Using relative strength is an important tool for successful investing. By this I don’t mean the actual technical metric. It is important to compare one company’s performance to its competitors before deciding on investing in it. Today we look at Pintrest (NYSE:PINS) to see if it would be wise to own it for the next few months. PINS stock is on a tear of late, so it’s important not to chase without reason.
Before we draw comparisons, we should first examine the particular situation. Fundamentally, I consider this a growth stock so I’m not looking for profitability. Investors should not insist on it being cheap to buy the stock. In fact, it’s expensive and so what? Its price-to-sales is well above 30. But for the time being this is acceptable and not a reason to short it. What is more important now is how the stock is performing relative to its prior failures.
Machines do most of the trading these days. To do that they follow strict rules and algorithms. Those rules are purely based on actual math and technical settings.
Therefore, investors cannot ignore the action on charts, because that’s the only thing driving the bulk of the action.
The Fundamentals Have Improved
The snapshot overview of the company shows improvement and underlying health building. Debt-to-asset ratios are falling and revenues are growing fast with improving net income. Therefore, it is safe to assume that management is doing a good job. The fundamentals warrant owning PINS stock.
Now we check on the technicals to see about timing. For that we compare the stock performance to its competitors. PINS is up 400% in a year. This is more than 10 times the performance of the S&P 500. When the world shut down for the novel coronavirus pandemic, a group of stocks like this took flight. The poster child for them was Zoom Video (NASDAQ:ZM), and it’s only up 120%. By comparison, Pinterest is doing very well, although it is lagging Etsy (NASDAQ:ETSY) a skosh. For another absolute reference, Amazon (NASDAQ:AMZN) is up 60% for the same period.
If I have a bone to pick with the fundamentals it would be with the revenue rate of growth. Although it is improving, it could be faster. The jump in total revenues from 2018 to 2019 was bigger than the one that followed. Meaning net net, the pandemic boost was unimpressive. It is comforting to see that the business remained stable through the most turbulent times ever.
PINS Stock Is a Buy But …
What’s the verdict? Is it a good time to buy pins stock or weight? This is not an obvious point of entry even at the risk of missing out. The stock has just rallied 20% from a solid base. Moreover, it is heading into a cluster of resistance around $85 per share. Ideally investors should be patient and buy it on the dip.
There should never be an urgency to rush into a stock. This happens often enough that they gave it the acronym FOMO. The fear of missing out is a real problem for retail investors. It’s also often the source of problems. A better entry point into Pinterest lies under $71 per share. The closer investors can buy it to $65 per share the better.
If the stock markets crash, losing that solid support would trigger a complete debacle but that’s not my forecast. This is a good company doing good work and it’s a matter of finding a good entry point for it. Investors who want to own it for 10 years are probably not going to worry about 5% or 10% differentials.
For the rest of us, we prefer being more selective with timing. It is not my goal to find the absolute bottom and top. But it’s absolutely my goal to not get into an obvious potential mistake. Sometimes by using options I can expedite and entry and leave room for error. But that’s a conversation for another write-up.
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.