Shares of Fitbit (FIT) and GoPro (GPRO) are up 12% and 16% respectively, both on positive fundamental news. There are a few interesting similarities between these two stocks, both fairly recent IPOs of wearable consumer electronic products that had first mover advantages but quickly became relegated to the sale bin as they are perceived to be one hit wonders with mounting competition from the big boys in CE. Both stocks lost 75% of their value from their post IPO highs, both stocks have short interest around 30%, both have more hold and sell ratings than buys and both and until yesterday were left for dead, trading below 1.5x sales:
What’s interesting to me about today’s price action in these two stocks is that the S&P 500 (SPX) is now only about 2.5% from its prior all time highs made last May, and calls for corrections and crashes have now shifted to calls for an epic breakout. If our equity markets were to make a new high in the coming weeks/months I suspect beaten up high short interest stocks like FIT & GPRO would sure participate.
One once loved sector with some similar characteristics in the last few years was 3D printing stocks. Back in mid December, when DDD was trading just above $9 I laid out the case why things may be so bad they could be good for the stock:
The stock is down 72% in 2015, at 5 year lows, sentiment is atrocious with 33% short interest, Wall Street analysts have abandoned the stock with only 3 Buy ratings, 16 Holds, 3 Sells and the stock trades at only 1.5x sales. Assuming that sales are not falling off of a cliff next year, after a flat 2015 year over year, consensus is calling for a 4% increase, the company should be just fine as they have no debt, and $150 million in cash.
3D printing, while over-hyped a couple years ago, is not going away. If DDD’s products and patents can help a large industrial or tech company get into the space quickly, with potential for scale and synergies, then a stock like DDD could look cheap and attractive due to its scarcity value.
Shares of DDD are up 91% in 2016, and while short interest has come down of late it is still at about 26%.
While I can not exactly endorse buying either one of these stocks on such a big up day, I certainly would not fade the first day up (for those contrarians out there), the ytd move in DDD should be Exhibit A why that is a dangerous endeavor.
Both FIT and GPRO have fairly liquid options. At first blush they also each have sky high vol levels, (30 day at the money implied vol is at 88% for FIT and is at 86% for GPRO) but in both cases that is down from early this year. Long premium directional trade strategies will be challenging, but for those willing to be put stock at lower levels, high option prices could set up some very good risk reward trades in the form of call spread risk reversals, where you would be selling more options that you are long.
For instance with GPRO at $13.75 you could target Q1 earnings expected the last week of April and sell one of the May 12 puts at 75 cents, and buy one of the May 15 calls for 95 cents and sell one of the May 20 calls at 20 cents. This call spread risk reversal can be put on for even money. The worst case scenario is that the stock is $12 or lower on May expiration and you would be put 100 shares at $12 and suffer losses below, down 13% from existing levels. But if the stock is between 15 and 20 on May expiration you could make up to $5, or 36% of the stock price. No gains or losses on May expiration if the stock is between $12 and $15.
I would also add that shares of GPRO have moved on average about 11% in the trading session following earnings over the last 7 quarters since its IPO, and the poor sentiment, and high short interest could be just the catalyst to keep things going.
Why target $20? Well, the stock was actually trading at that level in the first couple days of the year and there is little overhead technical resistance to that level:[caption id="attachment_62814" align="aligncenter" width="600"] From Bloomberg[/caption]
In FIT a similar trade lines-up where you could sell the May 14 put at .70 and in order to finance the buy the May 19/23 call spread for .70 (Buying the May 19 call for 1.00 and selling the May 23 call at .30
This is a good strategy for those that feel like they missed the (possible) bottom and don’t want to simply chase in the stock. the trade allows for you to be put the stock at a lower level and participate if the run keeps going higher. The most likely scenario is not having any position after May expiration if the stock closes between the short put and long call strike, but in that case the opportunity cost nothing (aside from commissions). But you have that upside opportunity or the opportunity to be patient and buy on a pullback (be put the stock) without chasing the stock after such a big near term breakout.
This isn’t my cup of tea to chase at all after such a big move, I’d love to see how the stocks react in the coming days, but using options in the form of a call spread risk reversal is much better than buying stock here for those that think this is the big one to the upside.