Square Drops 10% Overnight

Square Inc. (SQ) reports Q4 2020 earnings after Tuesday’s closing bell, with analysts expecting a profit of $0.24 per-share on $3.1 billion in revenue. If met, earnings-per-share (EPS) will mark flat growth compared to the same quarter last year. The stock rallied nearly 23% after blowing away Q3 2020 estimates in November and has added another 39% in the last three months, carving a series of new highs.

Square Payment Solutions

The company provides digital payment and point-of-sale solutions used by Europay, MasterCard Inc. (MA), and Visa Inc. (V). The stock has benefited from the pandemic, with surging revenue as a result of contactless and tap-based technologies. It also offers a suite of small business software for point of sale, terminals, appointments, restaurants, invoicing, as well as loyalty and rewards programs. Last but not least, it’s benefited from a timely $50 million Bitcoin investment made in October 2020.

Deutsche Bank analyst Bryan Keane raised his target to $330 last week, noting, “Depending on the pace of the recovery and timing of incremental stimulus, we see potential in our upside model for gross profit growth to reach as high as 85% year-over-year in fiscal year 2021, which would represent 40% above consensus and our model (we are conservatively modeling the recovery in our core model). In 2021, we expect SQ to continue delivering strong operating leverage, offset by incremental investments for future growth.”

Wall Street and Technical Outlook

Wall Street consensus translates into an ‘Overweight’ rating based upon 24 ‘Buy’, 2 ‘Overweight’, 16 ‘Hold’, and 1 ‘Underweight’ recommendation. Three analysts now recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $140 to a Street-high $380 while the stock has opened Tuesday’s U.S. session less than $5 above the median $247 target.

Square fell to a two-year low during 2020’s pandemic decline and turned higher, breaking out above 2018 resistance at 101.15 in June. It’s been on a tear since that time, gaining ground within a rising channel that reveals intense institutional sponsorship. The rally paused above 240 in December while a breakout earlier this month posted an all-time high at 283.19. Many shareholders are taking profits ahead of the report, dropping price 10% overnight.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

U.S. Market Wrap and Forecast for Tuesday

Weak price action targeted big tech stocks on Monday, dropping Nasdaq-100 to a three-week low. SP-500 posted smaller losses while the Russell-2000 retraced Friday’s trading range, with the outperformance consistent with positive seasonality.  The WTI crude oil contract surged above 61 after Brazil’s strongman installed an army general to run Petróleo Brasileiro S.A. (PBR), one of the world’s largest oil and gas multinationals. That stock fell more than 20%.

Tesla Breaks Down

Tesla Inc. (TSLA) broke support near 780, completed a double top breakdown, and closed below the 50-day EMA for the first time since November. Dow component Apple Inc. (AAPL) fell nearly 3%, dropping into negative 2021 returns. Boeing Co. (BA) initially shook off the 777 grounding, squeezing short sellers after dropping more than 9%, but still closed in the red. Royal Caribbean Group (RCL) acted like a momentum play despite a billion dollar loss, surging to a 52-week high.

Gold had a strong session while Bitcoin faltered, lifting the yellow metal to the highest high in a week. Bonds slumped at 11-month lows while the 10-year Treasury note lifted above 1.3%, renewing anxiety about surging inflation. Kohl’s Corp. (KSS) rose over 6% as activist shareholders tried to take over the boardroom, just ahead of department store earnings that should confirm miserable conditions in America’s shopping malls.

Homebuilders on Tap

Tuesday’s Home Depot Inc. (HD) earnings will set the tone for mega-caps, with the housing boom likely to translate into a strong quarter. NVIDIA Inc. (NVDA) volatility is surging ahead of its Q4 release later this week. Bears could have the final say, given sell-the-news reactions after other chip reports in the last month. Square Inc. (SQ) could also generate fireworks after its report, with the stock glued to an all-time high after massive upside in the last 11-months

Home Depot will provide just one metric in a week chock-full of housing catalysts.  Home price data will also be released in Tuesday’s pre-market, followed by mortgage applications, January new home sales, and Lowe’s Cos. Inc. (LOW) earnings on Wednesday. Existing home sales wraps up the data flood, telling market players to keep close watch on SPDR S&P Homebuilder’s ETF (XHB), which is trading at an all-time high.

