To avoid upsetting the fans of Etsy (NASDAQ:ETSY), I will start by saying that ETSY stock is a buy for the long haul. But it comes down to timing, so that is where I will concentrate the discussion today.
The virus crisis has not been equally bad to all stocks. Some like Etsy and Amazon (NASDAQ:AMZN) benefited tremendously from it. The quarantine increased interest in their products and services rather than kill it like most others.
As a result, ETSY rallied 300% off of the March bottom and made new all-time highs. Clearly it is too late to chase it up here regardless of how good a future it may have. I do like the company, but I hate the price action from the perspective of starting new positions here.
ETSY Stock Is a Winner Over Time
This is not to take way from the company’s efforts and what they can accomplish, but the smarter thing is to buy it on the dips. They just reported earnings and they did not disappoint with growth over 30%.
Believe it or not, we will have dips even though it doesn’t seem like it now. For starters, the whole stock market is precariously perched in spite of the worst economic conditions ever. We still have 18 million people claiming unemployment on a rolling weekly basis and an official 11% unemployment rate. Things are definitely not good and stocks should not be this high! Buying Etsy shares at these levels leaves investors vulnerable to almost certain near-term disappointment.
I understand that some like to invest for the long-haul, but it makes no sense to enter stocks knowing that they have better odds of falling than rallying right away. Not to mention the extrinsic risks from the overall economic conditions.
ETSY stock is not cheap with a price-to-earnings ratio of 181, so it could have some fat to trim under duress. Nevertheless, this is not a deal-breaker for me because growth stocks like this do not need to be cheap.
I compare it to other growth socks like AMZN for example, which not only has a lower P/E, but more importantly has a price-to-sales that is four times cheaper than ETSY. Amazon still grows 30% per year and has done so for a decade. Meaning that it’s no slouch in that department and the comparison is totally fair.
Why pay quadruple for ETSY if they are both growth stocks? The better points of entry are closer to $85 or even $70 per share. I know this seems like an eternity away but it was there only a few weeks ago.
Better Entry Points Means Stronger Bullish Conviction
Sometimes it is okay for traders to admit they missed a trade and catch it on the next swing up than to buy it too late. Conviction is thin when the cost basis is so high. In fact, it is a viable trade to short the price action on such rising wedges. I have done this even in stocks that I love.
The bearish bet is to buy a December $90 / $80 debit put spread for a total cost of $2.70 per contract. If ETSY stock falls in the next few months then this can more than double in profits. At which point the investors would book and flip bullish from there.
Momentum stocks that are rallying this fast are tough to chase unless trading for the short-term. Buying high and selling higher is a valid momentum trading method but not suitable for everyone. For investment purposes, it is better to wait for the dip and get more favorable starting points. After all the economy is still in shambles and soon enough we will know by how much.
Government programs camouflage tremendous damage and the medication from the Federal Reserve and the White House will stop this year. Only then we will realize that there are subcutaneous wounds bleeding and the panic could set in.
I am not always doom and gloom, but I am definitely realistic, and the facts here are undeniably risky. There’s absolutely no reason why the NASDAQ is at all-time highs and in a madder fashion than back in the dot-com bubble era. The VIX is at double its usual value for a reason and we should listen to it.
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.
