Investing is not easy but it is also not hard to avoid obvious mistakes. What causes traders grief are most often from avoidable scenarios. Zomedica (NYSEAMERICAN:ZOM) stock is a magnet for hopeful investors and its low-dollar ticket price is the lure.
The current trend on Wall Street is to chase home-run monstrous spikes. Hopefuls feel they have good reason to believe that is how things work. This mantra used to be more confined to penny stocks, but now it happens everywhere.
The bands on social media have succeeded in creating vortexes that launch prices into the stratosphere. Most famous were the shenanigans with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). In fact, AMC stock rallied 40% in 24 hours just last week.
ZOM Stock and Risk
ZOM stock trades fast because at around 80 cents per share it seems harmless. It’s easy to forget that it can still cause us to lose 100% of our investment.
Under normal circumstance, when I invest in a ticker I have the company fundamentals for support. On bad days, the metrics can attract buyers to help ease the selling. With ZOM those are virtually missing so the drops happen in free fall format.
In early April, I wrote about downside risk. The stock is now 40% cheaper, my suggestion for investors is to continue to avoid it.
In hindsight, my message a month ago was on point and nothing has changed. Management had the opportunity to change opinions with their earnings report last week. But investors shrugged it off with a tepid reaction at best. My comments are not to demean their efforts because they are trying hard.
Wall Street Does Not Like Change
Recently management announced a shift in distribution strategies. Their goal is migrate TruForma to direct sales. The company CEO suggested this will take two years to accomplish, so it’s a let-down reaction in the stock. What matters for price are market expectations and what they think of the developments. Wall Street doesn’t like change because it comes with a lot of question marks. For now, investors are skeptical about the company’s response.
Technically, the stock has the chance at holding recent support. But if last week’s lows fail, ZOM stock will close the gap 40% below that. Beware of chasing rallies because they are likely to fade. This is what happened late April as the stock soared 75% in under a week. Sadly, it quickly crashed and set a new low.
Clearly, the rips are opportunities for investors to salvage principal and profits. Until this behavior changes this is a potential trap, not an opportunity.
They say that in every bad situation there is a bit of good. This combination of high volatility and low fundamental substance are an avoidable hazard. But that is the draw for traders – and there the opportunities are aplenty. This would suit active traders who know their way around reading charts and ticker tapes.
A Better Trade Than Investment
For my conclusion today, I will reiterate my admiration of their cause. They are seeking to help people and pets so I am rooting for them. The better idea is to trade ZOM stock, not invest in it. From an investment perspective I fail to see the need for the risk. I prefer to use stocks where I have tangible justification for my enthusiasm.
Chewy (NYSE:CHWY) stock, for example, has also fallen from the sky. It is now 40% below its highs and struggling to find footing. At least with CHWY stock, investors have proof that management is succeeding. They more than tripled revenues in under four years. I can confidently expect that in the long run, the stock will heal.
I can’t say the same for ZOM, so my bet on upside in ZOM stock would be pure hope.
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.
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