Making a Quick 20% Gain on Funko Stock

Our insider trading indicator came through with short-term profits again. This time we nailed a quick 20% on Funko (Nasdaq: FNKO) in just a couple of weeks.

Funko is a pop culture company that has been on fire. Sales and profits are soaring, and there is very little to thwart that momentum. The company has agreements in place to produce iconic products of today and yesterday for people who can’t get enough of their favorite toy, character or even cereal. And Funko can make new products in no time flat to cater to current trends and whims.

For example, it has licensing agreements with companies like Marvel and distribution agreements with retailers like Walmart and Target. Funko also has a large following on social media and is apparently very good at exploiting sales channels of all types. The company’s revenue growth attests to that!

On Funko’s recent earnings call, it increased guidance, and the shares have responded. The company actually does earn money, and it was trading at less than 20 times this year’s projected earnings estimates of $1.14 at the time I recommended it.

What tipped me off to Funko was massive amounts of insider buying by a private equity fund, followed by more buying from a Funko executive.

But the problem was that the share price was higher than what these insiders were buying their shares for. Not to be greedy, but there is no reason we should be paying up on a stock that has the potential to move up or down 5% in a day.

When I made the pick on May 16, the shares were at $22. Here were my initial thoughts:

I’ve been talking about Funko since earlier this week. And it’s been moving higher. I wanted to see whether there was any more insider buying after the buys that occurred last week. There was. Last night another purchase was reported. This one was for 25,000 shares at $20.69. This recent buying is a great example of cluster buying, which occurs when a series of high-level insiders (officers and directors) buy at the market at varying prices.

That usually indicates there is news of importance coming down the pike or the company is doing better than the market thinks. Still, it can be weeks or even months before we find out, so this is a longer-term play.

There were Funko options available, but they were very expensive – even for a spread trade. So I decided to recommend the stock instead…

Buy a half position in Funko at levels under $21 (we’ll mark the trade at the average price between $21 and the low of that day). That’s right around the average price of all the recent insider trades. Since the market is volatile, we want to save some dry powder to average down if that opportunity arises. As I said, this is a VOLATILE SMALL CAP stock, and outsized moves are a reality.

It’s worth mentioning that I also talked about position sizing when I issued the trade, and it was a quick lesson I think anyone can benefit from learning:

This is a volatile small cap stock, and I urge you to position size accordingly. My standing rule is no more than 4% in any single position and a 25% stop loss as well. That limits your downside to no more than 1% of your portfolio.

A couple of weeks later we closed out the position. Here’s what a couple of members had to share…

War Room Member Darae: “Up 18.6%, nice!!!”

War Room Member LVL: “Made 24%!”

Takeaway: It’s important to note that this gain was on a stock, not an option. A few days ago, we closed out a gain on another stock, Hi-Crush, for gains of 30% in less than four hours.

The point is The War Room has something for everyone. We do stock trades, quick day trades, longer-term options trades, spreads, strangles, ETFs and more. Our philosophy is simple: We’ll look for opportunities wherever they show up to make members money!

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