3 Trading Ideas for a Counter-trend rally CROX, VRT, OPFI.
The purpose of this post is for educational purposes.
In this post I will ignore how recession fears and the FED's tightening have hit mainstream for a little bit, and concentrate on important things to look at when looking at how traders might look for counter trend rally candidates.
Like seeing a game in the casino, you don't have to play if you aren't comfortable risking a few bets.
The ideas here must have "a chance" of working out into an intermediate rally.
The similarities in the stocks below are they all of them 1) have guided to a decent or improving 2H22 and into 2023. 2) Have the rare occurance that both weekly and daily MACDs have recently turned up. 3) Are far from any existential problems... they have cash flow and manaeable debt. 4) Have at least some insider interest at these levels. 5) Are at good earning valuations or potentially good valuations coming soon. Show me the money!
In an earlier post, I mentioned that large cap stocks are not at crash prices, but some small cap stocks are. It is "possible" that these small cap stocks have overshot on the downside, because a severe recession or earnings drop has been discounted on them. Any kind of stable earnings or earnings following management guidance will likely cause people to get interested in them again.
Remember, I do not see a proper market bottom yet, but I see some green shoots, Here, I want to explore some of these green shoots to show what traders might look for for trade set-up purposes.
Long-term investors might want to wait a little longer because betting on green shoots before a proper market rally is always a risk/reward play. But those that want a glimspe into the risky world of bottom catching, please read on.
CROX actually had good guidance for 2022 with a fw PE of 5x at these prices, but debt not that high at 2.9x net debt / adj EBITDA but they plan to reduce it to <2.0x sometime in 2023 before starting up share buybacks. That's not bad.
2020 was an unfavorable year for Crocs' physical stores due to the pandemic; therefore, 2021 was the year of payback since the stores were reopened.
In late 2021 Crocs announced the acquisition of Heydude for $2.5 billion. CFO Anne Mehlman had important words to say about it:
Heydude has experienced incredible growth in revenue and profits over the past few years. Heydude is expected to be immediately accretive to our high revenue growth, industry-leading operating margins and earnings. We expect the combined business to generate significant free cash flow, enabling us to quickly deleverage while investing to support future growth. We are excited about the combination and are confident in our ability to deliver long-term shareholder value.
Revenues are expected to be around $3.5 billion by the end of 2022, $1.18 billion more than in 2021. If expectations are met this would be an extremely positive result also considering the difficulty for most companies to increase revenues during this period. Adjusted Diluted EPS are estimated between $10.05 and $10.65, which is quite high for a company trading at just over $50 per share.
When they announced earnings and forecasts in May 2022, they did not seem majorly impacted by supply chain issues.
Fundamentally, the stock looks cheap and earnings don't seem to collapse.
Q122 was good!
Their FY 2022 guidance is also good! What supply chain problem?
This means that if they hit their guidance in 2H22, CROX might become a "safe haven" in a universe where lots of stocks have shrinking earnings and compressed margins. And, if so, then ... maybe an intermediate rally is coming.
CROX's weekly MACD has just crossed upward.
CROX's daily MACD has just crossed upward.
Buying here is hoping you are getting the beginning of an intermediate rally where the price might finally break through the resistance at $59, or at least a move towards $59 at least. A trader would likely put a sell-stop at about $46 in the case that the bearish trend would continue.
Will a trade here work? It may or may not, but such a signal doesn't come often.
The reward-to-risk is favorable.
A handful of insiders picked up moderate shares at these depressed levels.
Vertiv is a leading critical digital infrastructure provider on a global scale with complete solutions and leading technologies few competitors can match.
Networks are becoming more distributed and complex as data usage accelerates, and the result is secular growth for leading solutions providers like Vertiv. A quick peek at its 50%+ order growth in the fourth quarter of 2021 and apparent strength across all its segments from Cloud and Hyperscale to Colocation should grab the attention of digitally aware investors.
It would seem that all is well at Vertiv considering the strong demand, but year-end 2021 results painted a different picture. In the back half of 2021, management lost control of the balance between rising input costs and price increases, and margins got crushed. The result was rather shocking earnings guidance for 2022 that sent the share price tumbling.
Vertiv has learned its pricing lesson, and backed by its strong product offering, is already pushing through price increases to return to attractive profitability levels.
Vertiv posted improving numbers and expects a "very good" 2H22 as well as a strong 2023.
Their margins got hit by supply costs in 1Q22, but they seem to have successfully passed the inflated cost to the customer, setting up an improved rest of the year.
Their full Year 2022 Guidance: Net sales $5,600M - $5,800M (consensus of $5.64B); Adjusted operating margin of 9.0% - 9.4%; Adjusted diluted EPS of $0.67 - $0.77 (consensus of $0.67).
This equates to a fw PE of 14.9x for 2022, which is decent for a turn around and includes 1Q22's suboptimal result. The fw PE will improve as we get into the strong 2H22.
