Offbeat Ideas and Commentary from the Depths of Gil's Trading Notes
Of IPOs and BGUs
Exactly two weekends ago I brought to Voodoo Report readers' attention two new IPOs that were catching my eye as interesting, compelling "new-merchandise" names. The first, Roku (ROKU), became a buyable gap-up (BGU) on Thursday as it rocketed 54.95% in a single day. In hindsight this looks like a "BGU lay-up," but in fact one would have had to be a) aware of the stock before the open, and b) very nimble and alert on their entry. Had one been able to enter this on Thursday somewhere between the intraday low at 23.86 and the opening price of 24.75, one would have realized a minimum gain of 18.94% in rapid fashion.
There are two main factors as to why this would have been very tricky to enter on Thursday at the open. The first, of course, was the fact that the market was gapping down sharply on allegedly disappointing tax legislation news, and things were looking dicey right at the open. So, psychologically, one might have been focusing more on playing defense with existing long positions rather than paying close attention to ROKU at the open that day.
The five-minute chart of ROKU from Thursday illustrates why getting long this little rocket-stock was nearly a split-second decision situation. At the open, as the general market was gapping down hard, ROKU printed 24.75, and within the first five minutes of trade dropped to 23.86. That might have caused one to pause before clicking on that "BUY" button. But 23.86 turned out to be the low of the day, and ROKU then immediately turned and rocketed back to the upside, reaching a peak of 29.44 within the first 20 minutes of the trading day.
Unless one was able to process the real-time information and act extremely quickly and decisively, the chance of being left behind was very high. Once ROKU reached 29.44, this turned out to be the high for the day, and the stock spent the rest of the day meandering back and forth. At the open on Thursday both Dr. K and I discussed ROKU as a candidate for a buyable gap-up report to be emailed out to members, but by the time we had assessed the stock thoroughly, it was above 28, way beyond the 23.86 intraday low. Many times in this market we have seen a recent IPO gap-up big only to reverse and close lower, as was the case with a situation like MuleSoft (MULE) on October 27th. The volatility in ROKU on Thursday was literally off the charts, and difficult to manage from a practical standpoint given the rapidity of the price move at the open and the overall general market action at that precise moment in time. If one missed ROKU's BGU, that is more than understandable.
We tend to believe that ROKU's technology is part of the new paradigm of how movies and other streaming content are "broadcast" and distributed these days. As cable TV disrupted the old broadcast television, so has streaming, on-demand content disrupted cable TV, and it will continue to evolve. ROKU is likely part of this evolution, and the huge-volume buying on Thursday speaks of institutional buying. Therefore, ROKU is certainly a stock to keep an eye on since if it is truly something that is thematically significant then this is just the beginning of any potential move. Sort of like Tesla (TSLA) when it gapped up hugely back in April 2013 when it was still only in double-digit price territory. Look for ROKU to consolidate these current heady gains and set up again. If it really does have any longer-term potential as part of the evolving paradigm of streaming, on-demand content, it will.
The other recent IPO that I discussed two weeks ago was Switch (SWCH). You can read my long discussion of the stock and its thematic underpinnings in that October 29th VoSI VooDoo Report to get a sense of the company's business. From a thematic standpoint, I do find the company compelling. SWCH came public in early October, just a little over a month ago, at $17 a share, and is now trading just above its offering price. On Friday, the stock posted a single five-day pocket pivot as it moved above the 10-dma and 20-dema. Remember that we like to see clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot, and this is but one five-day pocket pivot.
But this isn't the main point of my discussion. What I'm focused on right now is the potential for SWCH to post its own BGU on Tuesday morning, since it is expected to report earnings Monday after the close. Obviously, we won't have the slightest idea what SWCH will do after its reports earnings until it actually does so. There might be a BGU, and then there might not. It could come in the form of a gap-down move followed by a rally back up to the upside, similar to what Weibo (WB) did after reporting earnings on Tuesday morning of this past week. Go check that one out for yourself.
It is probably better to be prepared for BGUs before they open up, and highly alert to acting if necessary. Last weekend we discussed Canada Goose Holdings (GOOS) in our "Review of Pocket Pivot Reports for the Week Ended 11/03/17" sent out to members last weekend. In that discussion, we stated quite unequivocally, "GOOS is expected to report earnings on Thursday, November 9, before the open, so we would also be on the lookout for a possible BGU or other type of cup-with-handle breakout after earnings."
That's precisely what we got on Thursday - a big post-earnings BGU on a cup-with-handle breakout. The only potentially mitigating factor here might have been the fact that the general market was gapping down hard on Thursday at the open. Buying into BGUs requires that one be alert and nimble, since there is no guarantee that they will hold an intraday low. Therefore, one must be ready to cut and run quickly if things reverse. On Thurday morning, as we discussed before, one might have been pre-occupied and focused on playing defense with existing long positions rather than looking to buy into BGUs like ROKU or GOOS.
But such is the nature of this Ugly Duckling market, and hopefully the lesson is well-learned. The best opportunities in this market often happen when things look scary, and that was certainly the case on Thursday. But being aware of and ready to act on potential post-earnings BGUs when they occur is the only way to catch 'em, while at the same time ignoring whatever the general market is doing. With that in mind, we can await SWCH earnings Monday after the close.