It appears that the “Santa Rally” is in full swing, and the place to be this holiday season is in Internet Software & Services stocks.
Stocks like Yahoo!, Google, Shutterstock, and Pandora are all exhibiting considerable strength heading into the end of the year. A quick glance at the First Trust DJ Internet Index Fund shows that internet stocks are what’s hot right now, as the ETF’s chart is starting to look parabolic.
The problem in this sub-industry is finding a constituent that is set up at a nice entry point. Let’s turn attention to a stock that’s been beaten up a bit in the second half of 2013, but is on the mend heading into the new year – Zillow (NASDAQ: Z).
Zillow was having a tremendous year until the middle of September.
From the beginning of the year to early-September, the stock gained over 250 percent, skyrocketing from $27.75 all the way up to closing highs of $100.50 on September 2. However, a September 20 note from Citron Research listing the reasons why the firm thought Zillow “should” return to $30 was the catalyst for a long chain of selling that would last for months. Always take analyst reports with a grain of salt, but this one came off with language that sounded more like a marketing pitch than an institutional research report. Regardless, the headlines were enough to push the stock lower.
Despite a decent Q3 earnings report on November 5 (revenues beat, guidances beat), Zillow failed to hold support through the Thanksgiving holiday and into early December. However, recent strength in Internet Software & Services and some positive analyst chatter has finally led Zillow to find its footing heading into the end of the year.
On December 17, SunTrust Robinson Humphrey analyst Robert Peck gave Zillow a $95 target, and the next day the stock closed above its 50-day moving average for the first time since September 24. Two green days followed, and Zillow is gaining big this afternoon. The intermediate downtrend looks to be over, as Zillow has broken out of the channel to the upside.
As long as Zillow does not sink back into the downtrend channel this week, the stock looks poised to move higher towards $90 in the short-term.
The metrics on last quarters earnings report were actually pretty good, and Citron’s “research” report left a bad taste in my mouth, so I believe the rebound will be sharp and significant.
The target for this trade is $89.35, which would be a gain of 7.75 percent from current prices. The logical stop here would be at $76.30, as that would be where Zillow re-enters the downtrend channel. However, I think a stop a little higher at $77.96 is favorable, as a move back to this price would likely mean that the trend breakout was a fake (5.9 percent downside risk). This makes the reward to risk ratio a positive factor.
If you’re looking for a nice holiday stock pick, Zillow looks like a good bet for a move higher. The stock has been oversold for some time, and the driver behind the initial move down was of questionable intent.
When to Consider Entering the Trade:
At the current price (~$82.90).
When to Consider Exiting the Trade:
At a close below $77.96 (Breakdown) / An intraday price of $89.35 or above (Profit-Taking)
Disclosure: At the time of publication the editor and affiliated companies own the following positions: None
Note: Positions may be bought or sold while this publication is in circulation without notice.
Zillow Inc – Last 30 Days
Zillow Inc – Last 3 Months
Zillow Inc – Last 6 Months
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