Options Arena: Bottom-Fishing in ARK
Oh, how the mighty have fallen…It’s not often that a famous investor has looked like both a genius and a dunce inside of one year, but that’s exactly the situation Cathie Wood and her fund ARK Investments faces right now. Check out this screencap of ARK’s cost basis on its top holdings…
Yeesh. At least they got Tesla going for ‘em.And not much more than a year ago, these stocks were the flaming center of the stock market. Now, call me a contrarian, but it’s very tempting to buy some of these stocks at what’s obviously a much more attractive cost basis than Cathie managed. But which one is the best risk/reward setup? For the answer, I turned to our True Options Masters… I asked them to pick at least one of the stocks in ARK’s top 10 and form a bullish thesis on it. Today, we hear their takes. If you’re looking to go bargain-hunting on what were once the darlings of the tech market, you’ll want to pay close attention to this week’s Options Arena…
My Indicator Just Turned Bullish on TDOC
Like Cathie Wood, I do my own research. I looked at the charts of each of ARK’s top 10, and just one is a buy based on my indicator…This is a weekly chart of Teladoc. I designed the indicator below to identify low-risk trading opportunities. It turned bullish earlier this month.
TDOC does have potential. The company generates most of its revenue overseas and has a relatively small market share in the U.S. That means there is a significant growth opportunity.The company also consistently beats management guidance — and I think it could at least meet management’s revenue target of $4 billion for 2024. Now, to pick the right option… If we use a price-to-sales ratio of 4, more than double the average for mid-cap stocks, the stock could be worth about $95. Long-term options leave little profit at that price target and carry large risks, in dollar terms. I think we want to stay short-term on this trade. TDOC releases earnings on April 27. The Apr 29 $64 call is trading at about $2. I believe that could deliver a double-digit gain. That’s the most promising trade I see in the stock for now…
Chris: I’m Officially Calling a Bottom in Zoom
This is an easy one.It’s Zoom. Zoom was one of the greatest trades I ever made. I didn’t ride the rally during the pandemic. But I did call the top in November 2020. On one of my options, I bought puts for $2.80 and sold for $43.00. Now, I’m calling a bottom. On Monday, Zoom was trading at levels it hasn’t seen since February 2020. It’s officially lost all of its pandemic gains. It’s lost two-thirds of its value in the last year alone. I won’t pretend for a second that the stock isn’t overvalued. It still is. But revenues tripled between 2020 and 2021. So Zoom is growing into its valuation as a business. As a stock, it’s oversold in the short term. Buy the September 16, 2022 ZM $150 call option up to $6.00. Sell half at $12.00. Ride the rest higher. If you don’t like Zoom for whatever reason, buy Teladoc Health. It’s trading at levels we haven’t seen since 2019 — so it’s more than lost its pandemic gains. Buy the 6/22 TDOC $80 call option up to $3.00.
Chad: Bullish… Bearish… Why Pick Just One?
Kind of mind-blowing right? Once considered the Warren Buffet of her time, Cathie Wood now looks like your average retail investor.She has a ton of innovative companies though, which was her goal. Most of these stocks look the exact same on a price chart: big rally, crash, and now attempting to recover… But we can get a different angle using my Profit Radar.
Based on this chart, I like two trades: calls on ZM and puts on EXAS out over the next two months. This positions us for more volatility in the market and allows us to play both sides of the upcoming move.
ZM is heading higher in the improving quadrant after just crossing over from lagging. This is the path we want a stock heading in. Since it’s a weekly chart, we are looking for a move higher over the next five to eight weeks.
For EXAS, this one turned lower before it got to the leading quadrant. We are looking for this stock to lag the market over the next few weeks and give us profits to the downside.
Mike: This Setup Could Hand Us 250% in 2 Years
ARK’s research is an interesting read. It reminds me of Uber’s IPO, when they said things like: “Our [market] consists of 4.7 trillion miles per year, representing an estimated $3.0 trillion market opportunity in 63 countries…”I remember this because I thought it was irrelevant. Yes, there are big markets — but there are also competitors. Intensity of competition sets the prices, and it’s possible to have a large share of a large market and never make money. ARK’s research is victim to the same logic as Uber. Take Zoom for example. ARK’s research notes that office phones cost about $1,000 upfront for a device per user, and about $40+ a month for service. ARK believes Zoom is worth $500 or more a share by simply assuming that 25% of the office phone market will switch to Zoom’s applications. There are obvious problems with that assumption. For one, Zoom has competition from Microsoft, Cisco, Google, and others. It’s a competitive market and that will keep prices low — which might be more important than how much companies spend on telephone support. And besides, why is ARK using the telephone market to value Zoom’s video conferencing services?
Since ARK’s research is unreliable, I decided to do my own. And one stock stood out to me.Block (SQ) is a business that can grow. The company meets a need by offering banking services to small businesses, marketing consulting, and payroll support. It’s also set to expand into related markets, and is making a run at consumer banking with CashApp. These new opportunities support a higher price for the stock. SQ may be a little expensive, but it’s reasonably valued compared to the others in the top 10. Earnings could grow at more than 25% a year for the next three years. Given the reasonable valuation, the stock could more than double as well.
This is a long-term trade. If we risk 15% on the stock, that’s about $17 a share. For that, we can buy a Jan 2024 $170 call on SQ. If the stock doubles, we’d make more than 250%. And even if it plummets, our risk is capped at the amount we invest.
You’ve heard from our experts! The rest is up to you…
And if you have a topic you want our experts to tackle in next week’s Options Arena, shoot us an email at TrueOptions@BanyanHill.com!
Mike Merson Managing Editor, True Options Masters