While the stock markets are consolidating at near all-time highs, the small-cap sector has been under fire. The Russell 2000 index fell 13% from high to low recently. This is more than an official correction in Wall Street terms. One of those companies is SoFi (NASDAQ:SOFI) and SOFI stock has fallen in tandem.
Sofi stock is what I call these ARK-like stocks because they fit the profile of what they buy. It’s almost as if Wall Street is gunning for their ETFs on purpose.
Not being an insider, of course I am speculating on nothing but gut.
Regardless investing in SOFI stock for the long term should be a rewarding proposition. It belongs to a pretty exciting area of business.
Moving Forward
Financial technology, or fintech, is moving forward at a rapid pace. We’ve always wanted it to happen, but last year’s events put that process into high gear. When the world closed for business, it became apparent that we need to move our transactions to cyberspace. Add to this the fact that we are also pursuing crypto and you have a perfect storm.
Fintech includes a select few companies that have a jump start on the rest. SoFi is one of the newest high-profile ones. A few years ago Square (NYSE:SQ) and PayPal (NASDAQ:PYPL) emerged to challenge the old dogs in the sector. Those would be Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP), who also are in the race.
While that sounds like a motley crew, these are strong companies delivering great results. The younger ones are growing at an incredible pace, while the older ones are trying to keep up with innovation. In spite of this, Wall Street has found it appropriate to sell the heck out of them.
SoFi Stock Loses Dead Weight
SoFi stock has given up 40% in just over a month. While this looks like bad news, it is an opportunity for somebody looking for an entry. Investors who thought they missed it on the way up have a golden opportunity here.
In the summer, Sofi fell into these low levels and I shared the same idea as today. Even though I did nail the perfect bottom, that trade delivered a subsequent 60% rally. On Wall Street, history often repeats itself in stock action. However, I caution against going all in because we do have extrinsic risk factors to consider.
The ingredients that drive stock prices higher depend on investor sentiment the most right now. Unfortunately because of the speed with which news spreads now, corrections have become violent and sudden. We simply cannot count a correction out from these market altitudes. Should that happen, it would take all stocks down regardless of individual opportunity.
Technically, $13 per share has been pivotal since its first day as a public company. Odds are the bulls will defend it fiercely. But if it fails, there will be an overshoot lower. Perhaps they could even make new lows. For this reason alone it’s worth leaving some dry powder to pounce on that opportunity.
Using the options markets would be a way to get long SOFI and leave room for error. Selling the $12.50 put for early next year would make me long the stock. But I would not be assigned shares until it falls through that price. Even then my breakeven point would be just over $11 per share.
This means I would be long today with a 25% buffer from current price. This is not appropriate for all investors but it is a viable alternative than buying now and hoping for the best.
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.
