🗞️ The Fate of Our Portfolio is Set

WHILE YOU POUR THE JOE… ☕️
Thank Us Later

So Bill Ackman, a world-class investor (except for the time he went short Herbalife and lost a bunch of money), has recently taken an interest in Nike shares 👟.

Because of that, the stock opened yesterday at around $82 a share for a 5.2% rally 🔥, to which I personally sold for a hefty gain. Hopefully, after reading our post on Nike a few weeks ago, you also are celebrating a good profit run.

But that’s not all

Warren Buffett (the favorite uncle we never had) also took an interest in one of our recommendations. Ulta stock popped by 18% overnight 🥴 and rallied by over 40 points yesterday after Buffett announced a new stake in the retailer.

A while back, we also pitched all the reasons why that stock is a great name to be in, and we simply held on; that’s as close to a “Never sell” stock as we have.

Speaking of calls that make money, let’s get on with today’s email 📧…

COME AND GET YOUR GAINS
Love Proving People Wrong

When I told my family I would travel to Asia 🌏️ to explore alternative living opportunities and cultures and experience the economic impact China is having across the region, I was met with a lot of negativity.

It makes sense; parents worry that you’ll spend all your money and time traveling and not actually get ahead in life. In my lucky case, I could make money online while traveling, and due to the cheap cost of living, I saved 4x of what I was saving each month in the U.S.

But here’s where the intangible return came in…

I quickly realized that everyone was wrong about Asia, China, and even the United States' current positioning in relation to the rest of the world.

That led me to investigate a company that had caught my attention a few months before traveling.

Alibaba Group (NYSE: BABA)

I bought up to 700 shares at an average cost of $79.45, and it quickly became my biggest position. Here’s the feedback I got right after:

• You’re too invested in one country, and China is communist and the bad guys, etc.

• Numbers out of China can’t be trusted; you’re going to get burnt.

• The US will always be the US.

And after that, I eventually bought more stock, I just love to make money and prove people wrong when they have such a strong view and are so painfully wrong.

You know who else thinks the same thing about China?

That’s Ray Dalio, the founder and manager of Bridgewater Associates, the world’s largest hedge fund, and a guy who has been openly bullish about China for years.

And

There’s another guy who gained fame after calling the 2008 financial crisis as soon as 2005, so while he is typically right when he makes a big call, his timing could always improve.

Our friend Michael Burry, another big bull on China. Burry recently released his 13-F filing, essentially a mandatory report when someone owns a good chunk of any company.

His top holdings? Alibaba and Baidu are both Chinese consumer and technology stocks.

What caught my attention was his 24% increase 💰️ from his previous Alibaba position. He must have a good reason to be in the company, and our view is not too far from his.

Alibaba’s latest quarterly growth figures, with China wholesale commerce alone pushing 16% annual jumps. Now, does that sound like a dying economy to you?

International also pushed higher by 38% on retail and 12% on wholesale 📈. And even though cloud business revenue didn’t grow as much, the company is looking to rectify that situation.

Alibaba’s cloud business is tapped directly into the fastest-growing middle classes of the world. Asia, Southeast Asia, Middle East, all of these nations have given Alibaba exclusivity.

And as they say, data is the new oil.

This quarter, management has reinvested over $1.5 billion, focusing on the growth of cloud business. Knowing China is on a low cycle, these investments will eventually have a higher ROI once valuations return to pre-COVID levels.

But wait, there’s more.

An additional $1.5 billion was allocated to buying back stock 💵, increasing current shareholder ownership, and boosting the stock’s book value.

After all debt is accounted for, we think Alibaba’s basement value is $82.3 a share, well above where the stock trades today.

So, guess who will be allocating a percentage of every payout to more Alibaba stock? Yessir.

But how much is this stock worth? There are two basic scenarios.

This is the previous “Best Case,” which prematurely assumed China’s economic recovery. Now that inflation and business activity are back up in China, this best case has now become the base case.

And those projections yield a valuation of… Drumroll please:

Our valuation would be roughly $212 a share, or 165% upside 🔥 from the stock's current price.

Of course, this doesn’t account for the approximately $20 billion remaining in the share buyback program or the recovery in Alibaba’s equity investments throughout China.

There could be an argument that this stock goes back to its previous cycle high of more than $300 a share 🎯, which would be life-changing gains.

One last thing before we move on, here’s another Alibaba buyer:

George Soros, who some people call evil, has also bought as many as 2 million shares of Alibaba this quarter.

Doing the math on today’s price, that’s a position worth up to $160 million.

TRADE OF THE WEEK(END)
Size Matters?

When it comes to the upside, it does, among other things.

Realizing that the Fed might actually pull the trigger on interest rate cuts by the next FOMC meeting (September 18), we decided to start investigating the recent dip in the small-cap ETF $IWM.

You know who else thought of this trade?

Stanley Druckenmiller, who in his early days was hired by George Soros himself to trade with him, so we feel pretty confident on making this call as well.

Small-cap stocks are heavily dependent on low interest rates and flexible financing, so rate cuts could prove extremely bullish for the space 📈.

This is why we are starting to probe a position into small-cap stocks, starting with the ETF to cover as much ground as possible.

However, we understand that diversification is only for those who don’t do this full-time, so we are also considering looking into individual stocks 👀.

Under the following criteria:

• International sales exposure is preferred.

• Growing and steady Free Cash Flow (Operating cash flow minus capital expenditures)

• Gross margins above 20%

• Positive return on assets (ROA) over 5 years

• Price to earnings (P/E) or Price to free cash flow (P/FCF) below 12x preferred

We will probably have a list of stocks coming out after our picks, so stick around and enjoy it while it’s free (for now).

NOW GO AND MAKE IT HAPPEN
Know the Man

If you are going to place any decisive weight on what George Soros is thinking and doing, then we recommend knowing a little more about him and his way of thinking.

While a YouTube video might be enough, today’s book recommendation 📖 digs deeper into his theory of reflexivity, the main framework that allowed him to make $2 billion in a single day.

To your success,

G. 🥃