For a look at all of this week’s economic events, check out our economic calendar.

US Stock Market Daily Recap: The Yield Harbinger for Stocks

That correction I’ve been calling for weeks could have potentially started.

While I don’t foresee a crash like we saw last March and feel that the wheels are in motion for a healthy 2021, I still maintain that some correction before the end of Q1 could happen.

Bank of America also echoed this statement and said last week that “We expect a buyable 5-10% Q1 correction as the big ‘unknowns’ coincide with exuberant positioning, record equity supply, and as good as it gets’ earnings revisions.”

But rather than looking at the past, let’s take a look at what’s on tap this week to get you ready for what could potentially be a volatile week ahead.

This coming week, be on the lookout for the January leading indicator index, durable goods orders, and personal income and spending.

On Tuesday, we will also receive the February Consumer Confidence Index; on Wednesday, the Census Bureau will release upcoming home sales. On Friday, the University of Michigan will release its Consumer Sentiment Index.

Of course, as we’ve seen in weeks past, jobless claims from the previous week will be announced on Thursday too. After outperforming the last few weeks, the jobless claims announced last Thursday (Feb. 18) grossly underperformed and reached their worst levels in nearly a month.

Earnings season has been outstanding but is winding down now. Be on the lookout this week for earnings from Royal Caribbean (RCL) on Monday (Feb. 22), Square (SQ) on Tuesday (Feb. 23), Nvidia (NVDA) on Wednesday (Feb. 24), and Virgin Galactic (SPCE) and Moderna (MRNA) on Thursday (Feb. 25).

We have the makings of a volatile week, and as I mentioned before, a possible correction.

Look. Don’t panic. We have a very market-friendly monetary policy, and corrections are more common than most realize. Corrections are also healthy and normal market behavior, and we are long overdue for one. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017), and we haven’t seen one in a year.

While it won’t happen for sure, I feel like it’s inevitable because of how much we have surged over the last few months.

A correction could also be an excellent buying opportunity for what could be a great second half of the year.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one to help people who needed help instead of the ultra-high net worth.

With that said, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and the end of Q1 2021 is possible. I don’t think that a decline above ~20%, leading to a bear market, will happen.

Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.

Will the Russell 2000 Overheat Again?

Figure 1- iShares Russell 2000 ETF (IWM)

The Russell 2000 popped on Friday (Feb. 19) after seeing a bit of a pullback since February 9. Between February 9 and the close on February 18, the Russell 2000 lagged behind the other indices after significantly overheating. I switched my call to a SELL then on the 9th, and it promptly declined by 3.40% before Friday’s session.

I foresaw the pullback but cautiously saw a rally and switched to a HOLD call before it popped over 2% on Friday (Feb. 19).

I do love small-caps for 2021, and I liked the decline before Friday. However, I feel like the index needs a minimum decline of 5% from its highs before switching it to a BUY.

As tracked by the iShares Russell 2000 ETF (IWM) , small-cap stocks have been on a rampage since November.

Since the market’s close on October 30, the IWM has gained nearly 47.56% and more than doubled ETFs’ returns tracking the larger indices. If you thought that the Nasdaq was red hot and frothy, you have no idea about the Russell 2000.

Not to mention, year-to-date, it’s already up a staggering 16.38%.

It pains me not to recommend you to BUY the Russell just yet. I love this index’s outlook for 2021. Aggressive stimulus, friendly policies, and a reopening world could bode well for small-caps. Consumer spending, especially for small-caps, could be very pent-up as well.

But we just need to hold on and wait for it to cool down just a little bit more for a better entry point.

HOLD. If and when there is a deeper pullback, BUY for the long-term recovery.

For more of my thoughts on the market, such as the streaky S&P, inflation, and emerging market opportunities, sign up for my premium analysis today.

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Thank you.

For a look at all of today’s economic events, check out our economic calendar.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


Bitcoin – The Surge, The Outlook, and The Beneficiaries

Following greater regulatory oversight and disclosure, Bitcoin has drawn the interest of private and public companies in addition to traders and investors.

