Don’t Stop Believin': Stock Market (and Sentiment Results)

“Don’t Stop Believin’” is the second single from Journey’s seventh studio album ‘Escape’ released in 1981. Although the song only reached #9 on Billboard Hot 100 and #62 in the UK Singles chart, the track became a timeless classic. Today, “Don’t Stop Believin’” can be heard at just about every wedding, high school dance, and Saturday night college bar you can think of. The popularity of “Don’t Stop Believin’” in modern times started in 2007, when the song was used in the iconic final scene of The Sopranos.

The core of the track—its infamous words and chords—comes from Cain (the Keyboardist). These words originated and still serve for him as a personal mantra. He first heard the words that would become the song on a phone call with his father.

At the start of his career in the 1970s, aspiring musician Cain was younger and struggling when his dog was hit by a car. Unsure about his future music career in Hollywood, he called his dad. He needed $900 for his dog’s veterinarian bill and a loan. He asked his father if his music career was merely “dreaming” and whether he should go back home to Chicago. His dad told him that he’d give him the loan but to stay right there in Hollywood: “Son, don’t stop believin’.” The rest is history…

Background Sources: Adam McDonald and Liam Flynn

While investing in Alibaba (NYSE:BABA) has felt like “taking the midnight train goin’ anywhere,” the exact opposite is true. Since the moment we put the first dollar to work in this asset we knew that the “sum of the parts” valuation was multiples of the whole. Every negative headline and exogenous event simply created the opportunity for us to increase our ownership percentage in the business and for management to buy in shares to increase OUR ownership in the business. Nothing has changed about the underlying business – and if anything, prospects have grown a lot brighter. We never stopped believin’…

On Tuesday, management made our life a little easier by beginning the process to unlock the value for owners on an accelerated pace when they announced this:

“Alibaba Group said on Tuesday it will reorganize into six business groups and other investments, a move designed to unlock shareholder value and foster market competitiveness.

The move marks the most significant governance overhaul in the platform company’s 24-year history and positions Alibaba’s businesses to capture market opportunities and further stimulate growth.

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“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready,” said Zhang in an email to Alibaba employees.

The six business clusters will be:

-Cloud Intelligence Group
-Taobao Tmall Commerce Group
-Local Services Group
-Cainiao Smart Logistics
-Global Digital Commerce Group
-Digital Media and Entertainment Group

Daniel Zhang will continue to serve as Chairman and CEO of Alibaba Group, which will follow a holding company management model, while each of the six business groups will be managed by its own CEO and board of directors.

Each CEO will report to a board of directors and assume full responsibility for company performance. Zhang will also serve as the CEO of the Cloud Intelligence Group, as previously announced. This group will house all cloud, artificial intelligence activities, and businesses like DingTalk.

Goldman Sachs (NYSE:GS) stock analysts noted that Alibaba is trading at one of the steepest discounts to net asset value globally among holding companies and the investment bank expected the restructuring to help close the gap.”

As we’ve stated on previous podcast|videocast‘s when the fundamentals don’t make sense in the short term, we can look at technicals to point to our next targets. In the case of Alibaba we stated that the first target from here would be the 160-180 range – and it was likely no one would be let in. Why? Because everyone bought at ~$120 after the first 100% move off the Fall lows and got flushed back to $80. There will be no belief on the way up and the same chorus will sing, “Communists, Taiwan, WWIII.” The headlines are designed to separate weak handed holders from their ownership in the company and transfer it to people like us who gladly scoop it up when others mistake the noise of the day for the fundamental intrinsic, normalized earning power and moat of the business.

As we continue to say (borrowed from Michael Burry), “meet the new boss, same as the old boss (referring to Xi).” If you invest based on politics you will always lose. Many Republicans sold their portfolios at the 2009 lows because Obama was elected President. The bull market began. Democrats sold their portfolios after Trump was elected. They missed a two year rally led by tax cuts. Weak handed Alibaba shareholders puked in the hole in the Fall because somehow they thought covid or wrong-minded policies would last forever. At the end of the day, quality businesses (those with a history of compounding invested capital at rates above their cost of capital and above market returns) come out of “crises” stronger and with more market share than they came in. This time will be no different.

It reminds me of the beginning of covid when a reporter asked President Trump, “but what will happen to all of the restaurants?” To which Trump replied with a straight face, “don’t worry, they’ll still be there. They may have different owners, but they will still be there.” The same is true for Alibaba. Weak holders OUT, strong holders IN. Since we’ve covered the fundamentals many times over, here are our first technical targets, which are miles away from our final targets. $160 is on the basis of filling a gap, $180 is on the basis of a “measured move” from the “inverse head and shoulders.” How useful do I think these “techincal” targets are? Not very, but it gives us something to talk about while time arbitrage ultimately takes us up to “fair value.”