The 60% Alibaba Play No One is Talking About

It's official: Chinese e-commerce juggernaut Alibaba (NYSE: BABA) goes down as the biggest U.S. IPO in history. 

Shares were listed at $68 on Friday. By the close, they had soared 38% to $93.89, giving Alibaba a market cap that is bigger than rivals Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) combined.

Alibaba also handled more in transactions in 2013 than Amazon and eBay combined, booking $248 billion. Controlling 80% of China's e-commerce market, it is clearly a force to be reckoned with.

The excitement on Wall Street is palpable and has everyone looking for the best way to profit.

Buying shares of BABA may be appealing to some, but current valuations are rich and the company is still influenced by a communist government. I prefer to look for companies that will benefit directly from Alibaba's growth and the e-commerce trend in general.

Two names that will see continued windfalls from the societal shift toward e-commerce are package delivery companies UPS (NYSE: UPS) and FedEx (NYSE: FDX). Of the two, one stands out in growth, valuation and penetration in China. But the Street doesn't seem to have made the connection to Alibaba yet, presenting keen investors with a good entry point.

FedEx is the world's largest express transportation company, delivering nearly 4 million packages a day. It has a larger Asian footprint than UPS, with 18,000 employees in the region and a vehicle fleet of 3,900. UPS has 15,000 employees in Asia and less than half the amount of delivery vehicles.

In China, FedEx operates as a wholly foreign-owned enterprise, increasing flexibility and delivery speed, with 9,500 employees. UPS has about 6,500 employees in China.

Additionally, FedEx won courier status in China in 2012, allowing it to deliver to eight major Chinese cities with UPS only getting approval for five.

On Wednesday, FDX reported a blowout quarter thanks to volume growth and cost-cutting initiatives. Earnings of $2.10 per share were up 37% year over year and well ahead of estimates. Revenue for the quarter grew 6% from a year ago, and operating income improved 24%.  

FDX is trading for around 18 times this fiscal year's earnings (ending in May), and analysts expect an average of 15% growth a year over the next five years. As FedEx continues to cuts costs, economize and expand globally, I think these estimates may turn out to be conservative. 

UPS, on the other hand, missed expectations in the most recent quarter as net income fell, is trading for about 20 times earnings, and analysts estimate long-term EPS growth will be about 11% a year.

Following FedEx's earnings report, some analysts reiterated their bullish ratings and raised targets, but others, like Morgan Stanley (NYSE: MS), kept estimates on the low side.

The company's cost-cutting and growth efforts should continue to boost profits and will likely be reflected in analysts' models moving forward. Analysts should also begin to factor in the impact of Alibaba's expansion, as well as eBay, Amazon and others pushing harder to retain their positions, which will only add to overall e-commerce sales.

Look for analysts to increase their estimates ahead of the next quarterly earnings report, which is scheduled for Dec. 17. I suspect FedEx will book another exceptional quarter. 

I see shares trading to at least $170 by mid-December. That's only 7% above current prices, but we can leverage that move into 60% profits with a call option strategy. 

FDX Call Option Trade

Today, I am interested in buying FDX Jan 150 Calls for a limit price of $12.50 or less.

FDX Call Option
Risk graph courtesy of tradeMONSTER.

This call option has a delta of 71, which means it will move roughly $0.71 for every dollar that FDX moves, but it costs only a fraction of the price of the stock.

The trade breaks even on expiration at $162.50 ($150 strike price plus $12.50 options premium), which is 2.6% above current prices.

If FDX hits the $170 upside target, our call option will be worth at least $20. Once you enter the trade, place a good 'til canceled (GTC) order to sell at that price.

I expect the target to be met before the earnings report on Dec. 17, but if it is not, I feel confident holding through the announcement.

Recommended Trade Setup:

-- Buy FDX Jan 150 Calls at $12.50 or less (use limit orders)
-- Set stop-loss at $6.50
-- Set price target at $20 for a potential 60% gain in four months

If you have a question or comment about today's strategy, please send it to editors@profitabletrading.com.

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