While the pandemic was and continues to be a human tragedy, some good came out of it. A few investment ideas gained a lot of steam. Pinterest (NYSE:PINS) stock was an early beneficiary of this, but it then came crashing down hard. Today we determine if it is safe to wade back into it after a horrendous second half performance.
Social media stocks made for a powerful investment theme last year. That’s because the whole world had to socialize online. We had no choice but to do it while we locked ourselves in for safety.
Investors also flocked to online retailing stocks. Buying our goods online suddenly went from convenience to necessity. The idea came from Amazon (NASDAQ:AMZN), but it now has become the new “norm” going forward.
PINS Stock Has Two Tailwinds
Pinterest had exposure to both themes, which made PINS stock popular. But, as usual, investors overdid it as they rallied it 750% from the 2020 bottom. Sadly for those who chased it too late, the stock has since given almost all of it back. From its peak in February, PINS stock lost more than 60% of its value.
However, therein lies the opportunity going forward. The fall from grace has been nothing short of astonishing. But going lower from here will not be easy for the bears. Without a new shoe to drop, I don’t think they have it in them.
Technically this was the base for the rally that started in September of last year. This was also the place of contention from April and August 2019. Clearly Pinterest investors are likely to put up a good fight again. Besides, it is an e-tailer that lives inside a social media company. This is going to stay relevant for years to come.
The Strong Fundamental Argument
Fundamentally the story has not changed and it’s a good one. But don’t take my word for it, its financial metrics provide the supporting truths. Total revenues are now more than five times larger than 2017. They are also trailing 12 months of $350 million in net income. And gross profits are almost $2 billion for the same period.
Clearly the news is good for Pinterest the company, but this has not yet transpired in its stock. The best trading ideas come to those who find hidden gems. For whatever reason investors are ignoring these good facts in its financials. Buying sleeper shares like these is not likely to be a financial calamity. It would have been if you did so earlier this summer. Since then, PINS has lost most of its froth already.
There is room to fall further, especially if the bears are able to break through $34 per share. The danger from there would be another 15% dip. However, that would only likely happen if markets correct.
Nevertheless, it would make sense for investors to start with a partial position. Averaging into a full-size lot is proper procedure when uncertainty is high.
Potential Extrinsic Wrinkles
The general mood on Wall Street is edgy these days. The indices are swinging wildly coming into the end of 2021. Just yesterday the small caps rallied almost 3%. But the day prior it was the exact opposite story. Clearly emotions are high and investors have one foot out the door already. Near-term nervousness aside, I am confident that PINS stock will do well over time.
Using the options may offer investors clever alternatives. There we can get bullish now and leave plenty of room for error. This eliminates the need to be surgical with timing. The indices are still near their all-time highs despite of the high volatility. Moreover, the Federal Reserve may add fuel to the nervous fire by tightening its monetary policy. It is not a rule that markets will fall thereafter, but it is a concern now.
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.