Stock Trade of the Week: Autohome (ATHM)

Autohome (NYSE: ATHM) – Autohome operates an online automotive site in China that provides consumers with independent reviews, manufacturers information and content, advertising services for manufacturers and dealers, and a direct sales platform for consumers to purchase vehicles. The company was founded in 2008 and is headquartered in Beijing, China. The company was formerly known as Sequel Limited.

Autohome has experienced tremendous growth in recent years. Earnings have grown by a rate of 35% per year over the last three years and they grew by 50% in the most recent quarter on a year over year basis.

The company has seen sales grow at an annual rate of 26% per year over the last three years and they grew by 18% in the most recent quarter.

The company is expected to report fourth quarter results on March 5 and analysts expect the company to show sales growth of 23.3% over the previous year.

In addition to the strong growth numbers, Autohome sports impressive management efficiency and profitability measurements.

The return on equity is currently at 30.7%, the return on assets is at 13.1%, and the profit margin is at 39.4%.

It is also worth noting that the company doesn’t have any long-term debt.

Despite the impressive fundamental measurements, Autohome has some pessimism being shown toward it.

There are nine analysts following the stock and seven of them have the stock rated as a “buy” while one ranks the stock as a “hold” and one ranks it as a “sell”. The total percentage of buys is somewhat high, but I am surprised there are only nine analysts following the stock.

The real pessimism comes from the short interest ratio. The current ratio is at 7.45. The number of shares sold short jumped from 5.9 million to 6.9 million from January 15 to January 31 and that is a sign that the pessimism is growing. From a contrarian perspective, growing pessimism is a good sign as it suggests that the stock has plenty of possible buying pressure.

Autohome pulled back in the second half of 2018. The stock found support at its 104-week moving average in October and then bounced. It dropped again in December, but remained above the 104-week once again. I look for the stock to resume its upward trend and for the 104-week to act as support going forward.

Suggested strategy: Buy ATHM with a maximum entry price of $82.00. I would set a target of at least $120 over the next 9 to 12 months (for a potential return of 50% from here). I would also suggest a stop at $58.00.

— Rick Pendergraft

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