On one hand, I like the opportunity in Sofi (NASDAQ:SOFI). On the other hand I have concerns over how SOFI stock is acting now.
Financial technology stocks (fintech) are soaring. Yesterday PayPal (NASDAQ:PYPL) challenged its all-time highs. Square (NYSE:SQ) is doing very well also. Even the old dogs like Visa (NYSE:V) and MasterCard (NYSE:MA) are strong. To see a newcomer among the bunch lag this much is concerning.
In the long run, I believe that this shall pass. The opportunity for SOFI remains interesting. Eventually investors will come around to appreciate its value. Wall Street sometimes takes a while to catch onto a good thing.
They came to market with an IPO last year, so investors are still getting to know it. The stock is still up 60% from the first day of trading. However it is down 40% from its all-time highs. Recently in May the bulls brought the heat and rallied 75%. Unfortunately they gave up almost all of it in about a month. It has potential and is looking for stability to build a base.
SOFI Stock Has Support Below
The good news is that there is relief coming.
Technically, SOFI stock is falling back into a support zone. This is not one hard line in the sand. The buyers will be lurking in a region where they have rekindled their love for it before. They are likely to repeat the process this time around.
If I’m long to the stock then it’s too late to panic out of it now. I’m comfortable staying in it during this tough stint if my intentions are long term.
Investors looking to engage with it may have a good opportunity here. But because of extrinsic factors, it would be a mistake to go all in.
Things Are Too Good
The stock markets are breaking records into potentially diminishing returns. The downside opportunity is too great from these all-time high levels. Missing out on a few upside ticks is OK. Eventually equities have to cool off.
The inflation reports yesterday showed that the numbers are getting hotter. The Federal Reserve will experience pressure to end its QE early. If that happens, stocks will experience a big drop in tailwinds. There should be a negative impact on all stocks.
Therefore, regardless of how attractive the opportunity looks in SOFI stock now, I must practice some restraint.
Although there aren’t specific signs of an imminent correction, caution is in order. The idea of a selloff is a thesis, not a trigger. We have gone so long without any weakness that the odds of a fall are high.
Moreover, the longer we go without relief the harder the fall will be. By default, therefore, we are all traders now. Buying new shares must come with a stop loss.
Think Outside the Box for Buffers
One way I can accomplish a bullish positions is through options. There I can sell the January $12.5 put and collect a premium for it. Should the stock disaster come, my break even point would be at less than $11 per share. Compare that to somebody who bought the shares at face value today, they’d be already down 33%.
The old adage says that “they don’t ring bells” at tops and bottoms. Regardless, I am confident that owning SOFI shares around $15 is acceptable risk versus reward ratio. The company may be new on Wall Street, but they’ve been operating for almost 10 years. They have a rosy future ahead as long as management continues to execute on plans.
My conviction on this thesis is medium to high. Normally I would be exuding more confidence in my conclusions today. But these days I penalize myself a notch just to be safe. The current conditions are unique. No one should have 100% conviction.
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.
