PagerDuty (PD): Time To Buy the Dip on This Hot Stock?

Buying the dip can be a solid strategy for generating profits. Trouble is, telling a short-term dip apart from a longer-term correction or the beginning of a downtrend isn’t always straightforward.

However, there can be signs that a stock is poised for near-term success. That’s the case with PagerDuty (NYSE: PD), a company that specializes in incident management and business analytics. If the ticker rings a bell, it’s most likely because we highlighted PD in our Hot or Not section on September 4.

Let me paint a picture for you. PagerDuty has beaten earnings per share (EPS) estimates for 17 quarters in a row. That includes the company’s latest quarterly report, which was released on September 3.

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However, PagerDuty shares are down 7.94% on a year-to-date (YTD) basis. Within the last 5 days, they’ve shed 3.09% in value. The reason why this happened is quite simple — the company missed revenue estimates. By how much did it miss those revenue estimates, you might ask? By 0.15% — and yes, that’s not a typo.

Sure, a 3.09% dip isn’t huge — but it’s also fair to deem this an irrational overreaction, particularly in light of the fact that PagerDuty actually raised its full-year EPS forecast and reaffirmed its full-year revenue guidance.

So, what does Wall Street say? At present, 8 analysts cover the stock — and their ratings are split between 2 Strong Buys, 1 Buy, 4 Holds, and 1 Strong Sell. However, the average 12-month price forecast stands at $18.38, a figure that implies a nice 10.89% upside.

Analyst sentiment surrounding PD is decent enough — but we have reason to believe that Wall Street may be underselling it a bit.

Our quant rating system, Zen Ratings, evaluates stocks based on 115 proprietary factors that correlate with outsized returns. The system tracks roughly 4,600 equities — and PD currently ranks in the top 3%. To be more precise, it’s rated 106th overall.

Why does this matter? It’s simple — stocks in the top 5% are given a Zen Rating of A, and they have provided an average annual return of 32.52% since the early 2000s.

One of the things that this system allows us to do is compare and contrast stocks with their rivals and peers in a quick, efficient manner. PD belongs to the 200-stock strong App industry, which has an Industry Rating of B — and at present, PagerDuty is the 4th highest-rated stock in the industry.

However, we can also take things in the opposite direction — by going a bit more in-depth. Each Zen Rating is a composite score made up of 7 Component Grade ratings, each of which covers a specific area. This allows us to hone in on stocks with the exact characteristics that we’re looking for.

For example — Value is one of PagerDuty’s strong suits. In this category, the stock ranks in the top 15% of the equities that we track. The Financials Component Grade rating measures the strength of a company’s balance sheet — and in this regard, PD ranks in the top 14%.

PagerDuty also ranks quite highly in terms of Sentiment — in the 91st percentile, to be exact. The stock doesn’t have the most stellar analyst coverage — but this Component Grade rating also takes into account factors such as earnings surprises, short interest, and insider action. That last bit is the one at work here — company insiders seem to be quite optimistic, as 17.55% of the insider transactions tied to PD in the past 12 months have been purchases.

Finally, we have the star of the show — Growth. This Component Grade rating factors in sales growth, EPS growth, profit margin improvement, free cash flow momentum, and operating income growth. Through this lens, PD ranks in the top 3% of the more than 4,600 equities that we track.

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So, to summarize — we have a business with a pronounced history of recent outperformance, which stacks up well against others in its industry, trading at an attractive valuation. That business also has great growth prospects, and company insiders are purchasing shares.

It might not be your typical dip — it’s quite unlikely that we’ll see a big bounce in the short-term, but if you have a longer time horizon, PagerDuty is looking like a great buy-and-hold investment.

—> Click here to research PD. You might also want to check out our Zen Strategies Buy the Dip portfolio

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