Earlier this year, IQIYI (NASDAQ:IQ) stock was the mother of all momentum stocks, yet the year-to-date scoreboard shows that the stock has done nothing overall. It is important to note that the dip in IQ stock is not all from intrinsic problems.
All Chinese stocks have been under severe pressure. In fact, IQ stock has done better than the group. The iShares China Large-Cap ETF (NYSEARCA:FXI) is down 17% year-to-date; Baidu (NASDAQ:BIDU) and Alibaba (NYSE:BABA) are down over 25%.
IQIYI stock is a relatively new entrant to the stock market. It came out of the gate earlier this year like a rocket rallying to $46 per share. But the 180% rally came crashing back down to earth after its June highs. Now it is struggling to recover $16 per share. So for those who missed the IPO opportunity, this is their chance to start over again.
IQ is the so-called “Netflix (NASDAQ:NFLX) of China.” So in theory, the tariff wars should not impact its P&L. Yet, in 2018, investors sold it down with all stocks that had anything to do with China. The fears are that the country leaders won’t come to terms in time, and the U.S. will impose more tariffs.
On the way up, IQ was a hyper momentum stock. Meaning it never left clear entry points into it. Conversely, on the way down it looks like it’s falling into a giant bottomless chasm. The opportunity to accumulate shares while Chinese stocks are still out of favor on Wall Street is here. I consider this is a second chance at grabbing its IPO.
How to Approach IQ Stock From Here
But this is not a bloated stock from the traditional sense, so it will eventually find a bottom. In the long run, it makes sense that if the stock markets are higher, then IQIYI stock is also higher. So even though $15 may not be the absolute bottom for it, starting long into a position, or adding to one makes sense.
The macroeconomic conditions still favor the bullish thesis for IQ. It is only because of geopolitical headlines that the buyers have shied away from buying dips in the stock. But eventually this too shall pass. There will be buyers as value opportunities present themselves.
Case in point, on Wednesday, the S&P 500 rallied 5% proving that there is pent up demand to buy once the fears abate. Coming into Wednesday, there was a lot of upside pressure in options open interest and the giant burst upwards relieved a lot of it. This is to say that there could be another leg lower, but it should be one that long-term buyers would dare to buy.
These are uncertain times as we still have several headlines risks. In addition to the tariff wars, investors fear the U.S. Federal Reserve Chairman Jerome Powell stated his intent on raising rates regardless of what the data says. Doing that would be reckless, so I have to believe that he is bluffing. He is in a battle of words with President Trump, so what he says may not be what he will eventually do.
Bottom Line on IQIYI Stock
The Fed will not break the economy on purpose. It has spent too much effort bringing the economy off its knees from the 2008 financial disaster. After all is said and done, the Fed will do the right thing. So, in essence, we have three egos in charge of the headline risk and I have to respect that. Therefore, I only take partial entries into position in order to leave room to add more into IQ in case we do go lower.
Technically, there’s not much to discern from the chart of IQ stock except that it has hit support. I say this because we don’t have any levels lower than what we just set, so from here it will be market dependent.
IQIYI will report earnings sometime in January and this could change. Onus is on management to prove that the rally they enjoyed out of there IPO box was indeed justified. So from here, IQIYI stock will need the overall sentiment on Wall Street to improve, and in about a month, it will also need its management team to deliver a solid earnings report in the first quarter of 2019.
Analysts agree that is is a “Buy” and it is now trading well below their lowest price range. Nevertheless, I still consider this a speculative trade inside a conservative investment portfolio, so trade size is important.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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