A gain of 143.89% in 2019 for shares of PagSeguro Digital Ltd. (PAGS) tells a story of a stock gaining alongside a high amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved.

This stock is interesting because the digital payments sector has been on fire. All you need to do is have a look at the stock performances of PayPal Holdings, Inc. (PYPL) and Square, Inc. (SQ) over the past few years to get an idea of the growth in payments. The point is that PagSeguro is a Brazilian disruptor company catching our attention. 

Smart money managers are always looking to bet on the next outlier stocks … the best in class. The main criteria we look for when betting on upside in a stock are a history of strong fundamentals, solid technicals, and unusual trading in the shares.

I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in the trading activity of the stock. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For 2019, PagSeguro stock has clearly been in demand.

For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals PagSeguro stock has made over the past year. Focusing on 2019, you can see a lot of buy signals (green) that line up with a lift in the shares. This is exactly the kind of setup we look for at our research firm. We want to bet on the best … period. This move is notable because stocks move based on supply and demand. This is a chart showing big demand:

Chart showing the unusual institutional (UI) signals made by PagSeguro Digital Ltd. (PAGS)

So far in 2019, PagSeguro has logged 12 unusually high-volume days, indicative of buying in the shares (see chart above). However, what gets our attention now is that PagSeguro is still gaining quietly but in an unusual way, which suggests that demand for the stock is increasing.

If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas in which PagSeguro stock has grabbed our attention year to date (YTD):

  • YTD outperformance vs. market: +123.65% vs. SPDR S&P 500 ETF (SPY
  • YTD outperformance vs. sector: +125.78% vs. Financial Select Sector SPDR Fund (XLF)
  • Recent bullish unusual trading signals

Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2018 when PagSeguro made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we have been all over the massive run-up over the past year. For now, this stock is setting up to be an outlier:

Chart showing the top-rated buy signals made by PagSeguro Digital Ltd. (PAGS)

On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, PagSeguro's latest earnings report showed solid year-over-year (YoY) growth:

  • Q1 2019 YoY total payment volume growth rate: +69.8%
  • Q1 2019 YoY net income growth rate: +108.6%

PagSeguro is breaking out to highs and is growing rapidly. We like the long-term story of the stock. The narrative for PagSeguro and other high-quality digital payments companies is one of huge growth. We are always on the lookout for great companies showing usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

PagSeguro represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance, and recent unusual accumulation signals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: The author holds long positions in PagSeguro, PayPal, and Square at the time of publication.

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