A Market Of Extremes Creates High-Impact Opportunities

Big Tech has spoken. After months of building anticipation and more than a little dread, the most widely held stocks on Wall Street have revealed exactly how well their businesses are faring as the pandemic recedes and the interest rates rise.

As you know, the results were extremely scattered. The true giants each won some degree of applause, but second-tier names like Meta (formerly Facebook), Netflix and PayPal confessed that their businesses are hitting the wall.

Winners are up on a wave of relief. The disappointments have taken a savage step back, wiping out hundreds of billions of dollars in the process.

Some of these exaggerated declines are worth buying. Others aren’t even worth holding. It all depends on how high your personal ambitions stretch.

Too Much Fear

Start with the immediate environment. Meta and PayPal are now grossly oversold, straining the limits of statistical reality. They’re due a bounce.

Netflix has already started that recovery process. People who bought the bottom on its first horrible post-earnings plunge are up as much as 22% in a handful of days.

Those who were a little more patient and waited for the absolute bottom have earned up to $100 per share for their courage. That’s how fierce an oversold bounce can get.

But of course it’s no consolation to those who were caught holding Netflix above $500 when the quarterly numbers hit the market . . . much less anyone who bought the $700 peak back in November.

Don’t misunderstand me, Netflix has simply run out of easy audience growth prospects. That’s a problem for people who assumed its ramp could keep rising forever.

This won’t be a $700 stock or even a $500 stock again for some time to come. But it’s probably not going to be a $350 stock or even a $400 stock for long.

The selling was too exaggerated. There was simply too much fear around what is still a solid communications company that had simply gotten too rich for the fundamentals to support.

Here between $400 and $500, there’s a lot of room for short-term traders to grind money out of Netflix, buying the dips and selling when they’ve earned a reasonable profit. Three months from now, the next quarterly report will reset our sense of the fundamentals and that range will need to move up or down.

For now, however, a 20% channel is wide enough to be interesting for swing traders to exploit. That’s pretty attractive. If you use options, you can probably reach even higher on every cycle.

We’ve been hitting some spectacular scores in the options market. Buy a $445 call on Netflix and you’ll pay about $1.50 per share. If the stock goes to $450 in the next five weeks, people owning the underlying shares make 9% . . . the calls will probably be worth at least $5.

You can weigh those percentage points on your own. And then, once the stock hits its ceiling and goes back down again, we can buy puts and make money on the downside. Hard to do that if you simply buy and hold the stock!

My point, however, is simply to present a range of return profiles. Options are risky and a lot of work, but if you think Netflix can retest its recent ceiling in the immediate future, they make sense.

If not, an active trading strategy can still do well if you time the swings correctly. But if you’re hanging onto stock you bought at $600 or $700, you’re going to need a lot of patience to even break even again.

And even then, it’s not really likely that the stock will hit $1500 before the next earnings report. At best, $700 is now the ceiling until management rolls a few dice and changes the competitive map.

And a $500 top is a lot more likely. What that means is that even an exaggerated dip like this one is not going to make everyone rich unless you really hustle. The days when Netflix would simply soar on any given day are over . . . at least for now.

PayPal And Meta

PayPal and Meta, on the other hand, are due that bounce. Maybe today was the start. If so, the near-term bottom is in place.

After all, one nice thing about earnings season is that it provides clarity. Surprises and shocks become rarer and rarer as each company gets its quarterly moment of truth.

Right now, we know as much about these companies’ operations as management. But as time goes by, that historical view will necessarily diverge from corporate reality, until as we approach the 90-day threshold uncertainty will once again be at its peak.

And with all the Big Tech stocks now on record, the odds of a contagious shock like the ones that rocked the market as a whole after Meta’s numbers came out have dropped as close as they get to zero.

In March, the Fed will probably start moving on interest rates and we’ll have to see how Wall Street reacts. Until then, there’s not much threat from that front either.

With that in mind, PayPal could easily retest $140 before hitting resistance. That’s a quick 11% gain . . . which in the grand scheme of things is far from awful.

It’s actually what you get from buying and holding the S&P 500 for an entire typical year. If PayPal can do that in a week or so, you’ve booked that return and done it in a fraction of the time.

But again, while you can multiply that upside with options and careful swing trading, the long-term ceiling has closed for the quarter. PayPal just isn’t going to convince a lot of people that it’s worth $170 per share, much less $300.

And if you bought in that range, you’re going to need to be patient for at least three months and probably a year to have any chance whatsoever of getting out above breakeven. After that, you’re looking for long-term gains . . . I’d rather be in PayPal than Netflix on that front.

Meta is still damaged goods. Don’t buy the dip until the knife has hit the floor and starts its bounce. When will that be? It could be Monday. It could be a week or a month from now.

For now, we’re still only 3% from the post-earnings high. That’s not really worth grabbing, except maybe as part of an options strategy. Odds are good Meta will go down before it comes back up.

I wouldn’t be surprised if Meta hits $220 again before the buyers come back. After all, there are more cheerful places for swing traders to park their money and get a better shot at real instant gratification . . .

. . . and for cautious, long-term investors, there’s not a lot of point in buying what will be dead money for weeks or months. Start the profit clock ticking faster and go elsewhere.

But what if you bought Meta well above $245? Hang in there. Zuckerberg is scared now. He’ll engineer a way to get growth moving again.

He’ll acquire what he needs and motivate his team to find new audiences. It might not be on Facebook. It could be video, “augmented reality,” Instagram, WhatsApp or some minor Meta property.

Think back to Amazon or Alphabet in the grim times between R&D and profit. That’s where Meta is now. And there’s at least one more big act left in the stock. Hold on if you’re here for the long haul.

Just be honest with yourself about your goals. Meta will clear $300 again, break out above $400 and, I suspect, be a $1 trillion enterprise. Buy in under $250, you’ll double your money here faster than you will on Netflix.

IPO Insight: Drinking From The Hose

I am not thrilled to see companies still going public at an accelerated rate. Three deals today, in an environment when Big Tech sent chills throughout Wall Street, is not good, healthy or helpful.

But at least we’re seeing the pipeline finally flush free of lookalike biotech and “health tech” startups. I’m not even looking at those names until we see a few of the losers from last year wash out.

Silver Spike is interesting at the right level, however. This is the kind of deal I always like to see, because I think it can pay dividends right out of the pipe.

It’s a business development company that lends money to companies so small they can’t go public. We’d rarely get the chance to invest in them, so stocks like this help us benefit from their dynamism indirectly.

The borrowers repay their loans with interest. Silver Spike hands some of the profit to shareholders and then puts the rest of the money back to work.

I’m intrigued. Especially if the rest of the IPO market needs time to heal, a little quarterly cash flow is a great incentive to hold on for the mood to brighten.

Watch Silver Spike closely. It has the potential to become my favorite IPO of 2022 . . . at least, ironically, until deal flow pauses for at least a month to give us all a chance to digest the hundreds of names that hit the market last year.