If we had bought out-of-the-money calls on Newegg (NASDAQ:NEGG) last Monday, we could have retired wealthy by Wednesday. The stock’s improbable 250% gain meant that $70 strike calls — which were worth virtually zero the week before — became worth $1,500 per contract.
Today, however, prices of those same options have plummeted to $140.
The accelerating speed of Moonshot bets is stunning, even to yours truly. Meme stocks last an average of three to four days, down from nine last month — barely enough time for traditional settlement rules to kick in.
Perhaps we can blame the attention economy. Discord and Twitter (NYSE:TWTR) naturally have shorter “memories” thanks to their scrolling-based user interface. It’s a system that works for funny dance videos; one can only watch the same person dancing to Staying Alive so many times before swiping for more content.
But that’s also had a profound effect on stock trading. Investors who sell quickly are now those who profit; buy-and-hold investors get left holding the bag.
With retail investors becoming more mercenary, here’s what that means for playing the new Moonshot game.
Rising Stars: Short-Term Trading
As the adrenaline-fueled rush of GameStop (NYSE:GME), Dogecoin (CCC:DOGE-USD) and AMC (NYSE:AMC) has subsided, many Robinhood traders abandoned the trading app to focus on other, non-stock fascinations. America, after all, is finally reopening from a year-long pandemic.
But those that have stuck around are more dedicated than ever. These new day-traders are the hardcore fans — possibly including you — who realized that they have more stock-picking interest (and usually, ability) than the average investor.
Of course, it’s impossible to predict stock perfectly — instead of NEGG $70 calls, I could have just as quickly told you last week’s winning Powerball numbers. But being right 51% of the time at the casino still pays off in the long run, especially when you’re targeting bets with extremely high returns.
And that brings me to today’s topic: how to play the one-day pop.
SELLING IN THE ATTENTION (DEFICIT) ECONOMY
I know many of you don’t believe in technical analysis — and in 95% of cases, I’d wholeheartedly agree. But technical analysis can give you an edge when less sophisticated traders unwittingly leave clues of their next moves. (To see proof of technical analysis in action, you can read up on Momentum Master here).
So, to invest in meme Moonshots, we’ll use a Momentum Master technique. In this case, I’ll use an SMA-25 indicator: sell whenever stocks cross back under its 25-day moving average. (I’d usually use a 50-day indicator, but high-volatility meme stocks require a more sensitive metric).
Here’s what Momentum Master tells us to do for three popular stocks today.
CARVER BANCORP (CARV)
Investors using the SMA-25 indicator on Carver Bancorp (NASDAQ:CARV) would have done splendidly this year. SMA-25 would have saved investors from a -22% slide in March and told them to jump back in for the stock’s 75% gain last week.
Today, SMA-25 says to sell whenever CARV moves below $14. Skittish investors can take profits now, of course, but there’s a chance that meme stock investors could send shares higher before prices normalize.
Exela (NASDAQ:XELA) is another instance of profiting from swing traders. While a buy-and-hold strategy would have returned zero in 2021, any investor following the Momentum Master strategy would have turned $10,000 into $30,750.
Today, that strategy says to hold on until XELA crosses back below $2.40. Until then, there’s still potential for more significant gains.
Turning back to NewEgg, an investor who bought and held NewEgg at the start of the year would have seen a 950% return. Those who followed an SMA-25 strategy? 1,850%.
The outperformance happens because Momentum Master rules force you to take profits as prices start falling. And that gives you dry powder to jump back in at lower prices. Meanwhile, buy-and-hold investors will see their early gains melt away as initial interest fades.
SMA-25 now tells investors to sell the moment NewEgg falls below $28.
Falling to Earth: High-Priced Moonshots
Sometimes it’s great to fall in love with a stock, especially when it’s early days for a new technology. I like reminding people that those who bought Tesla (NASDAQ:TSLA) at its $17 IPO would have turned $10,000 into $1.7 million after adjusting for stock splits.
That strategy, however, has lost its golden touch. Investors who bought shares CCIV (NYSE:CCIV) before the Lucid Motors merger announcement would have lost 70% of their wealth.
That’s because people have started mistaking growth companies with Moonshots. Coinbase (NASDAQ:COIN), Airbnb (NASDAQ:ABNB) and Didi (NYSE:DIDI) all reached a $60 billion market cap after their IPOs, which gives them less room to grow as Tesla did. To earn 100x in these stocks is a near-impossibility. (No modern company has ever reached a $6 trillion valuation).
Meanwhile, the downside looms large. Coinbase *could* become the next Visa (NYSE:V) of payments, but so could competitors PayPal (NASDAQ:PYPL) or Robinhood. There’s no rule saying the dominant players need to stick around forever; of the top 10 Fortune 500 companies in 2000, only Walmart (NYSE:WMT) and Exxon (NYSE:XOM) remain on the list today.
My advice? Stay wary of richly valued Moonshots, especially if you’re looking to invest for the long run.
By the Numbers: Who Knew That Unprofitable Businesses Lose Money?
|170||The number of U.S. NYSE/NASDAQ-listed companies with a price-to-sales ratio above 100x at the start of 2021.|
|$5.1 billion||Total revenue generated by the 170 companies in the past 12 months.|
|$8.1 billion||Operating loss created by the same companies during that period, according to data from Thompson Reuters. Only nine companies showed a positive operating profit.|
|675||Total “buy” or “strong-buy” recommendations of these companies by sell-side brokers. Only 165 “hold” or “sell” recommendations were issued.|
Interesting Reads: Of Moonshots and Space
Which company, if any, will win the space tourism race? With Virgin Galactic’s (NYSE:SPCE) Sir Richard Branson slingshotting into space this weekend, Luke Lango and his team give their own 264,000-foot view of SPCE’s long-term prospects.
Is CCIV all hype, or does it have some tangible long-term substance? Joanna Makris makes an in-depth case on the Lucid myths you need to know.
Soccer fans were likely glued to their TVs this weekend. Meanwhile, stock market fans might have been eyeing FuboTV (NYSE:FUBO) — a purveyor of such content. Will Ashworth looks into how high this intriguing stock might rise.
Finally, those deciding between Moonshots and space stocks can thank Wayne Duggan for bringing it together. With both banner stocks so expensive, is AMC or SPCE a better buy?
Notice how I speak negatively about high-priced stocks, yet the Momentum Master strategy doesn’t consider valuation? That’s not by accident.
Swing trading: short-term gains from volatile companies that we sell out at the first sign of trouble.
Buy-and-hold: long-term gains from great companies at absurdly low valuations.
Confusing the two could be terrible for your wallet. NewEgg’s 40x price-to-sales (P/S) ratio makes it almost 10 times more expensive than Amazon by that metric.
Occasionally, however, we’ll come across companies that land in both camps. So if you want to know my personal favorite for a long-term Moonshot bet, here’s a hint: the company name rhymes with “Acela” and likely has a 20x upside.
In the kingdom of Moonshots, momentum might reign as king. Valuation, however, is still the all-powerful queen that no Moonshot investor should ever ignore.
Questions or comments? Connect with Tom on LinkedIn.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.