Why Wayfair Stock Obituaries Are Premature

Sentiment got way too dire on W stock after earnings

Wayfair Inc (NYSE:W) gapped drastically lower on Nov. 1, as traders reacted to a quarterly earnings report that had the online furnishings retailer reporting a wider-than-forecast per-share loss, even as revenue topped expectations.The dire reaction to Wayfair's financial results is perhaps most concisely summarized by a Wall Street Journal article published the same day as the sell-off, suggesting "the company's best option may be to look for a buyer."

Wayfair's negative surprise on earnings prompted a number of analysts following the stock to downwardly revise their price targets. But the brokerage community was already pretty firmly planted in the skeptics' camp on W; the stock carries 15 "hold" or "sell" ratings, compared to nine "buy" or better ratings.

Short sellers have likewise put down roots on Wayfair. Some 15.8% of share float is committed to short interest, representing 6.73 times the stock's average daily trading volume -- a formidable supply of bearish bets.

A fact not mentioned in the post-earnings obituaries on Wayfair was the near-surgical precision with which its bear gap was contained by support at its 320-day moving average. This trendline previously offered key support at the stock's March-April lows, and has so far provided a reliable floor during this latest pullback. Note also the key price points clustered just below W's current perch (marked as "S1" and "S2" on the accompanying chart), which serve to confirm our bullish thesis that the downside momentum for Wayfair has largely played out -- and, by extension, that reports of its death are somewhat premature.

At Friday's closing levels, our recommended call will triple in value on a move by the stock back up to $123.40, where it traded as recently as late October. This out-of-the-money option carries implied volatility of just 52.7%, a discount to Wayfair's 60-day historical volatility of 58.6%.