May Not Be In The Ddoghouse For Much Longer
This week in our premium service we introduced the Investor’s Bootcamp. Very simply this is a weekly webinar that amounts to the analyst training you might receive at Big Money, LLC, if said Master of the Universe shop was more cynical than is normally permitted in Corporatesville, USA. We’ll be covering fundamental analysis, technical analysis – with more than a little help from our friends at TrendSpider, whose CEO stopped by to present the platform’s capabilities to our members last week – and much more. How to interpret earnings calls, that sort of thing. (Clue: ignore all the words that are actually spoken – listen instead to the spaces between the words and the words that are not spoken).
We kicked off the series with a topic that Everyone Wants To Know, which is, How To Spot A Buying Opportunity. Next week we have How To Spot A Selling Opportunity, which is probably more important but for some reason is less fascinating to folks, many of whom have read too many Buffettisms to consider actually ever taking profits.
Allow us to walk you through the example of a buying opportunity we used, which was DataDog ($DDOG). This is a software business that sells nerdy stuff to nerdy people working deep in the bowels of the enterprise. The company sells a kind of Stasi app that spends all its time watching other parts of the enterprise IT stack. It doesn’t have a great deal of competition, and its customers have to buy said app from one of a handful of vendors. So it has pricing power, long-running contracts, and fat cash flow margins. Before we get to the interesting part – the chart – let’s deal with the numbers bit. We have more fundamental analysis experience at our shop than is healthy for normal humans so take it as read that this is what good looks like, save for a decline in the rate of growth in the order book which the company does need to get on and fix in the next couple quarters.
(Sources: Company SEC filings, Cestrian Analysis)
OK, so the numbers are good with one nag. Fine. The valuation is what you would expect from a banzai software business growing at 79%/yr – the market is asking you to pay a mere 23x TTM revenue for this puppy. But enough of reality, let’s get to where the real action is, and that’s the stock chart.
Let’s look at the stock in a couple of different ways. First, here’s on the weekly since IPO. (You can open a full-page version of this chart, here).
If the candles look weird by the way – that’s because they aren’t candles. They’re raindrops. This is a proprietary TrendSpider tool that includes the volume-weighted average price within each measured period – and, better, shows you the first half and the second half of the measured period individually. This is a much richer way to view price action than a simple candle alone. We’re using these raindrop charts more and more in our own work – you can read more about them here.
Back to the chart. For recent IPOs, we find that charting from a notional zero price can be helpful in defining subsequent levels. Here we show the 5-wave up move from that notional zero to the 2021 peak just shy of $200/share. Come the correction that hit growth stocks in Q4 last year, the name then puts in a textbook A-B-C three-wave move down, where the C-leg was a little longer than the A-leg (an indicator of confidence that the selling may have stopped). To add to the notion that may have bottomed in this cycle, the end of that C-leg took place very close to the 0.618 Fibonacci retracement of that whole 5-wave up move. And that is a characteristic level for such a corrective move to find support. Finally, look at the volume of shares traded in the price zone between that 0.618 retrace level (call it $75/share) and the bottom of that A-leg (call it $110/share-ish) – that’s the faded blue bars on the right-hand side of the chart above. That’s a lot of shares traded; it’s a zone of high volume nodes which tells you that this is highly likely to be institutional accumulation of the stock.
Let’s now look at the stock on the daily. Full page version, here.
Here we can see the retail % of trading activity at the bottom of the chart. Looking for evidence to confirm or reject the idea of institutional accumulation, we set the Volume-by-Price start point right after the recent February spike in retail activity. And we see a set of large high volume nodes after the retail spike – in the range of $85-110 or so. Which to us looks like further evidence supporting the notion that this stock is under accumulation, in preparation for a potential move up.
Now let’s zoom out to the monthly. Full page version, here.
Here we plot the larger-degree Wave 1 up (from the notional zero to the Q4 2021 peak) and Wave 2 down (troughing at that textbook 0.618 retrace of the larger-degree Wave 1 up) and we project a possible set of Waves 3, 4, and 5. A typical Wave 3 target is the 100% extension of Wave 1 – which is the same as saying, take the stock price movement achieved in Wave 1 and add that to the stock price at the bottom of the Wave 2. And that gets us a target of $292, nearly a 3x money multiple from here. This may sound nuts, but this is a very high-growth company that may currently be under institutional accumulation. If the stock hits the markup part of the cycle next, then this isn’t an overly ambitious target. We then plot a typical shallow Wave 4 and a modest Wave 5.
So there you have it. – could go all wrong tomorrow of course but on today’s evidence? You have a recent low against which to place a stop; you have possible institutional accumulation in the current price zone, and you have a genuinely achievable longer-term price target. And this, to our old, tired – nay, wizened – eyes – looks like a compelling buy.
DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in .
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Cestrian Capital Research, Inc – 24 August 2022
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.