(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Square, Inc. (SQ) has had a fantastic run over the past 52 weeks with the stock up by over 215%. But signs in the technical charts are emerging that over the short term the Jack Dorsey-led company is due for a pullback by as much as 15%.
The payment processor's strong performance over the past year has come on the heels of revenue and earnings growth. But since February 8, the stock has gone into overdrive rallying by over 34%, a very big gain in a short period of time, and easily beating the S&P 500's gain of only 2.5%. (For related reading, see: How Square Inc. Transformed in 2016.)
The stock has fallen through a technical uptrend that started back in early February. Additionally, the chart has had a noticeable shift in direction, one that has become negative sloping. With the two changes in the chart, the stock could fall to roughly $45.20 over the short term, a decline of about 15% from its price around $53.35.
The relative strength index (RSI) has reached overbought levels recently with a reading over 70 on March 20. The RSI has declined some since, to 57, but is still far from being oversold and would require a drop below 30. The RSI trend is also concerning because it has now been trending lower since late November when it touched 91, despite the stock rising. An RSI that is trending lower while a stock is rising can be seen as a bearish divergence.
Another negative that could weigh on shares is the company's earnings outlook. Analysts are forecasting first-quarter earnings to grow by only 10.5% to $0.05 per share, but those estimates are down by roughly 37%, from $0.08 per share, since February 21. But more surprising is that analysts are looking for weak earnings growth while forecasting revenue to grow by 43.6% to $292.7 million in the quarter.
Options Activity Picking Up
Options activity has seen some activity in the $45 puts for expiration on April 20, with nearly 32,500 contracts trading on March 26. It may indicate that a buyer of those puts is betting Square will fall below $45 by expiration. But it is also possible a trader sold the puts and took in the premium. If that were the case, it would be a bet that the stock doesn't fall below $45 by expiration, allowing the options to expire at zero and the trader to keep the premium.
Square's stock has had a very big move higher over the past year, and a pullback would serve as a much-needed break.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.