As we near the end of 2018, it’s safe to say that it’s been a tough year for equity investors. Markets have been under siege from tariff war headlines and, until yesterday, a combative U.S. Federal Reserve. Although markets have had their good moments this year, the bulls have little to show for it. Wednesday’s monster rally barely got the S&P 500 back to even.
Indeed, some stocks got hit more than others: Electronic Arts (NASDAQ:EA) stock, like Facebook (NASDAQ:FB), got shellacked, with EA down more than 20% year-to-date. Facebook’s problems are self-inflicted whereas EA is suffering from a shift in trend, and it’s not alone. Activision (NASDAQ:ATVI) is also down by the same amount YTD.
Fundamentally, EA stock is still not cheap in absolute terms. Even after the sharp drop, it still sells at a 21 price-to-earnings ratio. This is almost 50% more expensive than Apple (NASDAQ:AAPL). But relative to the sector EA is cheaper than ATVI and Take-Two Interactive (NASDAQ:TTWO) by 40% & 100%, respectively.
So is it time to load up long for a rebound?
Unfortunately, it is not a simple answer.
Cheap valuation alone is not reason enough to take the risk on EA stock. There is still froth to shed. That is how value traps form when the stocks seem cheap only to find out quickly that they can get cheaper.
Furthermore, we have extrinsic headline risks to come this weekend from the G20 meetings. Wall Street is expecting good news from the U.S. and China meetings. But if they don’t set the framework for a tariff deal then all bets will be off and the markets will sell off hard and deeper than the year lows.
So an EA trade becomes a technical decision. Trends at their peak seem endless. Currently, the gaming trend puts EA stock at a disadvantage, so investors cannot see how the embattled gamemaker can regain its edge.
Its games are out of favor now, but they will eventually make a comeback and EA stock will rebound.
Electronic Arts stock has fallen back into a weekly support zone, which means investors can wade back into it now. These are not hard lines in the sand, but they are zones like rubber bands. The weekly support areas are usually sticky. Now that is 45% off its highs, it has a strong pivot area around the $80 per share.
These were long-term battle zones where consolidation happened since early 2017, so it is likely that the bulls and bears will fight over them fiercely thereby creating congestion. So falling to here is much easier than slicing through them.
Bottom Line on EA Stock
EA has great game assets with strong fan base who are not likely to leave. So the sellers will need to find new reasons to bring incremental selling. Nevertheless, I consider going long here a speculative trade in a conservative portfolio.
Conviction is low because this is catching a falling knife with a tiny two-inch handle. It is likely to cause a few cuts. To leave some room for error it is best to use the options markets to buy some protection to ride out the next two weeks of potential headlines or start with a partial position to leave for additions.
Even though they agree with my points, I don’t look to experts on Wall Street for direction on this. most of them have been wrong with their buy ratings. And EA stock is now trading around the lower-end of analyst price targets.
There is plenty of extrinsic macroeconomic risk to fret so investors have to respect that. We have two egos that could decide the fate of the global market this weekend. I expect that President Donald Trump and Chinese President Xi Jinping will come to some terms since they both have too much to lose but nothing is for sure.
Until then, I never risk more than I can afford to lose.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.