Going back to the vault of my previous articles — particularly on innovation-related companies — is fraught with risk. You can never tell what the market is thinking. Fortunately for my take on Stem (NYSE:STEM), I read the tea leaves of STEM stock correctly.
First, let’s back up and start with the basics. As my InvestorPlace colleague Larry Ramer mentioned, “Stem has developed software, powered by artificial intelligence, that increases the efficiency of lithium-ion batteries and enables more cost-effective, resilient connections with electricity grids.” STEM stock was a hot public market debut, being a reverse-merger target of special purpose acquisition company Star Peak Energy.
But as much as I believed in the long-term relevance of STEM stock, I was concerned about its technical posture. That was the main point of my argument when I stated that you should be ready to pull the trigger the instant STEM trades at a discount. Perhaps my only regret in this take is that I should have explained more clearly what magnitude of discount to expect.
At the time of my article — near the end of March 2021 — I saw what appeared to be a bearish head-and-shoulders pattern. From my interpretation, the head printed on Feb. 17, while the two shoulders printed on Jan. 12 and March 12 of this year. Since the close of March 16, STEM stock traded underneath its 50-day moving average.
In my opinion, we could see further losses. That’s because significant bullish activity occurred on Jan. 11, 2021, where STEM stock closed at $30.95. Volume on that session was 17.4 million shares, well above the average volume of 3.5 million.
In other words, early bulls are taking hefty losses. To avoid the possibility of more damage, they may dump and cut their losses.
Necessity Fuels STEM Stock
Now the million-dollar question is, how low will STEM stock go? Just by recognizing market psychology and the power of even-numbered benchmarks, the $20 price target is a logical one for the bears. And if STEM drops below there, short traders will likely attempt to drag shares down into the teens.
Of course, I’m not going to guarantee that shares will hemorrhage to that point. But it’s not entirely out of the question. Aside from the uncomfortable technical posture, you have the fundamentals. Yes, Stem is relevant because it basically acts as a force-multiplier for electricity grids. But that notion is under fire thanks to the Texas winter storm.
You probably noticed that quite a few energy-related names, particularly those with ties to the green energy rollout such as STEM stock, took a beating following the devastating cold snap. Unfortunately, part of that was politically-driven, as misinformed editorials pinned the blame on renewable energy.
This translated into an “I told you so” moment. Now, the fossil fuel and nuclear power industries can say that they lever unparalleled energy density. And they would be right. In other words, they can easily overcome Stem’s techno-geek enhanced efficiency narrative with a good old fashioned brute-force approach.
On the surface, this doesn’t bode well for Stem. But here’s the thing — climate change is a reality. Now, I understand that many people debate this topic, and we should respect these dissenting voices. However, what I will say is that major institutions, from NASA to The Royal Society to National Geographic and countless other agencies and peer-reviewed scientific journals have affirmed the evidence of climate change.
That doesn’t mean that we’ll get rid of the fossil fuel industry or other energy sources. But it does mean that green energy is here to stay. And longer term, Stem’s innovative services to build renewable energy resilience will be incredibly pertinent.
Still, Watch the Charts
Despite the positive fundamentals pointing to a brighter future for STEM stock, the market doesn’t always trade on these dynamics. Sometimes it does, especially when a company produces a strong earnings beat based on the actualization of said fundamentals. But more often than not, an equity unit moves on fear and greed.
At the moment, I’d say that fear is STEM’s dominate emotion. Again, you have the bearish head-and-shoulders pattern. As well, the stock is trading below its 50 DMA. Finally, investors locked in at a higher price are getting increasingly anxious about not absorbing too much damage.
Given these powerful emotions, investors may want to wait things out a tad bit more before moving in. But overall, I’m liking this discount. Be prepared to build a long-term position.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.