A gain of 59.19% in 2019 for shares of The Trade Desk, Inc. (TTD) tells a story of big buy demand for the shares. This buying is very unusual and has been very consistent in 2019, until recently. The stock is likely being unfairly punished by getting caught up in a pullback in software stocks. A great way to uncover tomorrow's winners is to look for great stocks on sale, and Trade Desk could be just the opportunity.
Smart money managers are always looking to bet on the next outlier stocks … the best in class. For Mapsignals, it's not enough to look at technicals and fundamentals alone. The key lies in the demand for shares … the big money.
I'll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in its trading activity. 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, Trade Desk stock has seen strong demand, but the past few weeks show selling in the shares.
For Mapsignals, when we look for an entry on a leading stock, we oftentimes look for great stocks pulling back unfairly. Just to show you what our big money activity signals look like, have a look at all of the big money (unusual institutional) signals Trade Desk 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. You also see red bars indicating selling in the shares. What is interesting is that each red bar tends to be near the lows for the stock:
Starting in September, Trade Desk stock has logged five unusually high-volume days, indicative of selling in the shares (see chart above). This shows that a lot of supply can punish the shares. It has been happening quite a bit recently. These data points suggest big money supply for the stock is high.
However, if you look at the prior times we've seen "selling" – it didn't last long. 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. Based on history, the odds suggest that the stock is poised for gains. The big money is always looking for an opportunity to buy shares on the cheap.
Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by big money signals (outsized institutional activity). We are looking for the big money bets because big money moves stocks. By studying these data points, we can make an educated guess as to which stocks 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 long candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. The following are a few areas in which Trade Desk stock has grabbed our attention year to date (YTD):
- YTD outperformance vs. market: +39.25% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. discretionary sector: +37.09% vs. Consumer Discretionary Select Sector SPDR Fund (XLY)
- Recent big money buy signals
Now, we take it a step further and score the best stocks showing big money trading activity. Below you can see the historical times since 2017 when Trade Desk stock made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. What jumps out in the below chart is how the stock rarely pulls back for long:
On top of a long-term 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, Trade Desk's year-over-year (YoY) numbers are very strong:
- Q2 2019 YoY revenue growth: +42%
- Q2 2019 YoY diluted EPS growth: +35%
Trade Desk shares are breaking down with other software stocks. The company is doing well fundamentally, and a pullback is an opportunity.
We like the long-term story of the stock. The narrative for Trade Desk and other high-quality software stocks is one of growth in the years ahead. We are always on the lookout for great companies on a pullback. The best companies in a group tend to outperform over the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
Trade Desk stock is breaking down with selling pressure. Our big money indicator is signaling that we should take notice. Shares could be positioned for more upside. Given the historical growth in share price and healthy fundamentals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds no position in Trade Desk stock at the time of publication.