eBay Is Ripe for a Bid

 | Jun 11, 2014 | 10:00 AM EDT  | Comments
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FB

Foreign exchange trading, where my market education began 30 or so years ago, is, on a day-to-day basis, actually quite simple. Intraday, most markets establish a range and then trade within it until they break out. That may seem like a statement of the obvious, but recognizing this basic truth leads to placing relatively low risk trades, or at least trades with a limited downside.

The basic principle can easily be extended to longer-term equity trading as well. The simple fact that a stock is near the bottom of an established range doesn't necessarily mean that it is going up, but what it does mean is that the risk reward calculation is working in your favor. There is a nearby, logical stop-loss level and proximity to support increases the likelihood of a short term pop to give some breathing room. You don't even have to have a fundamental reason to buy the stock, although it is better if there is one.

eBay (EBAY) is in just such a position right now. The stock has traded in a $48-$60 range this year, and at the time of writing last traded at $48.55.

eBay (EBAY)
Source: VectorVest

Obviously, it is at the bottom of the range and, as an added bonus, is seemingly friendless right now thanks to the news that PayPal head David Marcus is off to Facebook (FB). Buying the stock right now still makes sense, though -- not because Marcus' departure can be seen as anything but bad news, but because even with that, it still hasn't broken through support at $48. A stop-loss to cover a break lower, at say $46, would mean risking less than 5% of the investment. If the support holds further, then even the natural exhaustion of the shorts will have EBAY drifting higher, allowing for the stop to be moved even tighter. A reversion to the mean around $55 would result in a decent profit.

I would stress again that this is not a long-term investment; eBay looks like a company whose best days of growth are firmly behind it. But if the current level holds, there could be a medium-term catalyst for a spike in the price. Recently, in a much publicized move, Carl Icahn bought into the company and, in his activist investor way, set about trying to convince or force the board to do something they didn't want to do -- in this case, spin off PayPal.

Icahn is nobody's fool, and on many levels such a move makes sense. The board, however, thought otherwise. As a parent, I am all too aware that even the best advice, if presented in a way that makes the recipient look or feel that they are being criticized, can be rejected. Eventually, though, children and board members alike can see the merit of some advice and will probably come around. Now that Icahn has publicly stated that he is giving up on his fight to have PayPal spun off, would it really surprise you if the board proposed just that sometime soon? Could it be that the departure of David Marcus is just the catalyst that the board needs?

Even if that doesn't happen, the fact is that eBay is still growing earnings at around 11%. That obviously isn't at a level that would justify a sky-high price-to-earnings ratio (P/E), but at a forward P/E around 14, EBAY is at worst fairly priced.

One of the biggest differences I see between those who trade other people's money and those who trade on their own account is that those who inhabit dealing rooms focus on exit points rather than entry points. When something sets up with a fairly tight stop-loss and a decent upside, it is hard to resist -- no matter what drove it to that point. If no bounce comes, then little damage is done. The fact that there is little to lose and a lot to gain, makes me a buyer of eBay at these levels.

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