Sometimes you find a company whose bullish thesis is too obvious. And on even rarer occasions, main stream investors miss the obvious. Consequently, its stock falls on hard times temporarily, and you pounce when the masses aren’t looking. Such was the case with Affirm (NASDAQ:AFRM) stock back in the summer.
AFRM stock came to market earlier this year and immediately rallied to $145 per share. Unfortunately it fell into a whirlwind of selling that cost it 70% of its value by May. It bounced off the lows but traded sideways for three months.
Finally, investors saw its value late August and it went parabolic.
The rally from the $70 breakout line extended 150%. Luckily I had been sharing the idea well before the breakout. The trades from those yielded tremendous profits for those who listened.
At this point, I would rather wait for a bigger dip in AFRM stock. I prefer stocks with more obvious entry points.
Here’s a closer look at how you might approach Affirm today.
Affirm Is In the Right Spot
Don’t get me wrong, I still like the concept of the business for at least three reasons. First of all they are in the fintech sector, which is extremely hot. Secondly they have a close relationship with consumers directly. Moreover, they are in close contact with the commercial side as well. They are in a pivotal situation that affords them many opportunities in B2B or B2C.
With all of this in mind, it seems like I should be suggesting to buy AFRM stock. But that’s not the case.
At these levels now everybody loves it and perhaps a little bit too much. However, I would be a proponent of buying it on dips, especially if it comes closer to $130 per share. This does not mean that investors should short it until then. But if you’re not long already, then you should admit to yourself that you missed it.
There is a good consolidation level starting at $130 per share and extending $20 lower. Remember that sometimes stocks fall through no fault of their own. Even though AFRM stock looks bulletproof at this point, it could fall thanks to outside factors.
The stock markets just broke records, so it’s easy for them to have a 5% hiccup. If and when that happens, it will cause all stocks to fall: Both the good and the bad. There is also an immediate, short-term wrinkle this week. The company is announcing earnings, which usually creates temporary, binary situations.
Regardless of how strong the results are, the immediate knee-jerk reaction is all about emotion.
Dips in AFRM Stock Are Prime Opportunities
If you read the headlines during the earning season so far, almost all of them focus on the word estimates. They ignore the good facts relative to last year, even though that’s what matters most. Companies are all striving to do better than last year. The immediate overnight action is all about expectations … not facts.
Stocks can double last year’s sales and they still fall 25% because they missed estimates by a small percentage. I would side with the facts over the estimates every time. But in the meantime, I would need to sit through the silly gyrations this week. If AFRM stock falls on headlines, it would be because of bad expectations, not bad results.
Chasing it into the earnings creates short-term risk. I’m confident that owning shares close to its IPO will yield long-term success. Therefore, it wouldn’t hurt to exercise some patience to get better entries in a quality stock. If they are adamant at starting out now, they should at least take partial positions. This would be the only way to manage this week’s risk.
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.