A gain of 20.76% in 2019 for shares of PayPal Holdings, Inc. (PYPL) 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. I actually wrote about PayPal last September, and you can view that article here. The activity we noticed then, we are noticing now.
This stock is interesting because so many people use the company's popular payment app Venmo. The growth it is seeing is very impressive. Smart money managers are always looking to bet on the next outlier stocks – the best in class – especially when the company has taken a beating.
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 shares. 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, PayPal 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 graphically what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals PayPal stock has made over the past year. Focusing on 2019, you can see a lot of buy signals, which coincide 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. Lately, demand for PayPal stock is clearly outstripping supply:
So far in 2019, PayPal stock has logged six unusually high-volume days, indicative of buying in the shares (see chart above). What gets our attention now is that PayPal 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 PayPal stock has grabbed our attention year to date (YTD):
- YTD outperformance vs. market: +8.62% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. sector: +2.60% vs. Technology Select Sector SPDR ETF (XLK)
- 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 2016 when PayPal 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 few years. We'd even venture to call this stock an outlier:
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, PayPal's latest earnings report showed solid year-over-year (YoY) growth:
- Q4 2018 YoY revenue growth rate: +13%
- Q4 2018 YoY non-GAAP EPS growth rate: +26%
PayPal is breaking out to highs and has a history of great fundamentals. We like the long-term story of the stock. The narrative for PayPal and other digital payments companies is one of massive growth. A cashless society is coming increasingly closer, and PayPal is at the forefront of this shift. 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
PayPal stock 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 a long position in PayPal at the time of publication.