Reader asked:
I just bought PLAY for $23.85. What do you think is the short-term downside risk in PLAY?
In at $23.85 and already worried? That’s day trading to the extreme my friend!
😎
Now this may give you a screaming headache but check out http://stockcharts.com/education/ChartAnalysis/candlesticks.html
It is a good introduction to interpreting stock movements from candle charts (which are the best kind) and can give you some idea about what a day’s movement means, even what an hour’s movement or 15 minutes movement might mean but you can never look at smaller incriments (just like with any statistical sample) and try to derive meaning from them.
In the case of play "candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow."
Now of course that’s a simplification and there are about 50 other things we look at very carefully including staying on top of news and the rumor mill combined with years of experience in weeding what”s real from the crap so that I can be hopefully right 51% of the time…
I am sorry you missed them on my initial entry letter at $21 but the basics for PLAY remain incredibly strong:
- The stock has generally closely followed its 2 year trend line, it was driven below it by not false, but information that has since reversed.
- Also, new positive information, in the form of raised guidance has recently surfaced.
- Fundamentals are amazing, including 200% y/y growth, 18% net margins (industry standard is 13%), no debt, yet it is currently trading well below its IPO price of $25 (it ran all the way up to $33 its first month).
- There is buzz on the stock (9 yahoo articles on Friday alone), including Mad Man Cramer who loves to be right and is on telivision 4-5x a day.
- PLAY was driven down by a combination of bad news that evaporated and analyst downgrades (see my first blog regarding sheep) that are also likely to evaporate.
The main knock on play is that they are a one trick pony with one client. While this is fairly true, their one client is Apple who is going to tripple in price for the second year in a row on sales of the trick they get from PPlayer, the IPod – That’s a pretty good trick!
The stock is heavily shorted. That may mean the shorts are smarter than you or it may mean that the herd is wrong and the wolf is right – these are the plays where, if you are the wolf, you make a killing!
My biggest concerns are the breaking the $25.50 resistance level and the fact that we are coming into options expiration where very wacky things can happen.
Now I’m an options player by nature and there is an option theory called Maximum Pain that basically says, in absence of other strong catalysts, that a stock price will drift towards the place where the most options expire worthless. This is a tough spot to call with Play at the moment because there are 13,000 put options set below $25, but there are only 5,000 put options above $25. At $22.50, the ratio of dead options increases by 7,000 so it’s a little dicy there.
My feeling is that the news is too good to let 700,000 shares control the stock price but I think $25 may be as good as it gets thru Friday. If it hits that price and flatlines, it will probably be consolidating for a healthy move up.
Good luck with this one, I’m sure it will be a daily mention next week as I currently hold 2 positions on it.
– Phil
