Shares of Redfin (NASDAQ:RDFN) continue to climb seemingly unabated. Redfin stock is now up over 250% year-to-date. It has recovered over 600% from the Covid crisis lows under $10 in early March. Earnings and revenue growth certainly account for some of the gains. RDFN has now come too far, too fast though. Time to position for a pullback in Redfin stock.
To say Redfin stock has had a good start to December is an understatement. RDFN has now for risen 11 straight days. The only down day so far this month was a miniscule loss of 17 cents on Dec. 2. Shares are up $28.51 just in December alone. This equates to an incredible 59.53% gain so far this month. Difficult to imagine this type of price move continuing.
Earnings did beat expectations when they were released on Nov. 5. EPS was 30 cents versus consensus of 25 cents. Revenues also beat by roughly 10%, coming in at $236.92 million versus expectations of $216.32 million. Revenues were actually down 0.7% on a year-over-year basis, however. The initial reaction for Redfin stock was a sharp sell-off for two days. Since then it has been nothing but up.
Valuations are now at historic extremes for Redfin stock following the recent rally. Current price-to-sales (P/S) now stands at 8.56x, the highest ever. It is also more than double the historical P/S average of 3.87x. Running RDFN stock up nearly 60% while sales grew only 10% will definitely expand the P/S multiple.
There is no P/E multiple to consider since the company hasn’t made money on an annualized basis yet. Valuations and fundamentals seem to be of little importance right now in this momentum-driven market. Ultimately, however, they do matter.
Piper Sandler analyst Tom Champion raised his price target on Redfin stock Tuesday from $58 to $73 and maintained an “overweight” rating. Redfin stock was at $67 at the time. It makes me wonder if it’s still at “overweight” now that Redfin stock has obliterated his price target in just two days.
Technical Take For Redfin Stock
Redfin stock is the most overbought it has been in the past year. 14-day RSI is nearing 90 while MACD has blown well past 2. Momentum is also at an extreme with an astounding reading of 27! Shares are trading at a massive 22 point premium (40%) to the 20-day moving average. One look at the chart is all you need to confirm a parabolic move.
Source: The thinkorswim® platform from TD Ameritrade
The price action yesterday may finally give a sign that the red hot rally is ready to cool. RDFN rallied up to a fresh new all-time high at $78.77 only to reverse course. Shares ultimately finished over 2 points off the high of the day.
This type of price action is many times a sign of exhaustion. It is especially powerful given the magnitude of the previous rally. The buyers may finally be getting tired and the sellers may look to take control.
Implied volatility (IV) is currently in the 15th percentile for Redfin options. This means option prices are comparatively cheap. So to position for the pullback in RDFN a simple put purchase makes probabilistic sense.
Trade idea: Buy the RDFN January $70 puts for $3.
Maximum risk on the trade is $300 per spread. A retracement even halfway back to the 20-day moving average line at $54.34 would make for more than a doubler on the trade.
Since the trade is long time premium, a time stop is important to consider for risk control. If Redfin stock hasn’t made a meaningful move lower by the first week of January, I would exit the trade to preserve what time premium remains. This avoids taking a full loss on the trade.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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