Zynga may be setting up for a trade over the intermediate term. We’ll look at the absolute performance and sentiment to outline why the risk/reward favors the long side at current prices. Additionally, ZNGA is non-correlated with the broader market on a rolling 10 week basis, which allows you to maintain a neutral stance on the major indices but still have exposure to individual names.
Sentiment has a lot of room to improve and the conditions present in the stock could potentially lead to a short squeeze.
As of 8/15/14 there were roughly 54 million shares short, representing 7.3% of the float.
Given the 10 day average volume of roughly 17 million shares, it would take 3 full days for shorts to cover.
Additionally, of the 23 sell side analysts covering ZNGA, only 2 have it as rated a buy, with 18 holds and 3 underperforms. This leaves plenty of upside potential.
The current risk/reward in the stock is 4.5 to 1. Downside risk is 20 cents if a stop is placed below $2.70 and the initial target is $3.80.
The risk/reward using the top of the channel target of $4.50 is 8 to 1 if a stop is placed below $2.70.
Both the initial target and optimistic target for this trade offer good risk/reward on the long side given current conditions.