Can You Handle a Bumpy Ride Like Uxin?

Lots of investors would be thrilled to own a stock that nearly tripled in a couple of weeks -- and China's largest used-car seller, Uxin (UXIN -2.07%), has done precisely that. The e-commerce business dominates in a market that has huge potential for growth, and offers service that in some ways is superior to what you'd see in a U.S. equivalent. That's the good news. The bad news is that it remains a broken IPO, and the stock has oscillated wildly in the past few months.

In this segment from MarketFoolery, host Chris Hill and senior analyst Seth Jayson discuss the business model outlook for this potentially promising company, as well as how investors might want to test their risk tolerance -- and their ability to sleep at night when parts of their portfolio are on a roller-coaster ride.

A full transcript follows the video.

This video was recorded on Dec. 18, 2018.

Chris Hill: Let's start with a company I'd never heard of. It got named checked yesterday by Emily Flippen on the show. You and I were talking about this this morning.

Seth Jayson: Emily and I are on the same wavelength here. We have to be on the show together, or two weeks apart.

Hill: This is Uxin. It's a Chinese used car company.

Jayson: Used car tech company. A big lead in market share, bigger than all the reasonable competitors combined. A small-cap, worth about $2.5 billion right now. Still not money-making. But this could be a pretty big market. And with their lead in mindshare and technology, I think it's a fairly decent bet. Emily's the one who brought it to me, and I thought it was good enough for my small-cap picks, then I ended up buying some more. It's just been crazy.

What they do is, they have a pretty automated car buying platform. It involves stuff that you would not get here in the U.S., where you have to go to something like CarMax. With Uxin, you get online videos of a mechanic going through and showing you all the stuff that could be wrong. This helps them get better price matches. It helps buyers know more. It's really pretty impressive. They also do some finance arrangements, and they can take a cut of that. It's a pretty interesting business.

Kind of broken IPO. Then the stock, over the last two weeks, it's up 200%. But let's not get too excited about that, because the two months before that, it was down 60% or something. It's crazy.

Hill: Yeah. Before, when you said, "This thing's been crazy," I thought, well, it's been crazy in two ways. One in terms of what the stock has done in the last couple of weeks. But then, two, just in terms of the volatility.

Jayson: Today, it was up slightly this morning. It was down 7% last time I looked. I was planning to buy a little more of that this week or early last week. And I just thought, oh, there's no rush. Well, they announced recently a deal with Alibaba, an investment deal to sell cars on Taobao. Then, after that, they announced that they'd moved something like 20,000 cars in 18 hours or something. And the stock went crazy. Like I said, up a couple of hundred percent in a week or something of trading days.

One, it's an interesting company. Two, this is not a company you put all your money in. Widows and orphan money, as they say. Even if you have acid indigestion, or are prone to it, stay away.

But it also shows you that people have no idea what to make of it. I mean, there's just no rational reason that a company should fluctuate like that. There's no valuation going on here. It's purely people freaking out, rushing to the exits and rushing back to the entrance.

Hill: To your point about the allocation, we get questions all the time about asset allocation. It's something that I think, hopefully, people get better at over time. But certainly, for stocks like this, having that mindset of, I'm going to have 5% or less of my portfolio -- 2%, if you want -- not necessarily in this one stock, but just say, "I'm going to have a very small percentage of my portfolio in volatile stocks like this. This is going to be a way for me as an investor to test, how strong is my stomach?" Because if 1% of your portfolio is in a stock like this, and you find yourself getting sick at the movements up and down, then maybe volatility ain't for you.

Jayson: Yeah. It's a good lesson. You shouldn't be there. I recommended this one. I liked it at the $6 price or whatever it was -- and of course, I was locked out for a while. I think I got my shares in the $3.90 range. Then it was promptly down 40%. That's just what happens. And, all the sudden, they're $8.50 again.

It's a good learning experience and a real reminder to take the allocation advice seriously. It's easy to be like, "Oh, it's up 200%! I should have put $100,000 on it!" But that would have been dumb, even if you'd tripled your money in a couple of weeks. It wouldn't have meant it was a good decision.