It’s been the prevailing wisdom that bank stocks can’t rally, and so I’ve avoided betting on their upside. But there is an interesting sliver of the sector: fintech. These are the transactor companies and I personally favor Square (NASDAQ:SQ) and American Express (NYSE:AXP). The former, SQ stock, has been my go-to upside bet for months and it’s been an easy trade.
This year, SQ stock has been out of favor on Wall Street. Suddenly, it lagged all the other major fintech competitors. Visa (NYSE:V), MasterCard (NYSE:MA) and Paypal (NASDAQ:PYPL) are at or near all-time highs while Square stock has been languishing miles away from its own.
Nevertheless, I remain positive on the company because the bull thesis has not changed. The world is still looking to migrate their transactions online, and SQ is part of the elite group of companies that will make that happen.
Recently Facebook (NASDAQ:FB) announced its indirect entry into the arena with their introduction of LIBRA. This further legitimizes all electronic financial transactors. So today’s point is I should stay long Square stock regardless of the short-term dips for as long as the economic variables remains the same.
Why To Go Long SQ Stock
The macroeconomic conditions remain strong. This is in spite of the recent rhetoric that it’s deteriorating. In the end, I suspect that it’s not as bad as most fear.
So, I am comfortable in my assumption that this environment is likely to persist for months if not years. And within it, SQ stock is still a buy right here. Luckily I have already written about buying the May dip. I sold bull put spreads and bought calls.
The spreads yielded maximum gains already expiring today in my favor. My calls are already up 64% so I am letting them run. I may sell some covered calls against them to further leverage my asset. Because I sold the put spread means that I am understating my profit because my basis cost is null. It’s basically a free trade from here.
I am not sharing to brag but rather to offer perspective. Today’s bullish SQ stock note stands alone. It still has more upside potential than downside risk this year. Currently, Square stock is in a tough zone which has been pivotal so it will offer resistance. Onus is on the bulls to plow through, and it may take a few tries.
My first target for SQ is near $84 per share. But that would only bring it back to within 15% of the all-time high. This means I may be understating my target for the stock — so the reward is pretty darn big even after the 25% bounce from $60 per share.
This is not the same as saying SQ stock cheap because it’s definitely not. Visa, MasterCard and PYPL are much cheaper from the traditional sense but SQ still needs time to grow into its valuation. So comparing them purely on value is wrong.
Rallies rarely unfold in one straight line so there will be rough areas. I expect resistance around $76 per share. Clearly $84 will also be a challenge but if the bulls can break through it then they could finish the primary 2019 objective of $95 per share.
Trading SQ Stock
Now that we’ve looked at what’s above current price we also need to watch for potential pitfalls below.
Depending on risk tolerance I would probably set my first stop at $71 per share. If that’s lost then it could invite sellers down to $68 then $64 per share. While this is not my forecast, it is a realistic scenario that exist below especially if the geopolitical headlines cause a market wide panic sell in the next few weeks.
If for any reason equities collapse I bet that SQ would find footing around $60 per share. This has been a big pivot level for 15 months. These tend to be sticky because both bulls and bears have battle histories at them.
The bottom line is that Square stock had been in the penalty box for whatever reason but seems to have gotten out. It is now free to resume its prior trajectory because its products and service will be in high demand for years to come. I can even ignore the short-term dip because they are part of normal price action. This is a proven management team so they will execute well on plans.
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. Join his live chat room free here.