A number of companies currently have sizeable Bitcoin holdings. Not only have they benefitted from the 2020 breakout but will see even more impressive gains should Bitcoin hit 6 figures this year.

The Beneficiaries

According to Bitcoin Treasuries, a large number of public trading companies have benefited from holding Bitcoin.

These include:

Microstrategy Inc. (“NADQ:MSTR”) – A U.S entity, with a reported holding of 70,470 BTC.

Galaxy Digital Holdings (TSE:GLXY”) – Canadian entity that purchased $134m worth of Bitcoin on 30th June 2020, equivalent of 16,651 BTC.

Square Inc. (“NADQ:SQ”) – U.S entity, with a reported holding of 4,709 BTC.

Hut 8 Mining Corp. (TSX:Hut-8”) – Canadian entity, with a reported holding of 2,953 BTC purchased in Q2, 2020.

Private Companies

MTGOX K.K – Japan private entity, with a reported 141,686 BTC holding.

Block one – U.S private entity, with a reported 140,000 BTC holding.

The Tezos Foundation – Swiss private entity, with a reported 24,808 BTC holding.

Stone Ridge Holdings Group – US entity, with a reported 10,889 BTC holding.

In addition, there are ETF like entities holding Bitcoin, where institutional and private investors have benefited from the Bitcoin surge.

The largest Bitcoin holders include:

Grayscale Bitcoin Trust – A U.S entity holding a reported 572,644 BTC

CoinShares / XBT Provider – An EU entity holding a reported 69,730 BTC.

Ruffer Investment Company – A UK entity holding a reported 45,000 BTC.

While some entities are established and directly involved in the crypto markets, other Bitcoin holders are not.

With Bitcoin price stability having returned after the slide to the 2020 low of $4,000, the upward trend has drawn sizeable institutional money.

In considering the more than 700% surge since the March low, balance sheets for these entities would have seen marked improvement.

Looking ahead, the number of entities is likely to increase. Existing Bitcoin holders are certainly well placed to reap greater rewards. Existing holders will also benefit from a significantly lower risk of being Bitcoin holders.

Looking Ahead

There have been plenty of Bitcoin price projections for 2021 flying around. When considering the upward surge from last year’s low of $4,000, $100,000 would be a conservative price forecast for 2021.

The largest reported public company Bitcoin holder, Microstrategy Inc., would see its Bitcoin holdings of 70,470 surge in value to $7.05bn. As of the end of 2020, its Bitcoin holding was valued at approximately $2.04bn.

Galaxy Holdings, the 2nd largest public company Bitcoin holder would see its $134m BTC investment hit the dizzying height of $1,665.1bn. With a current market cap of C$1,014bn, a Bitcoin visit to $100,000 would double the companies market cap. Not a bad return for shareholders…

Private companies have an even more impressive exposure to Bitcoin and have seen unprecedented rewards from their Bitcoin holdings.

Japan’s MTGOX K.K., would see its Bitcoin holdings rise from $1.1bn to $14.2bn should Bitcoin reach $100,000 in the year ahead.

Finally, looking at the Bitcoin ETFs, Grayscale Bitcoin Trust reportedly holds 572,644 BTC. A Bitcoin jump to $100,000 in 2021 would give Grayscale and its investors $57.3bn in Bitcoin investment income.

Investor Returns

For investors that have no direct exposure to Bitcoin, indirect benefits to Bitcoin’s newfound strength will boost returns.

Shareholders may also look to pressure companies to rejig balance sheets and have some exposure to Bitcoin. Short and long-term bonds and cash holdings may not cut it anymore.

There are fiduciary obligations, however. So, we may not see public and private companies purchase Bitcoin in the numbers seen to-date.

Few shareholders would complain about the likely dividends that would result from a Bitcoin surge to $100,000.

Downside risks are ever-present, however, and the more risk prudent investor will be mindful of the impact of any Bitcoin meltdown.

The good news, for the companies discussed above, however, is that Bitcoin would need to take quite a hit to give them a Bitcoin loss.