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BAND Offers Hope In A Hopeless Market

10/15/20 04:22:04 PM
by Billy Williams

There are shifts in how business will be done going forward and this company is in a position to lead.

Security:   BAND
Position:   N/A

The intensity of the stock market's ups and downs are only surpassed over the uncertainty of its future. Economic uncertainty is one thing, but the level of social unrest and gutter-fighting of an election year makes it worse. The market's wall of anxiety is becoming higher to climb with each passing day but there are still pockets of hope for solid returns if you refuse to be distracted.

The U.S. is facing massive unemployment due to the Covid-19 pandemic leaving retailers desperate to keep their numbers up. Hope lingers that with the impending holiday season they can make up lost ground. At the very least, Big-Box retailers hope the holidays will help them stay afloat, otherwise another round of cutting hours for employees and layoffs could be back on the table.

Despite this, the stock market keeps trading higher. This raises the question of "why is the stock market going higher when the economy is going wobbly on weak legs?"

There are couple of explanations for this starting with the stimulus package from earlier this year. The SBA (Small Business Administration) worked with banks to help administer the Paycheck Protection Program, PPP loan, to businesses in order to help weather the negative effects of locking down the economy due to the pandemic. The SBA had the money and the banks had the ability to reach the businesses that needed the capital, in effect.

Unable to make loans in a scared economy, especially with the Fed slashing rates in early 2020, banks were experiencing "margin compression". Margin compression is where the margin between the interest rate that they pay depositors versus the interest rate they lend money at shrinks due to the low-rate environment.

But, with the PPP loan, banks make fees based on the amount of loans that they helped the SBA make to a badly wounded economy. While the banks were not going to get rich on these loans it did help stop the bleeding of falling profits due to margin compression.

As a result, the biggest sector of the stock market — the financial market — was given a boost and so was the market.

Second, the way business was conducted changed.

Figure 1. BAND was taken down with the rest of the market during the early part of 2020 but has experienced a strong bullish rally.
Graphic provided by:
Face-to-face meetings were replaced by online meetings. Consumer focus changed from shopping at brick-and-mortar stores to online shopping. Restaurants and grocery stores began delivery services to make up the drop off of on-site customers. Schools began taking advantage of internet services like Google Docs to issue out homework and collect it from stay-at-home students. Doctors began using video for routine appointments with patients.

As time goes on, you can expect more market adaption to the current state of affairs. Adding to that, the longer things go on, you can expect these changes to become permanent.

And, therein lies the opportunity.

The tectonic plates have shifted and business-as-usual is evolving into a new status quo.

Online services and they way we shop and communicate are morphed into a "new normal" which creates new demand for products and services to adapt.

Bandwith Inc. (BAND) provides cloud-based communications platforms-as-a-service that enables enterprises to create and operate their own voice or text communications across any mobile or connected device. They are a B2B (business-to-business) service that supports other communication/media companies in the creation of their own customized communication platforms for their respective customer base.

Some of their biggest clients are Google, Zoom, and Microsoft, who are supported by BAND's technology.

The company had its IPO back in November of 2017, trading from a low of $18.05 before finding its legs and making the climb to its current heights. The current 52-week trading range has been from $42.61 to $175.54 and is currently trading near it's all-time price high at $174.23.

The stock was taken down with the rest of the market earlier this year during the initial pandemic scare but demand for its services by star-quality clients helped it weather the storm. Soon after hitting its 52-week price low, BAND was able to ride that demand to recover and go on to shine by outperforming the market.

However, can it sustain it's current course?

Figure 2. BAND has pulled back but the spike in volume from 9-17-20 shows that the bullish run is about to resume.
Graphic provided by:
Trends tend to stay in place even during trying times, so the short answer is "yes", but it would be unwise to jump in with both feet in the current state of the market. Fear of a downturn or the introduction of a new stressor into the market could cause traders to run like they were caught in a burning building.

On the weekly chart (Figure 1), you can see a slight pullback in price over the previous weeks, but on the daily chart (Figure 2), you can zero-in and focus more closely on the details. You see where price pulled back but, interestingly, the real insight into whether the trend will resume or not, on 9-17-2020, price formed a bullish doji candlestick. The day's opening gapped downward and sold off before the bulls began trading the stock higher. Price action shows the price bidding higher before selling off again but not enough to push the stock lower.

What's worth noting about this price action is the trading volume for the day. Volume was over 800% of the 20-day average which is a huge indicator that the bulls have control of the price action. This was further confirmed when the stock began to lift off out of the pullback and head back towards BAND's 52-week high of $175.54 where it currently is a stone's throw away from passing.

The smart play is to ride the upward trend by buying BAND as it trades past it's former high, but the more intelligent play would be to scale in.

A partial position at $175.64 followed by additional positions on each pullback with trailing stops would be advisable. Better, using call options would help to further control risk while putting yourself in a position to win if the trend follows through.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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