Fintech is a hot topic on Wall Street and getting hotter. Last year’s global shut-down turned up the wick 10 notches underneath it. The stocks within it set records coming out of the pandemic crash. Affirm (NASDAQ:AFRM) stock, on the other hand, has lost its mojo. Yesterday, it was down while the segment soared.
Today we examine the opportunity that might still be in AFRM stock.
It burst onto the scene in January and rallied almost to $150 per share. The February correction was brutal and it hasn’t stopped falling since. In March, the bulls tried to hold a consolidation zone but May is proving too difficult. So far this month the stock is down another 25%.
But, there is technical hope at the end of this nightmare tunnel.
Since they reported earnings, the bulls have been making progress. Even though they are still at the bottom of the range, they have been making higher lows. Soon they will face the resistance at $57 per share and they will need some help to break through.
Fundamentally, the company has a lot to offer. Their P&L is too new to show proof but the business is legit. The company is almost 10 years old, so the concept is real. This is not a startup looking to establish an income stream.
Logic Suggests AFRM Stock Is Worth It
In the absence of tangible financial metrics using simple logic works. The easiest way to appreciate its potential is to visit their website. The links there are top notch global retailers like Walmart (NYSE:WMT). These are fruitful relationships that rarely fail.
AFRM stock broke soon after its IPO. The company, on the other hand is fine and it just needs time to heal its Wall Street wounds. Investors are a fickle bunch these days. If social media is not fighting over it, the stock falls into the shadows. And as they say, out of sight out of mind, but that’s not a reason to pass up on opportunities.
The bulls may have help from charts soon. Machines have taken over the price action in the last few years. Therefore, whether we like it or not, the technicals matter a lot and are almost self-fulfilling prophecies. Machines trade methodically using mathematical formulas. This is not foolproof but it’s a start.
In this case, to get bullish on AFRM stock, investors need to draw a hard line below its 2021 low. They should stop out below it regardless of conviction. This is mainly because there is extrinsic risk to consider. For the last two weeks, the bears have controlled the small-caps and the Nasdaq price action to a degree. This could be hidden weakness that is yet to materialize in the S&P 500 and the Dow. If there is a change of control, it usually marks an interim top.
Long Term, the Company Has a Bright Future
I am not one to call for a crash for no reason. My message is that markets at these levels are vulnerable to a 10% correction. This is the season that historically scares investors. Last week, the bulls made strong showings but then faded. Yesterday they had another strong day, so they better not fade again. These battles in the indices bleed into individual stocks. Even if we nail the entry into AFRM, it cannot rally on its own. Stocks do not trade in a vacuum.
The company strategy is very broad and in the right areas. Online retail is extremely strong, which places strong demand on electronic transactions. The pandemic put a cash crunch on everyone and Affirm empowers shoppers currently short on means. Furthermore, their strategic alliance strategy has served Amazon (NASDAQ:AMZN) and Walmart very well.
Management simply needs time to prove itself to investors. Nothing is more effective than showing them the ability to grow revenue. Profitability is easy to achieve after establishing strong income streams.
Use Options to Trade
For the next few weeks, while markets shake out some jitters, I would rather use options to trade AFRM. I don’t want to stick my neck out for the stock yet. There I can sell the November $35 AFRM put and collect over $2 for it. This is a bullish trade that leaves another 38% buffer before I can suffer losses. The worst that can happen in this scenario is me owning shares at $35 and breaking even at $33.
Regardless of method, it is important to only take partial positions. This leaves room to manage the risk over time. Because the investing environment is so fluid, conviction must be humble.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.