This week was the Wild West in the cryptocurrency world. Bitcoin (CCC:BTC-USD) crashed 30% in mere hours and the damage was throughout the whole complex. Square (NYSE:SQ) is one who’s world plays in the same sandbox as crypto and blockchain. It has an important role to play in our future and SQ stock makes for a solid investment.
We learned a valuable lesson last year that we were dragging our feet with progress. For decades we’ve been pursuing digitization but not at full speed. I know this because suddenly after shuddering down the world we kicked it into high gear.
Transactors played a big role in this and they will continue for years. That argument alone makes me want to be long SQ stock and add on weakness.
I don’t believe in blindly jumping into a stock regardless of how good the thesis. I enjoy seeing my trades green whenever possible, so I am patient. The idea is not to find the perfect entry point but to avoid bearish stints. I want to avoid entry points that look like they could be obvious bull traps.
This concept is especially important when dealing with a stock that moves as fast as this. Even when it consolidates sideways like year-to-date, the range is huge. In the last few months, SQ stock had three 40% rallies and four 20% corrections, 30% each.
Action like this is worth trading for those who have the time. Some investors prefer to simply take the super long horizon route.
How You Trade a Winner Doesn’t Matter Much
Neither method should claim supremacy because it’s a matter of style. I made this point in February and the action that followed proved it right. SQ stock rallied 20% but then quickly fell 30%. At the time of my article, the stock was mid range and the outcome was perfect. Both sides can claim victory because both had the opportunity for big profits. Those who bought and held now have 12% of paper losses.
Now the stock is at the bottom of the same range and it’s a better buy than not. If markets in general hold up, SQ has good odds of a rally. The swing higher could bring big rewards. It has been rejecting $192 hard for a month. Yesterday was the fifth time, so if it holds, it may have a spring-board effect.
But this time could be different because of the overall scenario. Our stocks do not trade in a vacuum. They have to rally inside the market. If the indices are correcting then SQ is likely going to retest $160 per share. It won’t go there alone but it won’t rally if Wall street is freaking out.
Using options to invest in great companies like this is a viable alternative. There I can get long SQ now and leave 30% room for error. I can also structure trades that don’t need rallies to win. It sounds too easy but it’s not. There are risks. But if we set them up right, the risk would be smaller than owning the stock.
Speaking of risk, the Square fundamentals don’t show a lot of it. It is not cheap from the traditional sense but that’s because it goes to extremes to deliver growth. In just four years, the company grew its revenues almost seven-fold. They also swung from losses to +$350 million net income.
SQ Stock Is a Winner
Value is in the eye of the beholder. I prefer Square’s three digit P/E over a mature “cheap” financial stock. Its price-to-sales is a modest 8 so owners of it have realistic expectations.
The investors won’t easily give up on their bullish thesis. This has been going on since 2019 and will continue for years. In the opening paragraph, I stated that SQ makes for a solid investment. Now you know my reasons why. “How” you trade it won’t matter much. There isn’t one right way that fits all, and not a perfect time to do it.
Management is confident and are setting the trends. Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP) are playing catch-up to SQ and PayPal (NASDAQ:PYPL) now. Fintech is the way of the future and all of them will have room to profit. My message has been consistent even before the pandemic hit.
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.