Wayfair Stock Is Bound to Experience Pain As Its Rally Ends

Look for a meaningful retracement in W stock now that the recent red-hot rally has cooled

Wayfair (NYSE:W) is finally beginning to stall out after a monster move higher post-earnings. W stock exploded 45% higher on the heels of those earnings before finally losing steam near the $170 area. Although both the top- and bottom-line were a beat, the reaction in Wayfair stock is getting decidedly overdone. Look for W to pullback over the coming weeks.

The company reported earnings Feb. 22 showing a loss of only $1.12, coming in ahead of expectations for an earnings-per-share loss of $1.28. Direct Retail net revenue, consisting of sales generated primarily through Wayfair’s sites, increased $576.6 million to $1,995.8 million, up 40.6% year-over-year.

Active customers reached 15.2 million, bettering last year by almost 40%. InvestorPlace contributor Will Healy does an outstanding job with a deeper drill down on the earnings report, taking particular note of the ongoing onerous cost and company cash burn.

Although sales and customer growth increased 40% from a year ago, the W stock price is up nearly 73% in that same time frame. This makes metrics such as price-to-sales even more extreme at current levels for Wayfair stock. Wayfair co-founder and co-chairman Niraj Shah makes particular note of the company’s outsized growth at scale. It’s important to remember, however, that growth necessarily becomes increasingly more difficult as a company becomes bigger. The law of a large numbers begins to apply.

What to Expect From Wayfair Stock

Expect a slowdown in growth rates over the coming quarters.

Wayfair stock is looking extremely overbought on a technical basis. Shares reached astronomic nine-day RSI readings over 90 before finally weakening. Momentum also was at the highest level of the year until it softened over the past few days. Wayfair stock finally capitulated after rallying for six straight days post-earnings. This type of reversal pattern is many times emblematic of a short-term top in the stock as the buyers finally become exhausted.

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Investors and traders looking to add a short position to their portfolio should consider shorting Wayfair stock at current levels. The initial short-term target would be a retest of the break out level at $150. A move to fill in the earnings gap at $142 would be the ultimate goal.

Option traders may want to look at selling the April $185/ $190 call spread for a 75 cents net credit to take a guardedly bearish stance with defined risk. The trade has a risk to return of 17.65%, while proving a 13% upside cushion to the $163.27 closing price of Wayfair stock.

Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.

Article printed from InvestorPlace Media, https://investorplace.com/2019/03/wayfair-stock-rally-ends/.

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