The height of the pandemic saw incessant demand for at-home healthcare services. People were hunkered down and they needed answers quickly. Companies like Teladoc (NYSE:TDOC) were busier than they could handle. Teladoc stock soared 140% after the March bottom.
But the trend had already started last year because it was up just as much since 2019. Unfortunately for the bulls, TDOC stock gave back 30% and retraced its steps back to $177 per share. But you can’t feel too sad about a +111% year-to-date performance, and therein lies the opportunity ahead.
To be sure, at the height of demand, the service suffered because they were just too busy. The panic has since abated even though the virus is still rampant. People know more about it and the panic need for healthcare on the fly diminished.
Moreover, a lot of the healthcare providers beefed up their own internal efforts to provide similar solutions. The virus infection rate is accelerating into the cold season. Fortunately the death rate has been declining steadily due to better therapeutics. The medical community this time around is better prepared then it was in February. There is less panic all around therefore more reasonable demand on Teladoc services.
It’s Not Game-Over for Teladoc Stock
This doesn’t mean it’s the end of the rally for the stock. Fundamentally management almost doubled its revenues since 2019 which helped absorb the stock price increase in the last few months. Currently Teladoc stock’s price-to-sales multiple is 16x. While this is not cheap. it is definitely not bloated either. For an absolute comparison, consider that Zoom (NASDAQ:ZM) and Shopify (NYSE:SHOP) are, respectively, 3x and 5x, more expensive that way.
All three are Covid-19 stocks because they benefited from the pandemic and social distancing. On Monday the stock prices were under pressure for the entire cohort because of the headline that Moderna’s (NASDAQ:MRNA) vaccine is 95% effective. This is great news for humanity but investors deem it as bad news for the strongest stocks this year. Such a falling knife scenario also happened a week earlier on a similar headline from Pfizer (NYSE:PFE).
We know that there are dozens of companies working on vaccines, so I expect more of these headlines to lesser degrees. The reaction to them will abate as they come out because investors become immune to them.
Eventually the correlation between positive vaccine headlines and their negative effects on Teladoc stock will fade. Investors will go back to trading their fundamentals and the charts.
Charts Can Guide During Whipsaw Periods
In a year where nothing makes sense, the only given truths that we have are in the charts. They offer me great guidance when there are so many questions. Without knowing the proper levels where support and resistance lie investors are leaving themselves open to surprises. Case in point, when I last visited TDOC stock, in August, I suggested that the shares would face resistance starting at $218. It wasn’t the perfect top but we knew when to expect a dip. The bears also telegraphed their push to $168. Once it fell to $210 per share, the downside target became technically obvious.
But now it is in the middle of a support zone because it has been in contention since March. The bulls broke out from $150 per share and tested it several times. This made for an excellent base to mount a 70% rally from June into the end of July. It ended in tears but only to hold at higher lows.
I use options to trade fast movers like this. This would be a rinse-and-repeat similar to my last write up I shared in August. The options trade setup I suggested back then was an easy win and I can repeat it today.
Teladoc stock has maintained its trend of ascending lows to face the downside pressure. They come into a point soon and investors will have to decide on a move. They will want to breakdown to retest $150 or breakout from $194 to recapture the ledge they lost late October.
Most investors cringe when we mention specific levels. Like them or not, machines do most of the trading these days. Therefore the math on the charts is the driving factor for most of the action. Ignoring that fact is leaving ourselves open to blindsides. It’s like going into a tennis match knowing that your opponent has the better racket. Investors should not leave an obvious advantage to chance.
Be Cautious But Don’t Sweat the Small Stuff
If the intention is to own the shares for a very long term, then buy some stock. I prefer selling puts into fear, this way I don’t even need a rally to profit. For example, instead of risking $177 to buy the shares now, I would use options to build a cushion. There I can sell December $150 put and collect $2.30 per share contract. This way I can still profit even if the stock falls another 15%.
Someone who buys the shares now would already be down 15% before I even start losing money. When the stock starts to make sustainable upside progress then I add shares or calls to capture them. Selling covered calls on big rallies also makes sense. Using options can be intimidating but it is an excellent tool that belongs in every successful trader’s toolbox.
There are outside risks, mainly from the entire market. Sentiment is the only variable in play because the Federal Reserve has a guarantee under everything else. The central bank is committed to its bullish programs. The risk comes from the fact that since last week, sentiment has increased too fast. This is a not a call to short stocks but rather to temper the enthusiasm.
Booking profits along the way makes a lot of sense. I expect that the end of the week with the monthly options expiration there might be drama. Better be safe than sorry in the short term.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.