(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of V.)
Visa Inc. (V) stock may have gotten ahead of itself as earnings approach in the short term, with shares now up approximately 48% over the past 52 weeks, and by nearly 10% since the middle of December. The shares could see a pullback after it reports results on February 1, for no other reason than that shares may be overbought, and could fall by 10% over the short term based on a technical analysis. (For more, see also: Visa Stock Has Room to Rise Further.)
Analysts are looking for Visa to report that fiscal first quarter 2018 revenue rose by roughly 8% to $4.824 billion, while earnings climbed by nearly 14% to $0.98. The strength of the recent holiday season may be helping to fuel the stock rise as investors anticipate strong results from the company. Visa has beaten revenue expectations in every quarter since the fourth quarter of 2016.
The chart shows a stock that has traded in a trading channel since November of 2016 but rose above that upper bound at the beginning of 2018. It would suggest that Visa is likely overextended at current levels, and could be due to fall towards support around $113, a decline of about 10%.
The chart also shows that the relative strength index (RSI) for Visa is very high and until recently was well over 80. A reading over 70 is considered to be an overbought reading and Visa currently sits right at 70, which suggests that it is likely to continue to fall. (For more, see also: Why Visa Is a Tech Stock.)
Bullish Option Bets
It is worth noting that options traders seem to be betting on Visa's continued rise when looking at the June options for expiration. In fact the June $125 strike price options suggest Visa could rise or fall by nearly 11%, putting the stock in a range of approximately $111 to $139. But the open interest at that strike price heavily favors the calls, with nearly 4,100 contracts open, versus only 900 put contracts. The $125 calls outnumber the puts as well and suggest shares of Visa would need to rise above $132 just for the price of the options to break even.
With Visa shares currently technically overextending a longer-date bullish options market, it would suggest that any pullback in Visa may merely be short-lived. But, Visa could escape the steep decline, should the stock consolidate sideways, helping to bring the RSI down and moving the stock back into the channel.
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.