The CFO has bet on the company at ~$13.
Will the macro significantly deteriorate worse than management already expected? If not, it might surprise into 2H22, and if so, then...
VRT's weekly MACD has just crossed upward.
The daily MACD has also just crossed upward.
Buying here is hoping you are getting the beginning of an intermediate rally (finally breaking past the $12 resistence), or at least a move towards resistance at high $11. A trader would likely put a sell-stop at about $9.50 in the case that the bearish trend would continue.
Similarly to CROX, it takes a long time for the weekly MACD to cut higher from below the zero line. Some traders will go long here until either the lows are taken out, or the weekly MACD cuts downwards again.
Those who want to risk into a growth / value name would be OPFI.
OppFi Inc. (NYSE:OPFI) is a Chicago-based financial technology platform that provides subprime loans to underbanked Americans through three bank partners plus its own facilities. Since inception, it has enabled more than $3.3 billion in gross loan issuance encompassing more than two million loans.
OppFi was formed in 2012 and went public in July 2021, when it merged into special purpose acquisition company (SPAC) FG New America Acquisition Corp. Its first trade transacted at $10.47 per share. The SPAC went public in 2020, raising gross proceeds of $237.5 million at $10 per unit, with each unit consisting of one share of Class A common stock and one-half a warrant to purchase another share at $11.50. OppFi stock currently trades around $3.25 a share, equating to a market cap of $370 million.
OPFI uses machine learning to give people loans.
At one time, OPFI has considered a growth company that got skewered by the market when they didn't meet expectations until now they are at value stock valuations.
They got hit by idelinquencies and write offs in the last few quarters so much so that they made almost no profit in Q122.
However, they claim that those types of loans were no longer being approved in 2022. Will this work? If so, then the share price will start it's move higher.
They guided for a return to profitability in 2H22 along with continuing loan growth yoy, this would translate to a fw PE of around 8x.
OPFI announced a $20M share repurchase program (vs market cap of $360M), not too shabby.
The weekly MACD has already cut higher some time ago.
The daily is consolidating but looks like it could cut higher.
Company insiders have been consistantly nibbling at these levels.
A bet here is a bet that things do turn around, and if so, momentum indicators that price could go to $4+. A drop to below $3 should consider the possibility that the uptrend is over (it might even be their fault, could be a market continued meltdown) and to rethink your position.
All of these names have acceptable fundamental valuation, good guidance for the rest of 2022 and into 2023, some insider interest (although not big) and have momentum presented pointed upward.
In the broad markets, I wrote earlier that large cap stocks are not at crash prices yet and still can have another -8+% to go before pricing in a severe recession. However, some small caps are already at crash prices... and if... IF... there is an intermediate buying program coming back to the market soon, you might see signs of it in these small caps first. So, buying these are somewhat ballsy moves that risks getting into them before the proper buy program hits the larger markets. Now, you could be wrong, but because they are all at cycle lows, a cut loss can be places just 5%-10% lower. That is your risk.
Your reward is a short term rally that could be worth 8% higher, or in the best case scenario, an intermediate term rally that could be worth 15++% higher depending how the macro and FED turns out in 2H.
These would be a trader's good set up for counter trend rallies, enhanced by the likelihood that there should be a market bear market rally some time in 2H22.
However, remember that if you go long on these names, you are going long into recession fears that have hit mainstream and have to manage your expectations and plan accordingly.
All three ideas are good, but not great... each one is missing one ingredient that would make it great.
CROX won't do share buybacks until next year (darn), but next year they would be in fantastic position with PE of 5x and less than 2x debt/EBITDA... it would be hard to see them NOT powering their share price higher when that happens. Getting in now is getting in a few months potentially too early.
VRT has a decent valuation, great for company is moderate growth industry, but they have to show they can attain what they guided, so there is some uncertainty there... especially because part of the tech space has inventory build up. I cannot know how much it affects their slice of the market.
The same for OPFI. The delta for expectation for OPFI is larger than VRT. Having the wrong algorthm in a complex loan market cost them big time. Yet, they claim that they already see improvement after changing their algos to exclude those types of loans. If that improvement carries on to the rest of the year, it's cheap. However, what is to say that the macro deteriorates in a way that their algos weren't trained for and more loan write offs occurred? There is uncertainty here as well, but at least management is seeing improvement.
Diversification is important for both traders and investors.
For traders, set your exit strategies first before entering. You should have a price target based either on set price target or if the daily MACD or weekly MACD (if you are lucky and it really IS an intermediate rally) looks to finally cut downward.
For investors, it's possible for price to go further down, and so dollar-cost averaging can be a possibility knowing that you are already at prices that interest company insiders and have stories that have a chance to get you > 10% earnings yield into 2022 and 2023 if the economy doesn't get broken.