A company that’s out of favor with the market can see big returns once it moves back into favor. But first, it has to have been out of favor for so long that shares are cheap. It also helps if the company is growing earnings and revenues.
From there, it’s best to wait until an uptrend starts. A hated company will typically start to move higher even if shares are out of favor with investors. Once perception flips positive, the rally can really take off.
That could be the case with payment platform
PayPal (PYPL). Shares have been out of favor with the market for years. Yet the company handily beat earnings and revenues in its most recent quarter.
Even better, PayPal is changing its reporting methodology. That will reflect the cost of the company’s stock-based compensation to employees.
PayPal is down about 7% over the past year, far lagging the overall market. But shares now trade at 13 times earnings, indicating a reasonable value now.
Action to take: Shares are cheap, still hated by the market, but are starting to trend higher. That points to market-beating returns in the months ahead. Currently, PayPal does not pay a dividend.
For traders, the July $75 calls, last trading for about $1.85, could see high double-digit returns if shares really start to take off in the coming weeks.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.