It is important to stay open to the idea that great stocks can fall through no fault of their own. Without this, we are likely to commit mistakes. Often traders fall in love with the stocks they trade and create negative positions in great companies. Today we examine the outlook for Palantir (NYSE:PLTR) stock, because the business is healthy but the stock price has just entered recession zone.
That’s not to say that Palantir will start losing sales, but Wall Street defines a 20% drop as such. What’s worse is that this happened in about a week.
Luckily, PLTR stock had just culminated a 40% rally that started in the summer. The correction is not worrisome since it’s just price action. Therefore, it doesn’t reflect failures by management.
In fact, in April PLTR lost almost 30%, then rallied back 60% within a month. The correction process repeated from the end of June. Here we are doing it again.
Therein lies the opportunity today: If markets stabilize, I expect PLTR stock buyers to show up in force. They did so twice earlier this year, so I don’t expect this time will be different.
PLTR Stock Has Loyal Fans on Dips
On Wall Street there’s a saying that “price is truth.” If that’s true, then with PLTR there is strong support below $22 per share.
Buyers have had tremendous success catching PLTR stock on dips for over a year. My method of choice would be to sell puts on bad days. This would allow me to choose levels at which I can own the shares. This is a bullish options strategy that leaves more room for error. This alleviates the need to be surgical finding bottoms. If the bulls can take it above $30, they could gain another 20% from there.
This is not the time for investors to be brash about their assumptions. We don’t know how this macroeconomic scenario is going to unfold. Central banks have deployed experimental policies to help bail the world out of a global shutdown. I contend that there are no experts on what’s about to happen next.
The leaders are knowledgeable, but they too are playing with a new deck of cards. Even with the best laid plans, accidents happen.
Consider the 2008 global financial collapse. We didn’t plan on it, and the experts had knowledge back then too. Yet, they did not sound the alarms until it was too late.
However, I am not suggesting that this is 2008, in fact just the opposite. If I expected a crash, I would not be looking at catching PLTR stock after a 20% drop. There’s no evidence that it will stop at $22 per share.
Therefore, I suggest being humble enough to not take full-size positions all at once. When investors go all in, they leave no room to manage the potential “uh-oh” moments.
Palantir: There Is Nothing Wrong With It
Fundamentally there’s no reason to doubt the company. They have a strong income statement that is showing healthy growth. Total revenue doubled in 3 years. The company still loses money, but its price-to-sales ratio is not outrageous. Besides, management cannot outperform by pinching pennies. Executing on aggressive growth plans demands expenditures.
So far the team has earned respect on Wall Street. The corporate events that I’ve watched were impressive. The executives all sound sure of themselves. They also sound certain of the prosperous future of the company.
I have no reason to doubt they cannot accomplish their goals.
Still, it’s also important to note that — sporadically — PLTR stock becomes part of the Reddit posse. This is a knife that cuts both ways, but I see it as a good thing.
If it rallies fast with them, then the bulls enjoy “fast-forward” profits. But if it falls out of control, then it opens opportunistic doors for new investors to buy some shares.
The strongest point I want to make for prospective owners is to have moderation with PLTR stock. My conviction in the overall success of Palantir is high. But under the current conditions, I purposely knock it down a notch.
I infuse self-doubt by design, so I can remain humble with my trades.
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.