Pinterest Shows Risk of Owning High-Multiple Stocks Priced for Perfection

Stocks to sell

Remember when Pinterest (NYSE:PINS) caught fire with the euphoria surrounding stay-at-home stocks last year? It joined Zoom Video Communications (NASDAQ:ZM), Teladoc Health (NYSE:TDOC), Peloton Interactive (NASDAQ:PTON), DocuSign (NASDAQ:DOCU), and many others on a rocket ship ride for the ages. If you thought the meteoric rise was eye-popping, you should see this year’s unraveling in PINS stock.

the pinterest (PINS stock) logo on a mobile phone held by a woman

Source: Nopparat Khokthong / Shutterstock.com

It’s been brutal. On the way up, Pinterest investors had a 225% gain from the early days of the pandemic in March 2020 through the end of that year. In 2021? It’s down 41%.

As is always the case when asset prices become unmoored from reality, there is a reckoning. Sooner or later, and in this case, it was sooner, an earnings report arrives that disappoints the masses. It often reveals the company’s growth is robust but not enough to meet the lofty expectations baked into the sky-high share price.

And, with that, a rug-pull ensues. In the case of PINS stock, it arrived in late July via a nasty overnight -20% gap. If you want to see a particularly vicious variety, take a peek at DocuSign, which fell 40% overnight this month.

Such is the risk of owning high-multiple stocks priced for perfection. Any whiff of disappointment can send shares tumbling. And given the trending nature of equity values, July’s instant plunge was just the opening salvo. Persistent downward pressure has continued to pull PINS lower over the following two quarters.

At Monday’s low, prices were down 61.6% from February’s record high. Let’s take a close look at the trend.

PINS Stock Chart

As always, the weekly chart provides the big picture. Last year’s pleasure is juxtaposed with this year’s pain. Here are a few key points.

First, the weekly trend is falling beneath a declining 50-week and 20-week moving averages.

Second, momentum measures like the RSI fell to new lows this week to confirm the downtrend’s growing strength.

Third, we’ve returned to a pivotal old resistance zone at $35. Breaking above this last September was a catalyst for the stock’s explosive growth. It also launched PINS stock out of its post-IPO base. So this is as logical a spot as any for buyers to mount a counter-attack. But just because they could and should doesn’t mean they will.

We need to see signs of slowing momentum and reversal patterns starting to emerge on the daily time frame first.

As for the daily view, it’s as bearish as you’d expect for a stock that’s been cut in half.

I’d echo those first two points for the above daily chart. We’re sinking below all moving averages, and the RSI confirms downside momentum increased on the last drop. The past three days saw a sharp rebound, but the volume was lackluster, and we failed even to get back to the 20-day moving average. In sum, we have a classic bear retracement pattern. I have every expectation that this rally gets rejected like all of its predecessors.

For the $35 potential support zone to spark a reversal here, we need the daily chart to build a higher pivot low or a double bottom. We need prices to break resistance and form a higher pivot high. In short, we need something, anything, to signal this week’s bounce is anything more than another in a long line of failed retracement.

What to Do Here

For now, I’m a seller. If you want to bet we revisit the lows, then here’s an options spread that will profit.

The Trade: Buy the Jan $40/$35 put spread for $2.

You’re risking $2 to potentially make $3 if PINS falls to $35 by expiration.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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