The more mo, the better
09/26/18

●Social networking stock MOMO has stood up to China’s bear market

●History of business growth and earnings outperformance

●Stock spiked lower Monday amid trade worries, then recovered


 

While the US stock market has been holding its own recently—US indexes are still relatively close to their all-time highs—Chinese equities have been in a slump, to put it mildly.

At around 2,780, the Shanghai Composite Index (SSE) is off more than 20% from its January high, and around 46% from its mid-2015 peak around 5,200. Its recent lows around 2,645 tested the index’s early-2016 sell-off bottom.

Time to pile into undervalued, oversold Chinese stocks? As someone once said, it’s not a stock market, it’s a market of stocks (or something like that). While many high-profile stocks from the Middle Kingdom have had trouble escaping the bear’s claws, one exception is Momo (MOMO), a social networking platform (free messaging, dating, search, etc.) that began trading in the US just six months or so before the Chinese market peaked.

Momo (MOMO), 12/8/14–9/25/18. Momo (MOMO) weekly price chart. A bull among bears

Source: OptionsHouse

The weekly chart above shows that although the stock hasn’t marched straight upward since December 2014, it’s gained more than 500% from its February 2016 low and is up close to 90% on the year. After making a sharp pullback last month, MOMO is within striking distance of its June record high of $54.24.

MOMO bulls cite the company’s fast growth, profitability, and (it’s in China, after all) its potential for growth. And although critics of the Chinese market may grumble about financial reporting transparency, MOMO’s numbers have appeared to be good. In its relatively short reporting history, the company has more often than not trounced its headline earnings and revenue numbers,1 and US analysts following the company have placed it in the buy/strong buy neighborhood.2 (The company’s next earnings release is currently scheduled for November 27.)

Momo (MOMO), 4/26/18–9/25/18. Momo (MOMO) daily price chart. Spike lows, intraday rebounds

Source: OptionsHouse

While most US traders probably think about the ongoing tariff wars in terms of the US market, Chinese stocks can be just as vulnerable as their American counterparts (some argue more so) to the shots being fired back and forth between Washington and Beijing. Which brings us to the past couple of days: The daily chart above shows MOMO spiked sharply lower on Monday amid renewed trade tensions before recovering to close above the open and in the upper portion of the day’s range—a nice intraday rebound that may have suggested traders decided the move was overdone.

To get an idea of how MOMO has behaved in similar situations, we looked at days the stock fell 3% or more below the previous day low’s but recovered to close above the day’s open. Here’s what things looked like five trading days later:

●MOMO was higher in 17 of 21 cases (80% of the time)

●The average five-day return was +5.8%

The daily chart marks the four most recent times this pattern formed. Three marked at least short-term swing lows, while the fourth (in June) was soon penetrated to the downside.

MOMO has exhibited a great deal of relative strength in the face of a bearish market. If and when the Chinese equities develop some broad-based bullishness, MOMO may find itself in an enviable momentum position.

Market Mover Update: After breaking out to the upside last week, US Bancorp has pulled back into the consolidation noted in “Bank breakout.”

Today’s numbers (all times ET): New Home Sales (10 a.m.), FOMC meeting announcement (2 p.m.).

 

Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.


1 StreetInsider. Momo (MOMO) earnings. 9/25/18.

2 Nasdaq. Momo Inc. Analyst Stocks Recommendations. 9/25/18.