The rise and fall of Peloton (PTON) stock from 2020 to 2021/22 is a classical example of a growth stock leader that is dragged onto the winner podium by the animal spirits of an explosive market in a conducive macro environment.
It was a splendid opportunity for the growth stock speculators among us, and I will give a brief overview of how position- and money management in riding this beast could have been handled with a growth stock strategy.
Producing luxury home exercise equipment with live and on-demand video streaming capacity for fitness classes, Peloton’s products and services could not have made a better fit with the havoc caused by COVID-19 lockdowns.
Early signs of a leader
As negative as sentiment in the real economy and the world at large was in March/April 2020, the stock market environment was in fact becoming extremely bullish early on and demanding aggressive money management from an active growth speculator.
As early as April, PTON started ticking the boxes for many of the characteristics I’m looking for in a true ‘massive mover’ stock.
There was a meaningful fundamental story. PTON benefited from the anticipation and discounting of future earnings rather than an existing bottom line, strong sales growth due to its market positioning of selling luxury exercise equipment during a forced stay-home period, and ultra-loose monetary policy pressure-pumping money into the financial system and downstream into no-earnings risk-on equities.
To date in 2022, PTON has yet to report annual positive earnings. However, for Q4 2019 a record 77% revenue growth YOY was reported, a number that would only grow over the following year and a subtle signal that something momentous was shaping up.
“Virility”, a measure I have developed for measuring the potential of stocks to make big future moves, was in the 98th percentile of all stocks in the US market in April 2020.
PTON traded a mouthwatering average of about 300 million-$ per day, showed a strong turnover of share float, had 1½ times more volume on days with net buying than those with net selling, and was located in the sweet spot of a ~35$ stock with a 10 billion-$ market cap.
… La Crème de la Crème.
The principal digestion
On the technical side, the quality of the digestion period shaping up during the brief but deep COVID bear market was equally stellar.
Volume (see chart annotations in above chart) was indicating that market participants with massive purchasing power were entering the stock, there were signs of support and accumulation on days the market showed weakness, and a March bottom formed weeks before the indices.
The stock price had recovered 2 months before the NASDAQ, and PTON had rallied 116% within the digestion period (a metric I call “Ground Covered“)
The start of the primary trend was initiated on May 6th from a well-defined pivot point, in parallel with PTON stock making a consecutive higher High and thus confirming a trend reversal.
On the first day, a 224% spike in volume showed up that made me drop on my knees and beg for more disposable capital to deploy. The 39-41$ price range on May 6 and May 7 was perfect for a pyramiding into a full position. On May 7, volume rose even more to >450% above average, signalling gigantic demand for the stock.
Adding size
The general market (and PTON and many other winning stocks with it) was on a tear until well into 2021, with secondary reactions in June and from September to November 2020. Market weakness rolled off PTON as if it was made from Teflon, and it continued to march higher relentlessly.
Over this fast-paced sprint, a savvy speculator could have force-fed more capital into PTON stock. I’ve marked two separate low-risk entry points in mid-June and late August as blue arrows in the chart.
Late-stage behavior
Over 2020, revenue growth accelerated sequentially from 66% YOY (Q2), to 172% (Q3) and 232% (Q4) – and with it, the stock price was driven up by frantic buying.
Q3 and Q4 reports finally showed by the first positive earnings numbers YOY. However, as the market often does, the actual appearance of earnings had long been discounted.
The growth market trend became obvious, overcrowded, overheated, and Q3/Q4 marked the top of PTON stock and many others, before their mighty fall in 2021/22.
A deep and high-volume selloff occurred on November 9 – the day the first COVID-19 vaccines were found effective, and collapsing uncertainty about future lockdowns in the western world.
This violent attack from a steep angle on the 50-day moving average (50DMA) marked a change of character, and was the first yellow flag to appear.
Since the stock had been severely extended from its last digestion before this gap-down, and price found support at the 50DMA mid-day and the next day, a speculator would not have had to liquidate their whole position. However trimming part of it was warranted at strong extension levels and during the gap-down.
The top
In retrospect, this point was only off about 2 months from the highest price that PTON would finally achieve in its 8 months run.
The late digestion forming in October to December was faulty in many respects and clear late-stage behavior. The following December 22 gap into all-time Highs on heavy volume confirmed possible climactic action – a sign to take profits and sell into strength.
If not there, the move below the 50DMA on January 22 was the literal clock striking twelve, PTON’s death rattle, and the last exit before the epic slide in the other direction started.
Stock picker’s paradise
A speculator using a growth stock strategy could have made substantial profits with PTON. Holding stock from the initial buying point at $39 in early May to a conservative exit point at $128 (25% trimmed on extension, 37.5% scaled out at $100 at gap-down, 37.5% sold into climax gap at $160) yielded a 330% gain. And that is a low estimate; additional 5% position add-on purchases as described above and sold with the same rules would have magnified this number to over 407%.
PTON was only one single stock, and 2020 had more than 15 of such magnificent beasts. It was a good year for those paying attention and adept at stock picking, and I was riding PTON up along the market … what were you doing?
