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SHOP trade ideas

SHOP Is Becoming Unstable - Minervini DissectionThose of you who have been following me for a while now know that one of, if not my absolute favorite piece of trading literature is "How To Trade Like A Stock Market Wizard" by Mark Minervini. The book is an incredible tool for finding super-performing stocks, dissecting them, and understanding how the most common stock models used by institutions are structurally deficient at pricing them accurately. I thought I would take the opportunity today to dissect one of the most prominent superperformers of the last two years - SHOP (Shopify), and explain why this stock is headed for lower prices in the coming year(s). If you're unfamiliar with the book, essentially Mark argues that there are a select number of extremely high growth stocks that, when targeted and traded properly, can yield unmatched returns. Here is a bit about his process: Traits of Superperformers 90% of superperformance stocks began their phenomenal price surges as the general market came out of a correction or bear market - In the case of SHOP, the huge slowdown in early 2016. Superperformance phase occurs during the first 10 years after the stock’s IPO. Stock is a small-cap or mid-cap that hits a period of accelerated growth. Stock has a relatively small total market cap and amount of shares outstanding - Yup! Low float count and relatively unknown name back in 2017. Majority had periods of outperformance in terms of fundamentals as well as technical action before they made their biggest gains. Many traded at more than 30 or 40x earnings before they experienced their largest advance - Can't buy a Ferrari for the price of a Kia. Key to Making Big Money in Stocks The key to making big money in stocks is to align supporting fundamentals with constructive price action during a healthy overall market environment - 2017 as healthy as it gets. You want all the forces behind you: fundamental, technical, and market tone. What matters is what big institutions think, because they are the ones that can move a stock’s price dramatically. Therefore, it’s your job to find the companies that institutions perceive as valuable - hard to model growth in standard DFC / DDM / CAPM modeling, assuming growth rates and periods is pure guesswork and beats = massive outperformance. Fundamentals Drive the Stages of Stock Price Movement From a fundamental perspective, the cause almost always was linked to earnings: from lackluster performance to upside surprise and accelerating growth, eventually followed by decelerating growth and then disappointment. These underlying fundamental changes drive big institutional players into and out of stocks. Five Key Elements Trend: Price in definite uptrend Fundamentals: Improvement in earnings, revenues, margins Catalyst: Hot-selling product, approval by FDA, new CEO, new contract, etc. Entry Points: Enter at a low-risk entry point Exit Points: Establish stop loss points. Pass the Trend Template filter Filtered by earnings, sales, margin growth, relative strength, and price volatility Scrutinize for similarities to a Leadership Profile to determine whether they are in line with fundamental and technical factors exhibited by past superperformers. Manual review, considering Reported earnings and sales Earnings and sales surprise history EPS growth and acceleration Revenue growth and acceleration Company-issued guidance Revision of analysts’ earnings estimates Profit margins When looking at stocks in this light, it's easy to see how everything came together for SHOP, an incredibly high growth, young, market leader with good margins and price action. All it required was the ignition from stage 1 - where the groundwork is laid - to stage 2 - where the stock goes parabolic. What we have now is a great example of a superperformer stock that's finally made it into stage 3, the distribution phase, where expectations for continued gains in fundamentals diminish, and the stock gets rapidly re-priced to reflect that - almost always resulting in a price correction. Another way to think about it is buying the hype cycle early and selling at the peak before it finally comes back to reality, which can take some time. Right now, we are finally distributing without new and convincing highs - the end is neigh. I really like how SHOP fits the superperformer mold to the T, looking extremely similar to all of the charts in the book. Well worth a read, and stay clear of buying SHOP at these prices!! Cheers
NYSE:SHOPShort
by PropNotes
22