The market simply has not liked the much leaner Fox Corp. stock that first hit the market on March 13. After giving back a quarter of its initial trading price, it may be worth a look.
It didn’t seem like the $38.60 that the new version of Fox traded at back in March was too out of line, at least initially, and day 2 of trading saw it break through $41. Things started to change right after that, as it seemed that the market had realized that it made a mistake by valuing this stock higher and decided to put it down instead.
During the next two weeks, it gave back almost 20% and this had clearly become a painful stock to be in on the long side. The mood had clearly turned and no matter what may be going on with the new version of the company, the market wasn’t liking it and was giving them a clear vote of disapproval.
Stocks without a history like Fox have a tendency to be more volatile than your average stock, as those who follow the charts of IPOs can attest to. Another thing that stands out with new stocks, and is very well worth noting, is that the market can be seen to form an opinion about the stock early on and this is a pretty reliable indicator of things to come in the short term at least, if not longer.
This is a big reason why IPOs tend to be so attractive, and they not only move more, we can also predict their movement more reliably. This should serve to have us being more inclined to hold our winners and also more ready to sell if it turns out that we are on the wrong side of the initial moves.
The time to get out of this would have been during the early stages, where we saw the market’s thumb start to get out and this then reversed into a quick thumbs down. More often than not, this does not bode well for the stock, and more often than not is the threshold here.
Many investors have a bad habit of ignoring significant negative trends, and they may tell themselves that these things are just too hard to predict, or that they have no interest in timing their positions, but whenever we are exposed to a negative expected return, that’s exactly what you will end up with overall.
We can get some situations where the probabilities are very one-sided, and given that we’re talking about investors this will mean a situation with significant downside, and this does not manage itself and does require intervention, as do all business decisions.
Once we get into the red with a play like this, it becomes about managing the risk of further losses, and when the probability of losing more is greater than the probability of gaining, and if we knew this to be the case, it would not make sense to be in the stock at this time.
The trick here with investors is to not only look to see which way things are leaning at any given point in time, it is also to see how far they may be leaning and how far down we are at risk of going. This does require a certain interest and effort and the threshold of most investors is well below this.
However, with new stocks, even those with little interest in becoming very skillful at it can be presented with clear situations that it really doesn’t take much skill at all to act upon. The way that Fox opened up is a good example of one of those times, and as a general rule, to not be very patient at all with them.
Fox Has Presented Some Good Trading Opportunities Along the Way
In spite of what has been an overall trend downward, taking us to Fox’s current price of barely above $30, the ride has been anything but straight down, and at various times it did look like the mood may be shifting. Given the choice between a stock that doesn’t have much fight in it and will move down in a pretty clear trendline, and one that has at least battled and done so several times as Fox has, it’s simply better to have some bulls hanging around.
There actually have been numerous good trades that have been possible, with as many on the long side as the short, although the short plays have been more profitable due to their greater magnitude. Shorting new stocks can be tougher though and generally come at a pretty high cost so there are usually better things to trade and these require an extra amount of confidence, which mean straight down and not this.
Just looking to trade this long though, there have been 3 distinct opportunities and all would have been profitable with the correct timing. The average amount of these moves has been greater than 10%, so this is definitely something that has been worth a look, and this remains to be the case.
As often happens when the price of a stock drops like this, analysts start to circle around it like vultures, given that its lower price and lower valuations in turn make it look more appetizing to them. We’ll need more than the value of a stock going down to convince us though, and while it is true that there is less downside as a stock moves down, less downside doesn’t mean much if the overall expectation points to a loss of some sort.
Still though, bottom plays can provide some good opportunities at times, although we want to be particularly careful with these. They are in the doghouse, so we need to be clear enough about their leaving it to want to come along for the ride.
From a short-term perspective, it would not be hard at all to imagine Fox delivering another good trade, and perhaps several more provided that it continues to move up and down as much as it has. We’re not there yet, but seeing it hold $30 as far as its closing price goes, and then seeing it start to move up could make it a nice trade. You would place your stop a little below $30 and ride it until it shows it’s more likely done for now than not.
Further out takes us into a much foggier land given how new this all is. We’ll need the chart to give us enough of an idea that the mood is changing longer-term, beyond just the few weeks we’ve seen so far. The trendline on this time frame is decidedly downward, and while waiting will miss out on the first part of the move, this is the part that has a negative expectation and needs to be avoided.
While it doesn’t really matter why the turnaround happened, it still does pay to have a sense of what they may be looking at by looking at the views of analysts. These analysts are really only looking at a year out or so, and we might be feeling more ambitions than we should and want to know what things will look like many years from now, there’s never a need for this really.
We Need to Strive to Get in at the Right Time
While good fundamentals can contribute to the merit or lack of merit to a certain play, it isn’t in itself a sufficient reason to enter a play, because we need to get the timing right as well. If we think that this is a good time but the market disagrees, we lose. It is particularly important with a bottom play to get your entry right, and entering on the way down simply isn’t wise or profitable.
You also don’t want to be entering when a stock is trading sideways. If it is moving down, it is telling you directly that this is not the time, but when it’s going sideways, it’s saying that it is not sure. Unless it is sure enough, you cannot be sure enough.
Fox has gone all in on TV programming and having revenues fall off particularly hurt them. When a company takes a hit to their business like this, and especially if the causes of it are organic and likely to persist, this is going to be a concern.
Media analyst Michael Nathanson sees Fox meeting the challenge within 2 years and projects a 6% growth in earnings for the period of 2021-23. This looks more like a reason to buy this in 2021 than in 2019 though.
Alexia Quadrany of J.P. Morgan thinks that next month’s buyback authorization may be higher than investors anticipate, and maintains an overweight rating with a price target of $42. It’s been almost that high earlier this year, and it certainly may make it back up there some day, but the question becomes whether it will begin its journey now or later at a lower price and an even bigger bargain.
The November meeting will be an interesting one for traders though, although whether or not holding through something like this with a stock that is this volatile may not be within all traders’ risk appetites.
The good news is that when positive news like this strikes, it does tend to carry a lot of momentum, so waiting until this happens or even the next day if you are planning on holding this for a while can still be a good move.
There aren’t compelling reasons for anyone to buy Fox right now, whether they are just looking to trade it for a few days or hold it for many years. As this changes, the threshold for entry is less for the traders, who only may be looking to ride it for a year or two, where only a modest move upward would be sufficient.
For those interested in it longer than this though, they will need to see a more substantial confirmation that the worst is over here, and this is what we need to be waiting for now.