Ride the Volatility of Shopify Stock to Outsized Profits

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Shopify stock - Ride the Volatility of Shopify Stock to Outsized Profits

Source: Shopify via Flickr

Shopify (NYSE:SHOP) gained 5% over the past five trading days before today, closing yesterday at $164.60, one of the highest levels Shopify stock has seen over the past 52 weeks.

InvestorPlace’s James Brumley recently noted that owners of SHOP stock need to be “very patient.”

“Fans of the Shopify story need to remain very patient here, letting the euphoria and subsequent lull run their full course,” Brumley stated in an article published on Sept. 10. “Ironically, most investors are likely to give up on Shopify right around the time that its margins really start to climb.”

Translation: If you’re long Shopify stock, you better throw that stock certificate in a drawer for the next three to five years because otherwise you’re likely to give yourself an ulcer.

Embrace the Volatility

In March 2017, I wrote that people who invest in Lululemon (NASDAQ:LULU) should embrace the stock’s volatility.

“For those who believe in Lululemon and LULU stock, as I do, you need to buy when things are bleakest because that’s when you can best take advantage of the market volatility,” I wrote in an article that was published on Mar. 21, 2017. “If you look at the midpoint of each [fiscal] year’s [hi-low] spread, they all come in around $65. It’s currently trading below that. I thought it was a buy at almost $69 back in September [2016]; I definitely think it’s a buy at $64 and change.”

Today, LULU trades around $154, an increase of more than 100% since my article was published.

Over the past five fiscal years, the spread between the 52-week highs and the 52-week lows of LULU stock has averaged between $25 and $35. Through the first two quarters of fiscal 2018, the spread has grown to $81 as the shares have risen.

Once LULU’s new fiscal year begins in February, I expect its spread to return to between $25 and $35, which means you can expect a low of $120-$140 in fiscal 2019 and a high of $155-$175.

If you want to focus on buying below the stock’s likely midpoint, I would consider buying between $137 and $157, sometime in fiscal 2019.

That said, we all know that stocks don’t always repeat the same patterns.

What’s The Connection to Shopify Stock?

There’s really no connection between what I wrote about Lululemon stock and Shopify stock, except that I wanted to remind everyone that every stock, even those that are extremely volatile, have some degree of predictability.

Technical analysts use support and resistance levels to determine the best point at which to buy stocks. While I’m not pretending to be a technical analyst, it’s helpful to study stocks’ trading patterns over more extended periods to understand when they’re genuinely overvalued or undervalued.

In the case of Shopify stock, Brumley, my colleague, considers it obscenely overvalued at 237 times next year’s non-GAAP consensus earnings per share estimate of 59 cents.

It’s hard to argue with logic.

However, if you look at the trading patterns of Shopify stock, you’ll have an easier time embracing its volatility.

In the calendar year 2016, Shopify stock had a high of $45.45 and a low of $18.48, or a $27 spread. In the calendar year 2017, it had a high of $123.94 and a low of $42.14 for a spread of $82, or three times the spread of 2016.

Average the spread of the two years, and you get $55.

SHOP stock started calendar year 2018 at $101. It has risen ever since, reaching a high of $176.60 in July. Its year-to-date spread is $76, almost identical to its 2017 spread.

Wrapping It Up

On three occasions in 2018, SHOP stock has fallen by 15% in a week. All three times, it has quickly recovered most or all of its losses.

If you’re a confident long (I believe in Shopify stock, but I’m not as confident in it as I am in LULU ), SHOP ‘s spread data from the last three calendar years should have convinced you to buy SHOP stock on each of its corrections.

Moving forward, longs who are confident in Shopify’s story should embrace this volatility by buying more Shopify stock. 

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/ride-the-volatility-of-shopify-stock-to-outsized-profits/.

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