Stock Trade of the Week: Chegg, Inc. (CHGG)

Chegg, Inc. (CHGG) – is an online education company that operates a learning platform designed to help students pass tests, classes, and save money on required materials. Chegg Services offers students required materials such as print textbooks as well as eTextbooks.

The company also offers Chegg Study which helps students master difficult concepts, Chegg Writing to help students format and cite sources in written work, and Chegg Tutors which allows students to reach out for human help. The company is headquartered in Santa Clara, California and was founded in 2003.

The company has seen its earnings grow by a rate of 122% per year over the last three years while revenues have grown at a rate of 12% per year.

The company is set to report third quarter results on November 4 with analysts expecting EPS of $0.08 after reporting EPS of $0.07 last year.

Chegg saw earnings increase by 92% in the second quarter as sales jumped 26%.

Looking at Chegg’s management efficiency measurements, the company has a return on equity of 17.2% and a profit margin of 21.9%.

The ROE is in the average range while the profit margin is a little above average.

One thing that really jumped out about Chegg is the short interest ratio. The current reading is at 11.3 and that is huge. If the company issues a positive surprise next week, short sellers could add tremendous buying pressure to the stock if they are forced to cover their positions.

Analysts are far more bullish with 10 out of 13 rating the stock as a “buy” while three rank the company as a “hold”.

We see on the weekly chart how Chegg has been trending higher over the last three years, but a recent pullback has put the stock in oversold territory. The 10-week RSI reached oversold territory a few weeks back and that was the first time in the last three and a half years that the indicator dropped below 30.

The weekly stochastic readings were in oversold territory as well and they made a bullish crossover toward the end of September.

The stock dropped below the trend line that connected the lows from the last few years and it has now moved back above that line. It is also worth noting that the 104-week moving average held as support for the stock.

Suggested strategy: Buy CHGG with a maximum entry price of $33.50. I would set a target of at least $47.00 over the next 9 to 12 months. I would suggest a stop loss at the $28.50 level.

— Rick Pendergraft

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