Profiting from the Bounce in China

It was a mildly positive week for stocks with the Dow Jones up 0.77%, the S&P 500 gaining 0.90% and the NASDAQ up 1.16%. The MCSI Emerging Markets Index eked out a 0.86% gain.

Big gainers in your Bull Market Alert portfolio included the Ultra Nasdaq Biotechnology ProShares (BIB), which gained 3.54%.

Big Lots, Inc. (BIG) dropped below its 50-day moving average and moved to a HOLD. What a difference a month makes.

Just four weeks ago, investors were in a full-blown panic. Fears about China’s economic downfall and uncertainty with the Federal Reserve grabbed the headlines, leaving the doom-and-gloomers out in full force.

But today it looks like Mr. Market is recovering from his recent bout of depression — as he always does. The Dow is trading at a two-month high and the S&P 500 has clawed its way back above 2,000. Even much-reviled China has staged a comeback with Shanghai A-Shares soaring 7.64% just last week.

This week’s Bull Market Alert recommendation — Chinese Video game firm and Web portal NetEase, Inc. (NTES) — is a bet that this rebound in China will continue over the next six to eight weeks as we get into the meat of Q4.

Here’s why I expect NetEase to soar in the coming weeks.

First, sentiment about the Chinese economy is improving. Just overnight, the government announced that China’s economic growth eased to 6.9% in the third quarter from a year earlier, beating expectations. Robust consumption and infrastructure spending prevented a much-feared slowdown.

Second, Chinese Internet stocks are a high-risk, high-return way to play the current bounce in the Chinese market. From a fundamental standpoint, Internet stocks are immune from a slowdown in industry. But from a technical standpoint, they also tend to be more volatile, outperforming on the upswings.

Third, NetEase has arguably the best prospects among the major Chinese Internet stocks for gains over the short term. NetEase is among China’s fastest-growing Internet firms — racking up big successes, especially in the mobile game space. Its “Fantasy Westward Journey Mobile” rose to No. 1 among Apple iOS apps in China within three days of the game’s recent launch. Management also has faith in NetEase after it announced in early September that its board had authorized a $500 million stock buyback plan.

So buy NetEase (NTES) at market today and place your stop at $110. After Friday’s sharp rise, I’ll let the stock settle before recommending options on this one.

Portfolio Update

ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA) rose 0.19% over the five-day trading week. Zacks Research recently issued a “momentum-style rating” for ULTA. The consensus rating was 1.6, using a 1-5 scale where a 1 is a “Strong Buy” and a 5 is a “Sell.” This rating represents a consensus of all the analysts tracked by Zacks who have published ratings on ULTA. ULTA is a BUY.

Alaska Air (ALK) closed last week flat. ALK currently has a 51.3% year-over-year earnings growth rate and a strong “earnings per share (EPS) growth percentage” measurement of 39.40% over the past five years. EPS growth percentage helps quantify the rate at which a company has grown its profitability per unit of equity and allows for a reflection of additional factors like new stock issuance dilution, share repurchases and exercising of employee stock options, warrants and convertible securities. ALK will report earnings on Oct. 22 before markets open. ALK is a HOLD.

Ultra Nasdaq Biotechnology ProShares (BIB) gained 3.54%. BIB has been a winner on several occasions in Bull Market Alert over the previous few years as the biotechnology sector has soared — though this has come at the cost of high volatility. BIB captures the big gains of biotech, while remaining less subject to big drops in single-stock moves. BIB is a BUY.

Big Lots, Inc. (BIG) fell 4.38% for its first week. Zacks Research recently issued a rating of 2 (1 is a “Strong Buy” and a 5 is a “Sell”) for BIG. Indeed, 14 analysts providing coverage collectively give BIG a rating of 1.57 (“Buy”), with 10 analysts at “Strong Buy” and four at “Hold.” BIG moved to a HOLD.

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