How sweet is a 300% rally? DraftKings (NASDAQ:DKNG) investors just got that gift in a flash. The quarantine jump-started it like with a giant shot of adrenaline. After a small dip, DraftKings stock tripled in just two months, and the success should be long term.
But that’s why investors should exercise a little patience and find better entry points. This comment will likely upset a few fans, but my concern is with the stock’s price action, not the company itself.
The concept is great and the bullish thesis is 100% viable. The company operates in one of the hottest concepts of late. Gaming and esports have incredible momentum, and gambling will never fall out of favor. Add to it that they are domestic and online and it’s a formula for sure success for years to come. The world is now on an ultra fast pace to digitize thanks to the novel coronavirus crisis.
My caution here comes from the speed and slope with which the stock rallied. This does happen, but I’ve never seen it stick to where there are no give-backs. The bulls should ask for corrections because that’s how they build better bases above the ones below. Otherwise, the rise of DraftKings stock would become too frothy and very fragile. Any small hiccup thereafter would cause a massive breakdown rather than a normal correction along the way.
The Rally in DraftKings Stock Is Too Strong
There is no doubt that rising too fast has negative effects down the line. This is not the same as a suggesting to short the stock. Investors should admit that DraftKings is too hot to short, but it’s also too high to chase. It is okay to miss a rally because there will always other entry points. There are thousands of other tickers to trade on Wall Street, so we’re not forced to use only ones that are too hot.
While the quarantine and the global shut down completely demolished all crowd-economy companies like the physical casinos and hotels, it benefited others tremendously. DraftKings for example is reaping the rewards from the woes of the others. The in-person entertainment sectors are severely limited, and alternatives like this are booming. This is their moment to shine and the important bit is that a lot of these will become new habits. This trend will not be a fad and much of the new usage will stick going forward. The fear of disease is fuel to sustain its growth, even after all the businesses reopen.
More to that point, the normalizing process is going to be long and arduous. We are nowhere near having a vaccine in spite of all the sporadic updates of progress. In fact, we are not even guaranteed to have one at all because this has never happened for any coronavirus before. They say this time is different, so I’ll take them at their word.
Growth Doesn’t Come Cheap So Patience Is a Virtue
Fundamentally, DraftKings stock is definitely not cheap. But this is the growth phase, so value is not a concern at this point. During the developmental phase investors need to see past the current situation. Therefore, it is best to get help from the only truth and that is its actual stock price.
The short-term price action of DraftKings is tightening. The range is now stuck between $35 and $43 per share. A breach of either of those edges will carry momentum in that direction. If the bulls are able to beat the prior high, they will overshoot another $10 higher. Conversely, if the bears break through the last support they could retest $28 per share or lower. Until either of those two happen, there’s nothing to do with the stock. From a trading perspective it’s better to let them fight it out until one side wins and then you join the consequent rally up or down. This morning, the stock is under pressure perhaps because of the new share offering they are doing.
It’s OK to Trade a Stock While It Matures
For those not interested in trading and are instead looking for a longer time horizon, the decision is easy. They either plug their nose and buy the stock now, knowing that they’re going to hold it through dips and peaks. Or they can wait it out, and pounce on the next sizable dip. In either case, it is always smart to take the position in tranches. The stock markets are at all-time highs and that’s never a great place to load up fully on positions in any stock. Taking partial positions leaves room to manage the open risk by adding more lower.
The debate in the media about the shape of the recovery is misleading and incomplete. Experts present their arguments for or against a V-shape recovery. Very few actually make the distinction that the stock market has already recovered in a “V” from the Covid-19 crisis. In fact, the Nasdaq has already risen higher than ever before. But the other part is that the economy is nowhere near recovering and that shape will definitely not be anything near a “V.”
It’s important for investors to know what idea they are chasing to avoid mistakes. And this is more likely to happen at the tops after long rallies than any other point in time. This is one of those times. Consequently, all I am suggesting today is to exercise a little patience before loading up the truck with DraftKings stock.
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.
