There are very few stocks that can move as fast as Upstart (NASDAQ:UPST). In its short public life, UPST stock gave whiplash to those who were watching the charts. It does not like to move in moderation, so it is always in extreme mode. This summer, it could be ready to make another run at $50 per share.
A debate is raging among experts on the future of the stock market this summer. With that, I offer this necessary caveat that comes with all investment ideas. Regardless of the quality of the trades, they need a healthy stock market. If the indices are correcting, stocks cannot sustain rallies on their own. Be aware of the extrinsic risk layer stemming from the economic risks, especially the actions of the Federal Reserve.
UPST is a momentum stock, so it needs low volatility to rally. Right out of the blocks, it rallied more than 200%, then gave up 85% of it. It repeated the process again before embarking on a 240% rally to its highs. Sadly, the ride down from that perch was a colossal crash.
Recently, it showed brilliance again, but the indices foiled it. From high to low, Upstart lost 92% of its value. It is important to note that the fall from grace was not due to specific problems. Partly, it was a case of easy-come easy-go. The rest was Upstart not being immune to a massive wave of selling innovation stocks.
|UPST||Upstart Holdings, Inc.||$33.23|
UPST Stock Deserves Better
Last fall, Wall Street declared war on a specific profile of stocks. This selling vortex punished high-growth and high-spending companies. UPST didn’t fit the bill perfectly, but it couldn’t avoid it. Investors did not try to delicately sift through them. Instead, they sold every stock that could fit the profile of an ARK Invest stock.
Now, UPST sits just a hair above its low, which presents a big risk. If the bears are able to breach it, then it opens a fresh new trapdoor lower. My thesis today bets on the opposite happening. If markets hold up, then it is going to make a run for a big rally. The company results are still too strong to deserve a complete collapse from here.
So far, it is profitable. Last year, Upstart produced $141 million in income from operations. There could be tougher times ahead, but there isn’t overwhelming evidence of that yet. They are not getting kudos for running a good business at a fast clip. Investors sold UPST stock down 60% on last month’s earnings. This was to a 156% growth of the business.
The selling was on the back of fears of potential bad debt from loans they hold. The tighter lending conditions shrank the pool of investors who would have bought these loans. But so far, there is no physical evidence of that happening. Therefore, I will give them the benefit of the doubt that they can manage the threat in the next few months.
The Snap Back Rally Opportunity
Such a sharp descending wedge in UPST stock makes for a very violent outcome. Either it completely collapses, or snaps back in a violent rally. Since it is now cheap in absolute terms, I’m going to assume that up is the way to go. This is not just a wild guess because I have the backing of a set of healthy financial books. The price-to-sales ratio is now 3.24 and it also has a reasonable forward price-to-earnings ratio of 18.73.
After the May collapse, I wrote about the same opportunity and UPST stock rallied 90%. So, consider this a rinse-and-repeat opportunity.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.