A High-Risk Bet on a Bounce in China

The U.S. markets ended the week broadly flat, with the Dow Jones up 0.17%, the S&P 500 down 0.01% and the NASDAQ closing 0.23% lower. Global markets continued to struggle, with the MCSI Emerging Markets Index tumbling 3.67%.

Big gainers in your Bull Market Alert portfolio included Halyard Health Inc. (HYH), which jumped 5.14%, and the ProShares Ultra Nasdaq Biotechnology ETF (BIB), which gained 0.98%.

You were stopped out of Avago Technologies Limited (AVGO) at a loss.

Silicon Motion Technology (SIMO) fell below its 50-day moving average and is now a HOLD.

With a bailout of Greece accepted by Europe’s troika of creditors and the Chinese government so far successful in abating the fall of the Chinese stock market for the third day in a row, I expect markets to recover sharply in the coming days.

So this week’s Bull Market Alert recommendation is a bet on this very theme of recovery through online Chinese retailer Vipshop Holdings Limited (VIPS).

Vipshop began as an online shop offering brand-obsessed Chinese buyers upscale clothing, shoes, accessories and cosmetics, all at discounted prices.

Selling over 8,700 well-known brands, Vipshop acquires goods at a discount, sells them at a low price and then ships them out in bulk. Vipshop sells many of its goods at a 50% to 70% discount below their original retail prices. This allows young Chinese professionals to purchase quality brands otherwise beyond their means.

This business model translates into much-higher margins when compared to traditional e-commerce companies, which have to maintain massive inventories in a wide range of items. And unlike most companies, Vipshop could benefit from a slowing of the Chinese economy as it is the leading retailer of discounted apparel in the country.

Vipshop has been making money hand over fist since first turning profitable in Q3 of 2012. The company has enjoyed triple- or quadruple-digit percentage revenue growth every quarter for several years, including 100% in its most recent quarter. Earnings per share (EPS) grew at 117% last quarter and are expected to grow at 71% in the current quarter.

Although the stock dropped substantially during the recent market pullback and is down 26% from its highs, VIPS has steadied during the past two days, along with the rest of the Chinese stock market.

Deutsche Bank recently reiterated a “Buy” rating on VIPS. It now expects the total revenue for the second quarter will be RMB 9.0 billion ($1.45 billion), which will exceed the guidance from the company and estimates from Wall Street analysts.

Deutsche Bank has a price target of $32.10 on the stock while Summit Research expects the stock to hit $35.00. That’s almost 54% above Friday’s closing price.

So buy Vipshop Holdings Limited (VIPS) at market today and place your stop at $17.00. If you want to play the options, I recommend the August $24 calls (VIPS150821C00024000), which last traded at $1.45 and expire Aug. 21.

Portfolio Update

Halyard Health Inc. (HYH) jumped 5.14%. HYH became extremely oversold in recent weeks, and investors snapped up shares last week. A recent upgrade by analyst firm Zacks also helped. Halyard has a big leg up on its competition, as it manufactures over 80% of what it sells. This allows the company much better control over its pricing structures and profit margins. HYH is a BUY.

ProShares Ultra Nasdaq Biotechnology ETF (BIB) gained 0.98% last week. This leveraged and diversified play on the biotechnology sector has remained above its 50-day moving average (MA) for nearly all of the previous year, and it has done so throughout the recent bout of market weakness. Biotech remains strong, and BIB remains an excellent way to capture gains. BIB is a BUY.

Silicon Motion Technology (SIMO) fell 11.57%. SIMO announced that it will report earnings on July 27 after markets close. Despite releasing positive news that revenue would increase 7% to 9% from first-quarter figures (based on preliminary second-quarter results), traders sold SIMO lower. Analysts’ consensus estimates call for sales of $86.1 million, a 6.8% increase quarter over quarter. SIMO fell below the 50-day moving average and changed to a HOLD.

Ambarella Inc. (AMBA) dipped 1.58% for its opening week in the Bull Market Alert portfolio. This stock continued to trade sideways and consolidate last week as it works to gain a strong footing from its recent correction. This is the third recommendation for AMBA to join your portfolio, and both the technical and fundamental cases provide a positive outlook for the stock. AMBA is a BUY.

As a courtesy, I want to bring to your attention the newest version of The Top 15 Stocks for 2015, which features three of my top investment recommendations, as well as bonus picks from each of my fellow investment newsletter editors at Eagle. This report and others are available FREE on my website to you.

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