In yesterday’ Market360, I showed you an example of when it’s a good idea to let a fundamentally superior stock like BioNTech SE (BNTX) keep running.
Today, I’m going to show you the other side of the coin — how I know when it’s time to cut loose a stock that had been performing well.
That time came recently for PayPal Holdings, Inc. (PYPL), a stock I recommended to my Growth Investor subscribers way back in December 2017.
PayPal is a financial technology company that was spun off of eBay in 2015 and allows users to make purchases from online vendors with ease. The company offers easy, affordable, safe and reliable financial services. PayPal is also a major player in peer-to-peer payments through Venmo, which currently has about 76 million users.
With PayPal, individuals can instantly transfer money to others with the PayPal mobile app, shop online with various merchants and make donations to their favorite charities. Considering their numerous offerings, it’s not surprising that PayPal had more than 400 million active accounts worldwide at the end of the second quarter.
PayPal also allows users to buy and sell cryptocurrency straight from their app and allows customers to use crypto to buy products from millions of vendors. And for each cryptocurrency transaction, PayPal earns 1.8% to 2.3% on fees. That also made the company a good “picks and shovels” play in the highly volatile cryptocurrency market.
As far as the numbers are concerned, fiscal year 2020 was a record one for PayPal, and much of this momentum carried over into 2021. However, the company’s earnings and sales momentum has recently tapped the brakes, as new active accounts slipped 47% year-over-year to 11.4 million in the second quarter. Total payment volume rose 36% year-over-year to 11.4 million.
For the second quarter, PayPal reported that revenue increased 17% year-over-year to $6.24 billion, falling just shy of analysts’ estimates for $6.27 billion. On the other hand, second-quarter earnings climbed 8% year-over-year to $1.15 per share, which topped estimates for $1.13 per share by 1.8%.
Looking forward to fiscal year 2021, PayPal now expects full-year earnings per share to rise about 21% year-over-year to $4.70. The earnings forecast was slightly lower than analysts’ projections for full-year earnings of $4.73 per share.
As a result, third-quarter earnings estimates have been lowered and institutional buying pressure has started to dry up.
After reporting its second-quarter results July 28, the stock dropped over 6% that day and another 4% over the following three days. More recently, the stock has continued to slide sideways.
Interestingly, PayPal slipped to a D-rating in Portfolio Grader over the weekend, due to a D-rating for earnings growth, an F-rating for earnings momentum and a D-rating for its Quantitative Grade, which highlights the stock’s sliding institutional support.
As regular Market360 readers know, I base my stock selections on superior fundamentals like a company’s sales and earnings. But there’s much more to it than that.
In fact, the Quantitative Grade in my Portfolio Grader is one of the key factors I take into consideration before buying or selling any stock. The Quantitative grade is based on a stock’s Alpha (its return uncorrelated to the overall stock market) divided by its standard deviation in the past 52 weeks.
The bottom line is that my Quantitative Grade is a measure of buying pressure under a stock by institutional investors – the hedge funds and pension funds and sovereign funds and family offices of the world with massive amounts of capital to deploy into the market.
Now, when I notice a stock’s Quantitative Grade begin to deteriorate, even if it may still have positive forecasted sales and earnings, I will not hesitate to sell it. At the end of the day, I’m a numbers guy, so I stick with the numbers. And if a stock’s Alpha has disappeared – a signal that institutional buying pressure has ebbed – I move on and look to buy more fundamentally superior stocks.
So, you can see why I took PayPal’s D-rating in my Portfolio Grader as my cue to recommend exiting the stock Monday, handing my Growth Investor subscribers who bought in at my initial recommendation with about a 265% gain. That’s compared to the 134% gain for the NASDAQ, the 83% gain for the Dow, and the 64% gain for the S&P 500 over the same timeframe.
Of course, while I recommend getting out of PayPal at the moment, there’s plenty of other fundamentally superior stocks that I hand-pick and add to my Growth Investor Buy Lists to ensure that my subscribers are invested in the crème de la crème. All of the stocks that I add to my Growth Investor Buy Lists must meet my strict criteria and receive top marks in Portfolio Grader.
I’m talking about stocks in prized sectors of the economy like Artificial Intelligence (AI) that are popping up on my radar right now — stocks that earn “A” and “B” rating in my Portfolio Grader.
And the reality is AI is expected to be bigger than the tech boom in the 1990s and the smartphone revolution of 2007. It will allow us to build a whole new generation of incredible innovations.
In fact, Stephen Hawking predicted that AI would be the “biggest event in the history of our civilization,” and Google’s CEO called it “more important than electricity.”
Experts believe that this tech could add $150 trillion to the global market.
In fact, I just released a new presentation where I break down every element of this opportunity and even name a different stock that is providing critical hardware for the coming revolution.
And if you sign up to my Growth Investor service, you’ll have access to my special reports, including 3 Stocks Powering the $150 Trillion AI Boom, 3 Plays for the $12 Billion Battery Opportunity and The One AI Company Set to Corner the Booming Cybersecurity Industry.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
PayPal Holdings, Inc. (PYPL), BioNTech SE (BNTX)