The stock market is having a confidence shakedown this week. This makes it hard to buy stocks, even if the companies have demonstrated potential. Twitter (NYSE:TWTR) stock is now 50% off of its all-time high, so it’s worth investigating. Today we will examine the opportunity that exists in TWTR stock this year.
But first we evaluate the overall equity market state, because TWTR does not trade in a vacuum. If the market is about to correct, it will drag all stocks with it including this one.
However, so far the facts still suggest that the bulls are still in charge. The slope of S&P 500 chart is all the proof we need. It broke records three days ago, so that is a fact, not an opinion.
Stocks have so far had help climbing the walls of worry. Tail winds came from very accommodative central bank monetary policies. The Federal Reserve is just now in the process of ending those aides. Wednesday, the stock market fell apart on hints of potentially aggressive tightening policies going forward.
In reality, they should not call for the end of the bull run until there is proof. There are no imminent signs of it in the major indices stock charts. Moreover, I bet the Fed will be reasonable with its unwind efforts to cool down the economy. It tried the sledge hammer approach in 2018 and that failed. The reaction Wednesday was emotional and it shows evidence of an immature market. For now I will assume that buying dips is still the way to go.
TWTR Stock Is Doing Fine
We can’t blame the entire debacle on the company, because the whole cohort is under pressure. Etsy (NASDAQ:ETSY), Pinterest (NYSE:PINS) and Snapchat (NYSE:SNAP) stocks are also suffering. There is nothing wrong with it specifically, so panicking now is wrong.
TWTR is falling into a level that has been in contention since its initial public offering (IPO). The company started trading in 2013, then rallied 90% from $39 per share. The bulls and bears subsequently battled over that level for more than a year before the bears prevailed.
The stock capitulated into the bottom in 2016, and the swoon lasted almost two years. Then it found love and had a series of long rallies with small pullbacks. The action culminated in February of last year near $80 per share. Sadly for those who chased it late, they now hold the proverbial bag and perhaps for a long while.
I am realistic with my upside potential expectations for the short-term. The real opportunity is that it will follow the markets up since my outlook there remains positive. Nevertheless, catching this falling knife is risky business since there isn’t clear signs of a bottom yet. It is a process that will unfold as it approaches $36 per share.
Mitigate Risks When Possible
Naturally, there is risk from the overall markets correcting from near record levels. But that’s not the assumption while the bull are buying dips. To help ease the process, I find comfort in using the options markets. This eliminates my need to be surgical with entries. There I can either lower my out-of-pocket expense or create room for error. Otherwise, investors should at least consider taking only partial positions to start.
There’s never a rush to jump into a stock, even at the risk of missing upside. TWTR stock rallied 300% non-stop from the pandemic low; it is only natural that it gives some of it back. This is how a stock builds a better base to tackle more upside potential. Those who buy it are less likely to panic out of it too quickly. This gives the stock the chance to consolidate and build a base. If I am long the stock already I would not add to it yet.
Fundamentally and especially after this correction, Twitter is not statistically expensive. It carries a price-to-sales ratio of 7.6, which is low by any standards. This is in spite of maintaining reasonably strong growth metrics. Total revenues and gross profits grew on average 18% each of the last four years. That is a respectable scorecard that should attract more buyers if the sell-off continues.
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.