Oddly enough, while the stock market has been in a shambles, shares of Wayfair (NYSE:W) have been outperforming. While the shares admittedly are about midway between their 52-week low and high, W stock has been on fire over the last few weeks, gaining almost 40% from its lows in November.
Now hovering over a key level, investors are wondering if this stock will continue to hold up amid a turbulent market.
Flight-to-safety trades aren’t surprising in a tape like this. Just look at REIT stocks like Realty Income (NYSE:O) or blue-chip dividend stocks like Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO), there are a handful of dividend titans that are trading just like growth stocks (well, when the market is going higher, that is!)
To be sure, Wayfair has always attracted the short sellers, with their strongest knock on the shares being the valuation. Just how is it possible for Wayfair to be successful over the long-term, operating on such thin margins? To a large extent, the bears are right. But like Square (NYSE:SQ), it’s a great example why investors shouldn’t blindly short stocks based solely on valuation.
I’m not picking on the bears, either. How many times have you seen bulls arguing that a stock is “too cheap to ignore.” Too many, actually. But often times that same stock will get cheaper and cheaper as it continues lower and lower.
Bears Have Valuation About Right
The chart below shows where both the bulls and the bears have made a boatload of money if they’ve been on the right side. Flexible investors — ones who can ride from long to short and back again — could have made a killing in Wayfair stock.
When it comes to valuation though, the bears aren’t wrong about this one. Wayfair is expected to lose $4.25 per share this year, more than double the $1.97 it lost in 2017. Estimates for 2019 don’t improve very much, with expectations calling for a loss per share of $4.19. On a sales basis, W trades at just 1.5 times this year’s revenue. That’s not so bad, nor are growth forecasts, with analysts calling for 42.5% improvement this year and 31.5% in 2019.
Still, with negative free cash flow (albeit positive operating cash flow), it’s hard to make the case that we’re buying a cheap name with a healthy balance sheet. The company raised $500 million in convertible debt last month, further suggesting that positive free cash flow is not on the menu in the near term.
Logic of Trading Wayfair Stock
So why then are Wayfair shares doing so well? That’s hard to say, honestly. Amid the decline there’s been a clear flight to safety, although W stock is generally not the first security we think of in this group. Still, it has been moving higher over the last few weeks, particularly as we continue to see encouraging online shopping data. I think this is the main driving factor.
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While the housing market may be taking a breather and investors worry about a possible recession on the horizon, consumers aren’t showing much fear. They’re spending like the good times are here to stay and that means good things for online retailers like Amazon (NASDAQ:AMZN) and Wayfair.
Regardless, where do we see Wayfair share price going from here? If shares stay north of $100, W stock will get another chance at retesting the 50-day moving average. So far, the 50-day threshold has been resistance, keeping a lid on Wayfair stock all month.
Should it push through, a move up to $115-$125 isn’t out of the cards. Should W pare back to the $100 level, a decline into the low-$90s is possible.
So what’s the bottom line here? If a bid comes back into the market and we go into rally-mode to end 2018, then sure, Wayfair stock is likely a good bet. Short of that, though, this isn’t the flight-to-quality stock I would seek, even if it is holding up right now.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN and O.
