Quantifying Turning Points

"Never give up, for that is just the place and time that the tide will turn."

-Harriet Beecher Stowe

A year ago, on February 24th, 2014, zulily Inc (ZU) reported their first revenue and earnings results since going public in November of 2013. The results exceeded expectations, and the stock price jumped from $42.84 to $72.75 in just 3 days. After a great start, the stock has been in a free fall since, closing this past Friday at $14.40 or a drop of 80% from its 52 week high.

Whether or not you care about this mid-cap e-commerce stock or not, there are many companies like this that have been battered over long and short periods of time. Investors that understand the fundamentals of these companies are formulating a view on the future prospects, and if this represents a good value to purchase the stock (or perhaps short it).

What we often hear from investors is their frustration that the price will often move ahead of the fundamental story or continue to be unappreciated and languish, in both cases losing out on significant profits for their work. For a stock that has been beaten up or may have fallen out of favor, if you like the fundamentals how long is this thing going to typically languish?

Similar to how investors look at peer companies to gauge how a stock is performing from a relative perspective, EidoSearch uses patterns like price trends to see how peers have reacted to similar trends and environments historically. This allows us to quantify the probable turning points for investors.

For zulily Inc,, is this a good entry point? Fundamentally, they appear to have some decent things going on. In their first full year earnings release a couple weeks back, the company reported that net sales increased 72% to $1.2 Billion and they added 4.9 million active customers representing a 54% jump from the previous year. At EidoSearch we are able to ask the question, “when have we seen peer stocks trade like this historically and what are the probable outcomes for zulily Inc.?”

In looking at zulily, we narrowed the peer group to the Consumer Cyclical Sector and to just Specialty Retail stocks. We then looked at their current 3 month price trend, and also their 1 year price trend, to find the most similar instances of peers having trading like this historically and to see how the stocks have typically reacted.

For the 1 month projection, we looked at the current 3 month price trend in zulily Inc. and found 98 instances in Specialty Retail stocks dating back to 1990. The average return in the next 1 month is 9.8% with 5.2x the upside to downside. There are 24 instances where the stock rebounds more than 20%, and only 1 instance where it drops a further 20%.

For a longer term view, we looked at their current 1 year price trend and found 86 similar instances in Specialty Retail stocks dating back to 1995. The average return in the next 1 year is 25.1%, and there’s 4.1x the upside to downside.

Have a great week!