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Shopify Inc. Is Ready to Join the 20% Club

It didn’t take long for the ambulance chasers to appear.

The October 4th revelation that Shopify Inc. (TSX:SHOP)(NYSE:SHOP) could be a get-rich-quick scheme brought all kinds of law firms out of the woodwork the very same day. They were itching to make some money off short-seller Citron Research’s allegations the Ottawa-based e-commerce company is nothing more than a “dirtier” version of Herbalife Ltd. (NYSE:HLF).

Ouch; that’s low.

“On October 4, 2017, Citron Research published a stinging report questioning the legality of Shopify’s business practices. The same day, Bloomberg reported that Citron urged the U.S. Federal Trade Commission (FTC) to look at Shopify’s claims that its members can quit their jobs and become millionaires,” stated Hagens Berman Sobol Shapiro LLP’s press release. “We’re focused on the matters Citron Research raises and whether Shopify has misled its investors.”

As I write this on October 5 at the close of trading, Shopify stock is down almost 17% from its October 3rd high of $150.90 and 13% from September 29th’s closing price of $145.12.

Don’t look now, but with one more day of trading left in the week, Shopify could be ready to join the 20% club.

What’s the 20% club?

It’s a small, exclusive group of stocks that lose 20% or more of their share value in a calendar week of trading. Most recently, Equifax Inc. (NYSE:EFX) stock joined the club, losing 25% of its value between September 11 and September 15 as a result of its massive data breach, temporarily exposing the private information of 146 million Americans and 8,000 Canadians.

With the breach closed and Equifax cleaning up its mess, its stock has regained some of those losses. U.S. Senator Elizabeth Warren believes Equifax could profit from this egregious lapse of cybersecurity, because those affected will be more inclined to sign up for Equifax’s fraud protection tools once the free, make-nice peace offering expires.

“Equifax will be just fine,” Warren told former Equifax CEO Richard Smith at a Senate Banking Committee hearing October 4. “Heck, it could actually come out ahead.”

The senator was clearly sarcastic when she made the statement, but the truth is that investors almost always overreact in a similar fashion whether it’s extremely bad news or extremely good news.

A Canadian experience

In September, I discussed the strategy of buying on the dip using First National Financial Corp. (TSX:FN) as an example. The previous October, I’d suggested that investors who could handle the risk buy its stock after a 20% haircut on the premise that investors had overreacted to the changes proposed to the mortgage insurance rules by the federal government. Even First National Financial’s CEO Stephen Smith thought the rules weren’t all that bad.

Since that article last October, First National Financial’s stock is up 14%. It’s not a home run by any means, it’s a solid double nonetheless.

Should you buy Shopify stock even if it doesn’t lose 20% in the week? That’s your call. I use 20% as a cutoff point because, in my experience, I’ve found that those are the stocks that typically rebound over the next few months.

The critical distinguishing point between Equifax or First National Financial and Shopify is that these are profitable companies who’ve been temporarily knocked off course by an unexpected event.

Shopify doesn’t make money, and although I believe it’s a good long-term stock to own, the worst may still be out there, pushing its share price ever closer to $100 and below.

Bottom line

In the case of Equifax, it lost 13% in the first week of September and then 25% the week after making it eligible for the 20% club. The same thing could happen to Shopify if the bears grab hold of it.

I’d wait to see how this shakes out. Patience, in this instance, is a virtue.

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Fool contributor Will Ashworth has no position in any stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

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