PayPal Holdings, Inc. - A Great Entry Point Thanks To Analyst Downgrades & Tax Loss Selling
Summary
- PayPal suffered a significant price-per-share decline, and a gap down, after numerous analysts downgraded the stock on November 9, 2021.
- These downgrades coincided with tax loss selling or tax loss harvesting season, beating the stock up more than one might expect.
- Downside over-reactions create buying opportunities – the tide is already turning, as at least one analyst made specific reference to this seasonal pattern with an upgrade.
- I recommend that you note the very low short interest [<2%] – a positive indicator with respect to market sentiment, buy on dips and hold and accumulate PayPal shares.
- I expect a favorable January effect for PayPal, followed by a long-term improvement, as this metaverse stock recovers in 2022.
Pgiam/iStock via Getty Images
An Analyst Upgrade and the Underlying Rationale for Entry
The statement below explains the increase in the stock price-per-share (PPS) for PayPal Holdings, Inc. (NASDAQ:PYPL) on the first trading day of the year - January 3, 2022:
"PayPal shares are trading higher after BMO Capital upgraded the stock from Market Perform to Outperform."
Source: Yahoo! Finance
The same source provided a bit more detail:
"He also noted that tax loss selling [emphasis added] is done and investors are focused on more normalized 2023 estimates for valuation."
My TD Ameritrade account also made reference to tax loss selling from the BMO Capital upgrade on January 3, 3022:
15 hours ago
"Pressure from year-end tax loss selling is behind us and investors are now focused on more normalized 2023 estimates for valuation, Fotheringham wrote in the note. We believe payment technology stocks are set up constructively for this coming year."
A Graphic Illustrating the Classic Tax Loss Selling [TLS] or Tax Loss Harvesting Setup for a January Effect Increase in PPS
The graphic below was captured from my Fidelity account on January 3, 2022, before the pre-market opened:
The November 9, 2021, analyst downgrades resulted in a gap down (see orange box and arrows in the above graphic). The ongoing downward trend appears to have stabilized, where some may have sold their "losers," including PayPal, during the TLS or tax loss harvesting season, typically associated with early November, and providing the opportunity for the investor to buy the stock or security back after the 30-day "wash sale" period has expired. The good news is that TLS, in a positive index year (like 2021, for all 3 major U.S. indexes), is usually followed by at least a partial recovery or January effect. It is, for this reason, that I recommend an initial position in PayPal, if you do not already own it, and average down if you held this security during its decline.
Some Fundamentals
According to my TD Ameritrade account, PayPal enjoys about 80% institutional ownership and less than 1.5% of the float is short (as of December 15, 2021). This, despite the analyst downgrades that occurred on November 9, 2021 (see the above graphic). Earnings per share are $4.15 (estimated lower, at about $3.80 PPS, for the next year) with a price-earnings (PE) ratio at about 45. The stock is pricey at $200 PPS, but I believe that anything below this PPS is a "gift".
Continuing to rely on TD Ameritrade measures, note that the PayPal PE ratio is below the industry average. The price-to-sales ratio is also below the industry average. Even the price-to-book ratio is below the industry average. It is for this reason that Fotheringham at BMO Capital raised his rating from "perform" to "outperform," and it is for this same reason - valuation - that I recommend that you buy on dips and accumulate PayPal for a long-term buy-and-hold. A snip of these measures follows:
Metaverse Stocks
PayPal is a metaverse stock, as operationally defined by the Roundhill Ball Metaverse exchange traded fund (ETF) (META). At the time of this writing, N=45 stocks are included in the ETF, where only a modest position is maintained for PayPal. I favor PayPal and recommend a modest position in this security for a long-term buy-and-hold. My first Seeking Alpha metaverse stock and article is here.
I will be examining "metaverse" stocks in the coming months. I would expect to see quite a few penny and sub-penny stocks enter this space throughout 2022 (and beyond). An example of two new entrants into the metaverse space is provided in this Seeking Alpha article. If you identify any additional, new entrants, please feel free to provide the ticker in the comments section, where I and others can render an opinion on the future prospects for the companies. Working together, we can identify additional metaverse stocks - quite possibly the "next big thing" for 2022 and beyond.
Summary
The analyst downgrades on November 9, 2021, resulted in a "gap down", and in my humble opinion, an over-reaction to the downside. The upgrade by Fotheringham at BMO Capital represents the first of many, in my opinion, and the PayPal PPS will drift up as the 2022 calendar year progresses. The downgrades, combined with calendar year-end TLS, provides an excellent opportunity for a favorable entry point.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PYPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (26)
But the timing is always debatable, guidance got to be taken with a pinch of salt.
You will get PYPL below $170 after Feb.
Mark this comment, I will revisit in Feb.
