Warren Buffett’s maxim, “Be greedy when others are fearful,” is one of the most commonly cited pieces of investing wisdom, but contrarianism is not a strategy in itself. In the case of Zscaler, a painful judgment was reached due to price movements after the company’s financial results.
My hypothesis for this week’s bearish-to-bullish reversal was based on the idea that ZS was being unfairly punished and the 50-day moving average was turning positive. Despite beating expectations for the past quarter on both sales and earnings per share, the stock has been brutally beaten by what’s next. The outlook for fiscal 2027 indicates growth of about 16.5%, which was well below analysts’ expectations.
Compounding the valuation reset was the sudden departure of two senior sales leaders. Changing leadership just when growth is slowing just raises more questions.
Is it a good idea to wait for an answer?
There’s also the macro context that Jim Cramer identified this week. The idea is that institutional investors’ money continues to sell the group in order to track the parabolic movement in semiconductors. The dynamics of this rotation do not take into account the discounted cash flow model. Focus on momentum.
Zscaler, YTD
July’s 165/185/220 call spread risk reversal was set for conservative credit and the underlying stock fell $59, resulting in a loss of approximately $35. While this structure has done its job of limiting exposure to about 60% of the decline suffered by those who own the stock outright, it is going in the wrong direction and could be even more costly if left wrong. The position is currently below its 50-day moving average.
The saying “The first loss is the best loss” is true at moments like this.
Cut your loss and close your position. Defend the capital. There’s probably a better setup, even with ZS, but that’s another deal for another day.
