The selling that hit the market last week was a wake up call for many investors. The tech sector in particular got hit hard and many of the top-performing stocks from the sector got hit with sharp losses simply because they had moved up so high. Now that things are settling back down a bit, there are a few tech stocks that I think are ready to resume their upward trends. One of those is software company Square (NYSE:SQ).
Square stock has been on the minds of many investors over the past few years thanks to the fact that the company provides payment and point-of-sale solutions to customers all around the world. The company’s software and hardware enables sellers to use their phones, tablets and computers to accept payments for goods and services. And sales have been growing rapidly with average annual sales growth of 34% over the last three years.
The last earnings report showed that sales grew by 48% for the second quarter on a year-over-year basis. Analysts expect the company to grow sales by 60% for the third quarter.
SQ’s earnings have been flat over the last three years, but second-quarter earnings showed growth of 86% over the previous year. The current earnings estimate for third-quarter earnings is 11 cents and that is 57% higher than the 7 cents the company earned in the third quarter of 2017. Clearly, Square stock investors will be keeping an eye on the next earnings report, set for Nov. 7.
Square Stock Is the Most Oversold It Has Been Since Late 2017
SQ stock has been one of the top-performing stocks for much of 2018. The stock was up over 185% on the year before dropping over 30% in the first part of October. Even after the drop, SQ stock is up over 113% on a year-to-date basis.
After the selloff in the last few weeks, the daily and weekly overbought/oversold indicators have dropped sharply. The 10-day RSI is the lowest it has been since May 2016 and the daily stochastic readings moved into oversold territory late last week before making a bullish crossover on Friday.
Square stock had been trending higher within a trend channel from last November through mid-August, but then the rally accelerated and the stock moved above the trend channel. Last week’s selloff dropped the stock down to where it would be within that channel if we extended it out.
The weekly oscillators aren’t in oversold territory like the daily ones, but they have dropped sharply. The 10-week RSI dropped below the 50 level for the first time since August 2016. SQ was trading for around $10 at that time.
The weekly stochastic readings dropped last week and they reached their lowest level since December. After the drop in December, the readings made a bullish crossover while SQ stock was trading for under $40 a share. The stock went on to double by August.
The Sentiment Toward SQ Is Mixed
Looking at the sentiment indicators on Square, we see a mixed picture. The short interest ratio is a little on the low side at 1.67. The number of shares sold short dropped by 1.88 million shares in the second half of September, but that was as the stock jumped 25%, from $80 to $100. Given the sharp drop in the first half of October, I wouldn’t be surprised to see a jump in the number of shares sold short.
The analysts’ ratings toward Square aren’t as optimistic as I expected. There are 31 total ratings with 17 of them being “buy” ratings and 14 being “hold” ratings. Given Square’s price performance and the company’s fundamental growth, I would have expected closer to 75% of the ratings to be buy ratings. As it stands now, the buy ratings only represent 55% of the total.
The put/call ratio is currently at 1.22 and that is high compared to most companies, but Square’s put/call ratio has been above 1 for the last three months. The ratio was as high as 1.66 in late August.
Collectively we see that there is some optimism from the short sellers and slight optimism from SQ stock analysts, but not as much as I would expect. The options market is where we see the most pessimism.
My overall take is that the selling we saw last week is providing investors a buying opportunity on Square stock. The oscillators are the lowest they have been in years in some cases and with the sentiment still not overly optimistic, I can see Square stock moving back up to the $100 level in the next six months or so.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.