-purchasing shares of Snap, our instinct is to stay away from Snap!
In our view, it seems likely the Snap will never generate the same type of huge advertising dollars as Facebook and Google. And more likely, Snap will be a dud like Twitter. If you want to keep “day trading” Snap that is your choice (apparently, you’ve already had some success), but in our view, Snap is more likely a dud, and we are staying away!
Our next question comes from Mike in Lincoln, Nebraska. Mike writes:
“EVA: New wood chip play as a biomass coal substitute. Emerging dominant low cost produced with a high and growing dividend. John Hancock as backer and investor. Worth looking at and would be interested in your analysis. Thanks Mike”
We took a look at Enviva (EVA), and it is interesting. It's organized as an MLP, and that helps explain the big distribution yield (7.33%). It appears to have grown its revenue sharply over the last several years, and it is now generating positive net income. According to its most recent investor presentation the company expects "distributable cash flow" to be $76 to $80 million, which seems to be enough to cover the distribution payments ($54.6 million in 2016). However, its total distribution payments in 2016 were $145 million according to Google Finance which is more than its distributable cash flow and suggests there may be more going on here than meets the eye.
On the positive side, EVA has been increasing its dividend over the last 18 months, and its stock price has been going up steadily. However, its debt as a percent of total assets has been growing (it's now around 50%) which makes borrowing for growth more challenging in the future.
Admittedly, we are not familiar with the wood pellets industry, but as long as EVA finds a way to keep growing and covering its big distribution payments, then it could be a winner. We’re not jumping to add this one to our portfolio right away, but we’re adding it to our watch list. Thanks for the heads up. And if you have owned EVA over the last 18 months, congrats on your gains!
Alibaba (BABA) Call Options
Our third question comes from Benjamin in France. He writes…
“que penssez de l achat d un CALL2019 DE (BABA)????”
According to Google translate, Benjamin is asking what we think about 2019 call options on Alibaba. And our immediate reaction is that they are VERY expensive! For example, Alibaba currently trades at around $103 per share, and the January 2019 $110 strike price call options cost $15.75 per share. If the stock price goes up to $125.75 between now and January 2019 then you break even, and anything less is a loss for you. But if BABA climbs to $145 then you more than double your money. Using these option is basically a highly levered bet.
If you are not familiar, Alibaba is engaged in the online and mobile commerce in China and around the world. Alibaba is similar to Amazon. The bull case on Alibaba is that it currently has about 1/3 of China's total population as users, which means lots of business, and lots more room for growth. However, the bear case is that competition is building (from the likes of JD.com and Vipshop) which could disrupt Alibaba's business and slow its growth.
In our view, using call options to invest in Alibaba is a highly speculative and expensive bet. If you are correct, it could pay off huge! But if you are wrong, then you will have wasted a lot of money buying those call options. We believe Alibaba will continue to grow and profit, but we also know the stock (and the markets in general) are volatile, and this type of Call option bet is too risky for our taste!