Timing stocks successfully is not easy especially when they move as fast as The Trade Desk (NASDAQ:TTD). These momentum stocks rarely leave easy entry and exit points. TTD stock lost half of its value from the December high to last month’s low. Investors in it need to have strong charting skills or great convictions long term.
Having both would be ideal.
TTD has solid fundamentals for a growth company. Since 2017, its revenues and cash from operations grew three and six times, respectively. Management should be proud of that especially after the pandemic disruption.
It is not cheap with a three digit price-to-earnings and a 33 price-to-sale. You won’t hear me suggest buying it because of its value. This is not a problem for now because they could grown into profitability later.
Successful investors find future value in today’s companies before the masses do. TTD stock lost its mojo on Wall Street and it’s time to consider catching the falling knife. In this case it could be a machete with a tiny handle. Trying to time an entry is tricky as can be. But there is light at the end of this avalanche.
There Is Support Below
The fast fall from grace placed the stock into a prior base. This is a zone, not a hard line, and it should provide support. Last September, TTD stock broke out 90% from $520 after two prior failures the month before. Coming back to the starting point brings buyers back into the stock.
However, it then becomes critical to sustain the bounce. There will be resistance going back into $640 per share. Onus is on the bulls to not retest the May lows. Because if they fail, it will trigger another bearish pattern with ominous consequences. This is not my forecast, and I don’t think TTD would go there alone. But if the stock market hiccups, it will take TTD with it. In that doom scenario the risk could be an additional 30% to about $300 per share.
It is hard to imagine the panic that could cause this, so I would brave a small entry to start. Since the indices are still at all-time highs, taking small bites makes sense. Leaving room for error is essential with a stock that has such a high ticket price. At $560 per share, the mistakes can be financially devastating.
Using options can help mitigate some of the risk. There I can get long TTD stock now and leave a giant buffer from current price. Buying shares outright at face value places huge risk immediately in the face of danger. Instead, an investor can sell the July TTD $450 put and collect $5 for it. Money goes into the account to open the trade, and it doesn’t need a rally to win. In fact, the stock can fall 20% and they can still break even.
Leave Room for Error When Trading TTD Stock
I can’t emphasize enough the importance of building a moat. In March I wrote about trading it with options to leave room for error. That turned out to be a great idea. Although the stock fell, the trade worked out. I would repeat the process here for a lower level. Back then, it was imperative they hold $561, but they didn’t. The consequent target is still far below current price. The bulls are fighting to avoid filling it. There are still triggers below and using options, I can trade now and worry less.
The long-term commitment into it is a legitimate bullish thesis. The Trade Desk is in the right area and at the right time. It just needs more of it to grow into its opportunity. So far, management has a great report card to earn Wall Street cred. According to Yahoo finance, the analysts that cover it love it. They all suggest buying with an average price target above $670 per share.
Being successful when the whole world needs your services isn’t that impressive. But for TTD, its competition is formidable with names like Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Facebook (NASDAQ:FB). In spite of facing giants, it’s carving out its niche quite well.
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.