The stock market is in an uproar this week and it was completely avoidable. This hit the EV space especially hard. Even the almighty Tesla (NASDAQ:TSLA) fell 13% from the Monday highs. So it’s no surprise to see Plug Power (NASDAQ:PLUG) having a tough time as well. PLUG stock is now flat for the year, and down 55% from the February highs.
For whatever reason, those in charge of the Federal Reserve speech schedules jammed 20 of them. As a result, they created complete confusion and investors panicked.
Great stocks lost tremendous value through no fault of their own.
Confusion and Doubt
Since nothing has changed in the outlooks, this is an opportunity to get long PLUG stock. It’s definitely not a time to panic out of it. At the heart of my thesis is that “nothing has changed” and let me explain.
First from the macroeconomic perspective, the U.S. is still on the recovery track. The reopening is ongoing, even states like California have significantly loosened the rules. I can now dine indoors at restaurants. Just a few weeks ago I couldn’t even get a haircut where I live in southern California.
Moreover, the inoculation process is chugging along well. I guesstimate more than 60 million people already have had their vaccines. That is a significant percentage of the population. Things are still tough for small businesses, but that’s why the government stepped in.
Last week, the Fed recommitted to loose monetary policy through 2023. The noise they created this week raised doubts among investors. It opened the discussion around when they will taper. I consider this a pre-taper tantrum, which is completely illogical.
Second, the White House has unleashed a massive $1.9 trillion stimulus package on the economy. My 19-year-old son sold his truck three days ago. The young buyer brought $50 bills because he couldn’t find $100 bills at the bank. The teller told him they ran out because of the stimulus. This money will find its way into companies’ pockets.
Logic Beats Sentiment in the Long Run
For these two simple reasons the underlying conditions are good for stocks to rally, albeit with artificial aids. Shorting PLUG stock after it has lost more than half its value is risky business. The year-to-date statistic is flat and unimpressive, but zoom out a few months and it is up more than 750%. When I wrote about a similar dip opportunity last year it was under $4 per share.
This is not a slouch stock and it has its fans. They will come back to buying it and soon. The management report cards support a good story. They have delivered incredible growth. Revenues almost quadrupled since 2016, and that cannot happen by pinching pennies.
The one worry I have is the price-to-sales ratio of 40. That could be a lot of hopium that owners of the stock have for it. It suggests that they are giving it credit for 40 years worth of sales today. Onus is on management to keep delivering on their promises so that the investors don’t act out with disappointment.
PLUG Stock Is a Buy Down Here
The big breakout rally PLUG stock had was in early January. This correction gave it all back up and closed the gap, so that risk has passed. A stock that reverts back to the neckline from which it had a big breakout finds support. Investors who missed it the first time around will be willing buyers now.
Finding support does not mean immediate repeat of the mega spike. But it does mean that it makes for a reasonable entry point, and that’s the point of today’s article. Even though the stock could still fall, it’s not an obvious potential mistake. Those happened on the way up when buyers chased it above $60 per share.
The overall markets are on shaky grounds this week, so they will continue to be a potential pitfall. PLUG stock cannot rally on its own so it will need Wall Street to find footing.
The options markets offer alternative methods of getting long and leaving room for errors. My favorite is to sell puts out in time and near $20 per share. This leaves me another 40% buffer from current price. Regardless of the method, the logic is the same across the board. Much of the froth that the exuberance caused on the way up is out. From here, it will be harder for it to fall than on the way down.
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.
