Barclays’ $2.82 million phoenix autocalls on Alibaba offer valuable stock pick, contrarian bet

By Emma Trincal

New York, Jan. 19 – Barclays Bank plc’s $2.82 million of phoenix autocallable notes due Dec. 31, 2026 linked to the stock performance of Alibaba Group Holding Ltd. provide investors with an attractive value investment given the depleted price of the underlying stock and the quality of the e-commerce company, said a contrarian investor.

The notes will pay a contingent quarterly coupon at an annual rate of 14.75% if the stock closes at or above its 75% coupon barrier on a related observation date, according to a 424B2 filing with Securities and Exchange Commission.

The notes will be called at par plus a contingent coupon if the stock closes at or above its initial level on any quarterly call observation date.

If the notes are not called and the stock finishes at or above its final barrier price, 75% of its initial share price, the payout at maturity will be par plus the final coupon. Otherwise, investors will be fully exposed to decline.

Downturn

Steven Jon Kaplan, founder and portfolio manager at True Contrarian Investments, said the note offered an opportunity to take advantage of an undervalued stock with upside potential.

The share price of the Chinese e-commerce company peaked in October of 2020. Since then, it has lost three quarters of its value.

Regulatory concerns have often been invoked to explain the bearish trend. But Kaplan said the main factor was “momentum.”

“Once people see a stock dropping in price, they sell. It’s momentum, pure crowd behavior. Anything else is just an excuse,” he said.

Fear-driven

Headlines had pointed to the risk of the ADR losing its listing on the New York Stock Exchange.

In 2022, Beijing agreed to the inspection of Ali Baba and other Chinese companies by U.S. auditors in order to keep them listed on the exchange.

“It was a big change. It ended this fear of delisting. And yet, the stock continued to drop,” he said.

Media coverage and market sentiment were the biggest contributors to the downfall.

“There is this misconception in the market that if something is going down, it’s likely to go down more. But it’s not the case. A profitable company trading below fair value like Alibaba, that’s what you want to buy. It’s the way of investing,” he said.

“This disconnect between fundamentals and perception is what provides a sound investing opportunity.”

Not Magnificent

Kaplan said the opposite trend could be seen in the U.S. with technology mega-cap stocks showing a disconnect between high valuation levels and profit growth. Some of them have been nicknamed “Magnificent Seven,” such as Apple, Amazon and Tesla.

“Apple’s profits have been growing at a rate of 5% a year in the last couple of years. It used to be in the double-digits. Meanwhile Alibaba’s profit growth has gone up at a rate of 10% a year, which is twice as much,” he said.

He also compared the PEG ratio of the two companies, which is calculated by dividing the price-to-earnings by the earnings growth.

“Alibaba’s PEG is at around 1 while Apple’s is about 6, which is ridiculous,” he said.

The lower the price/earnings-to-growth (PEG), the lower the company’s valuation.

“Ali Baba is so unpopular, most of the valuation is based on perception, not reality,” he added.

“Apple is shockingly overvalued compared to Ali Baba. The same can be said about Amazon and some other mega-cap tech stocks in the U.S. Overall, the U.S. equity market is overbought and overvalued at this point.”

Amazon.com, Inc. has a P/E above 80, he noted.

“Ali Baba’s fair value is probably 40% or 50% above its current price,” he said.

Call event

Based on those valuation factors, Kaplan said the note was well designed.

“The 75% barrier level is reasonable. A big barrier is less necessary when you have an underlying stock that has already dropped a lot,” he said.

The quarterly autocall, which may be triggered as early as March, was not a drawback for this portfolio manager.

“People talk about call risk. But there is no call risk. There is just a high likelihood of getting called early. The stock is so cheap...it could certainly rise. But you will get your money back plus the coupon. If you’re worried about reinvesting your money, you can always buy Treasuries,” he said.

Divergences

The likelihood of an early call and its timing remained unpredictable. But the overall direction of the Chinese stock market will pay a key role.

“China has already been in a bear market for more than three years,” he said.

“The U.S. has been in a bear market or is about to enter one. Chinese stocks will recover before us.”

Timing the start of the U.S. bear market can be difficult, let alone its ending, he noted.

On Friday, the S&P 500 index just broke out above its all-time high of January 2022.

“We had a big downturn in 2022 followed by a rebound last year. We now have to restart the clock.

“Since bear markets last two or three years, I would expect the U.S. bear market to end sometimes in 2026. Of course, it’s impossible to know when for sure,” he said.

If the scenario unfolds, investors in the notes may see the likely call delayed perhaps by another year.

“You may be able to collect several coupons before getting called out,” he said.

With or without a call, Kaplan said the notes were attractive.

“This investment for a change takes advantage of a deeply undervalued stock with strong fundamentals. You buy quality at a bargain. That was the lesson of Benjamin Graham when he wrote The Intelligent Investor.

“An intelligent investor doesn’t chase what’s going up or sell what’s going down.

“This note certainly doesn’t. And that’s what makes it a good note,” he said.

Barclays is the agent.

The notes settled on Jan. 16.

The Cusip number is 06745PJF9.

The fee is 2%.

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