Shopify is probably overbought, this fund manager says

Is Shopify overbought?

Shopify (Shopify News, Stock Quote, Chart TSX, NYSE:SHOP) shareholders should be pleased as punch this year by the stock’s ability to defy expectations but for those of us on the outside looking in, the temptation to join the party is very palpable.

Hold back, says financial analyst Keith Richards of ValueTrend Wealth Management, who says a sizeable correction could be around the corner.

After posting substantial gains in an off year in 2018, Shopify has come roaring out of the gate in 2019, climbing past the $200 mark in early March and then barely hiccuping as it shot past $300 early in June. (All figures in US dollars.) The stock now sits up 140 per cent for the year and over 1100 per cent since its public listing debut just four years ago.

A number of factors have come to play in Shopify’s favour this year, from a dearth of other big name tech companies in Canada and an e-commerce environment that keeps picking up steam to lingering questions about US tech giants like Google and Facebook that continue to keep investors worried.

But the stock’s success has a lot to do with the company itself and its ability to execute quarter after quarter, hitting targets and growing its top line, even as profitability remains another year or two out.

“The reason I think the shares have done so well, independent of the real strong and favorable environment for software stocks, is that it’s lived up to its promise and then some,” said Tom Forte, a DA Davidson analyst, to BNN Bloomberg on June 25. “They now have a lengthy track record of execution and being shrewd when it comes to capital allocation.”

As for the share price, anxious investors may be best off looking to SHOP’s 200-day moving average, as a significant pullback towards that average should be a Buy signal, Richards said.

“When you have in six months the stock go from [$130 to $330], that’s a problem. It’s called parabolic. It’d be overbought,” said Richards, in conversation with BNN Bloomberg on Tuesday.

“If you did the 200-day moving average it would be [flatter],” he says. “There’s a little rule: whenever you have a stock that is more than ten per cent above its 200-day moving average (as this one definitely is), you’re starting to get into an area where it could correct. It doesn’t mean that it’s going to be a devastating correction, but just be aware that this stock is probably pretty overbought.”

“I don’t think that it’ll pull back to the 200-day moving average but if you can buy ten per cent over that, it might be an okay place to buy,” Richards said.