In a world where department stores are losing customers in droves, you have to wonder where all of those customers are going. Jim Cramer told viewers of his Mad Money program that he had found the answer: They're going to Revolve Group Inc. (RVLV) , this week's red-hot online retail IPO.
Cramer said Revolve has reinvented fashion. The company operates three websites, each with a distinct market. They launch hundreds of new items at a time in small batches, then use data and analytics to find the ones that work the best. This has made the company successful, and eight of their top 10 brands are their own. Revolve was able to post 21% revenue growth year-over-year thanks to strong execution and stellar marketing that heavily leverages social media. The company is also profitable. (Not all IPOs do that.)
Cramer said he loves the Revolve story, but there is a problem. Shares now trade at 90x earnings, or 5.5x sales. That makes it far too pricey, even for speculation. Cramer suggested viewers need to wait for a better entry point. Let's see what we can glean from just a few days of trading.
In this daily Japanese candlestick chart of RVLV, below, we can see that white or empty candles indicate that the close is higher than the opening and the red candle tells us that we closed below the open. The skinny lines above and below the "real body" (the distance from the open to the close) are the "shadows" and they tell us where traders rejected prices.
Traders rejected the highs on the first two days of trading and the lows on day three. On Wednesday the price action was more balanced and the real body was small which suggests that bulls and bears were more in balance. The move today could be pivotal.
In this hourly candlestick chart, of RVLV, below, we can see how the strength above $42 was rejected while prices were more in balance with small bodies around $32. Notice how volume dried up or diminished in the $32 area?
In this Point and Figure chart of RVLV, below, we can see where the activity has been concentrated.
Bottom line strategy: Trading IPOs is really tricky because of the lack of price history. Reread Cramer's comments above and consider buying strength above $41 only if you can afford to risk below $33.