DraftKings (NASDAQ:DKNG) stock has a boring scoreboard this year. Year-to-date it’s barely up 4%, which is only a quarter of the S&P 500’s performance. However, this boring score does not reflect the excitement in DKNG stock.
It has had six rallies, each more than 30%. Two of them were compound rallies that were 90% and 50%. Since the score is flat, it is safe to say that all the hoopla ended in fast corrections as well.
This brings us to the current situation where DKNG stock is approaching the base from which it sprang in July. This should provide some support, so that the buyers can reset footing. Unfortunately it must start right now, because below $48 it might lose another $4 before the next bankable base.
Since Wall Street is on edge this week, these bulls will also need some help in that department. It cannot do its work to stabilize if the indices are falling. The overall price action on Thursday was disappointing because the bulls left a lot of money on the table. They squandered an overnight rally, which turned into a -1.2% drop at the close.
That was emphatically disappointing and deflates those looking to incest in equities. The bears don’t have complete control yet, so the buyers need to step up to the plate. Their goal is to prevent the bearish thesis from gathering momentum, and it is not too late. This is nearly the same scenario that happened with the S&P 500 back in May. The price action now is eerily similar to back then.
Upside Potential for DKNG Stock Is Still There
In other words, we’ve seen this before and it could still end in a bullish way. For that reason, DraftKings at or below $48 per share presents an opportunity for bullish bets. This is where the investor has to make the a decision if this is a trade or an investment. For investors the choice is easier than the traders. Their mantra is that over the long term being precise with entries is not that important. But it’s also important to not take the entire position all at once.
Leaving room to add without increasing size of risk profile is important to managing over time. Traders, on the other hand, have to be a little more precise. They also have to set stop loss levels. In this case, I suggest using a futures style approach with an immediate stop out if the Thursday low fails. Otherwise, I expect traders to withstand pain into $44, where there will be a lot of willing buyers.
There is an even more ominous setup if DKNG loses $40 per share. That is not my scenario but it does exist. We have to remember that sometimes stocks fall through no fault of their own. If the indices for example corrects 10%, it is very possible for DKNG to follow another $10 lower. Not acknowledging that fact is sticking our heads in the sand. It works if we’re lucky, but it’s not a good approach broadly speaking.
Sound Long-Term Fundamental Basis
Fundamentally, the company is still too new to judge with precision. The easy statement is that the top line is growing fast and they still lose money. Losses don’t bother me for as long as they are exponentially adding to their sales. That’s what successful companies do over time. For an example of this, take a look at Tesla (NASDAQ:TSLA).
Critics are always demanding for management to lean the operation. Those who do are looking at the wrong stock. If profitability is your primary measurement, you shouldn’t be looking at investing in growth companies. Management needs to overspend in order to deliver the growth. You just can’t do it while pinching pennies.
Usually when the team is squandering funds it becomes quickly apparent. Spending for the sake of spending is wrong. Thankfully this is not the case with DraftKings. The company seems to have the ear of many major companies. We see this in the kinds of alliances they have forged. Take for example, it’s deal with Disney (NYSE:DIS). This is where investors should be OK leveraging other people’s homework. If Disney likes doing business with DraftKings, then I’m comfortable risking money on DraftKings’ stock.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.