Investors that bought Vipshop Holdings (VIPS) one year ago have experienced some very impressive gains, even after a recent brutal decline. The stock was trading below $7 at the beginning of August 2019. By January of this year the stock was trading above $14, giving investors a gain of 100% in less than six months.
The stock fell a little from January through the end of February and hit a low of $11.53. Once again the stock rallied over 100% in the next six months with the share price jumping to $24.46 on August 18.
The stock dropped sharply on August 19 after the company missed its EPS and revenue estimates. It ended up falling 19.45%. The stock fell for a few more days and seems to have found support at the $17 area. The low on August 21 and August 24 was $17.
We see on the weekly chart that an upwardly sloped trend line connects the lows from last August and this past February. The trend line is right at the $17 area currently and seems to be acting as support at this time.
Earnings consistent
Vipshop Holdings is an online discount retailer in China. The company sells brand name clothing, shoes, and jewelry at a discount. The company has seen earnings grow by 17% per year over the last three years and the EPS was up by 17% in the most recent quarterly report. Revenue was up 3% in the most recent quarter, despite the economic slowdown created by the coronavirus. Revenue has grown by an average of 10% per year over the last three years.
Vipshop has a return on equity of 25.6% and the profit margin is 6.4%. The company also has very little long-term debt. These factors should help the company in most economic environments.
After the big drop, the stock is trading with a trailing P/E of 22.1 and a forward P/E of 12.4. Those are very modest readings for a growth stock like Vipshop.
Investors could buy Vipshop at its current level and watch to see if it can gain 100% within the next six months again. I think the better way to play the pattern is with the options that expire next February. These options will expire on February 18, 2021. The 14-strike calls are currently trading at $5.00. If the stock rallies back up to the $24.46 area, the previous high, these options will double in price.
If the stock rallies 100% like it did in the two six-month periods mentioned earlier, the stock would be in the $34 range and that would make the options worth $20 — a gain of 300%.
If the stock breaks below the trend line, I would expect it to see another level of support at the 52-week moving average. The 52-week is at $15.11 currently so I would suggest a stop just below that level in the $14.90 area.
