Nervous short-term profit-taking and a sympathy sell-off from Twitter CEO Jack Dorsey's testimony before Congress yesterday, combined to create some very attractive opportunities to buy a handful of powerful growth stocks, especially if you're a dip-buyer.
To cut right to the chase, here is a chart comparing yesterday's performance of the S&P 500 versus Twitter versus the 4 growth stocks we like.
In our view, the two key reasons these shares sold-off are: 1: nervous profit-taking, and 2: a sympathy sell-off with Twitter. And both of the reasons are short-term. If you like buying powerful growth stocks after a pullback, these four are worth considering.
First of all, the short-term profit taking is not uncommon. These are volatile securities, and they've all experienced multiple sell-offs this year (usually within a few trading days of month-end) but they all also have been climbing higher this year (despite the short-term sell-offs) because of their powerful growth potential.
Additionally, Twitter CEO, Jack Dorsey, is also the CEO of Square (SQ), and Mr. Dorsey testified before congress yesterday, and this also contributed to a short-term sympathy sell-off (many powerful growth stocks with momentum sold-off yesterday, despite their powerful long-term growth potentially remaining firmly intact, in our view).
We have written in detail about all of these companies earlier this year, and you can read those members-only articles here:
- Shopify (SHOP): New Purchase - Disciplined Growth Portfolio: Pullback Creates Opportunity
- GrubHub (GRUB): Want In On The Next Big Thing?... Consider This...
- ServiceNow (NOW): New Purchase: Blue Harbinger Disciplined Growth - Swapping Out Less Growth for More Upside
- Square (SQ): A Stock With Big Upside, Especially After the Recent Market Wide Sell-Off
And all of these stocks continue to have attractive long-term upside price appreciation potential, in our view. We currently own shares of Shopify, Square and ServiceNow within our Blue Harbinger Disciplined Growth portfolio.
If you like the growth potential of the above mentioned stocks, but you're turned off by the lack of dividends (none of them pay dividends), then you might consider selling income-generating put options. This is a strategy we like to use from time to time, and we've described one current (time-sensitive) example below, with regards to Square in particular.
We Sold Put Options on Square (SQ) with a strike price of $78.50 (10.2% out of the money), and expiration date of September 21, 2018, and for a premium of $0.79 (this comes out to approximately 12.1% of extra income on an annualized basis, ($0.79/$78.50 x 12 months). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of Square at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own Square, especially if it falls to a purchase price of $78.50 per share).
We believe this is an attractive trade to place today and potentially tomorrow as long as the price of SQ doesn't move dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 10%, or greater.
Note: If you are not comfortable with this options trade, but you're still interested in owning shares of Square, consider buying shares outright on this sell-off.
Our thesis is simply that Square is an extraordinary powerful "Fin Tech" growth company, with tremendous room for continued growth considering the enormous "total addressable market" ("TAM"), and the company's continued opportunities to collaborate innovatively with new partners. However, as we've seen with many powerful growth companies this year, the shares sell-off briefly in the short-term as nervous investors take profits, only for the shares to shortly thereafter resume their powerful upward trajectory.
And not only was this stock due for a sell-off (i.e. profit-taking), but its CEO's testimony before Congress Wednesday helped spark the sell-off for an entire group of somewhat similar companies/stocks (Jack Dorsey is the CEO of Twitter and Square):
In short, we believe the 1-day sell-off is simply nervous/noisy short-term profit-takers, and the shares will soon resume their upward march.
Important Trade Considerations:
Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. In this particular case, Square doesn't pay a dividend, and it announced quarterly earnings just last month. Therefore they're both largely "non-issues" in this case.
Final Thoughts on Square (SQ):
Near-term profit-takers and a fearful short-term market reaction to the CEO's largely unrelated testimony before congress, have created this attractive high-income opportunity.
If the shares get put to us (at an even lower price) we're happy to buy and own them for the long-term considering the very powerful growth opportunities that lie ahead for Square. And if the shares don't get put to us before the option contract expires in just over 2-weeks then we're happy to simply keep the high premium income we just collected for selling these puts.
At Blue Harbinger, we believe in owning attractive opportunities across categories, such as growth, value and income stocks. The ideas presented in this write-up do not pay dividends, but they do offer powerful long-term price appreciation, and they also offer important diversification benefits to an investment portfolio. For example, all investment styles go in an out of favor, and we believe in owning attractive opportunities across styles that can perform well across market cycles and conditions. You can view all of our current holdings here.