ARCE - A New Squeeze Pattern Revealed by VSTA (1k average daily volume to 10M)

ARCE - A New Squeeze Pattern Revealed by VSTA

All credit to /u/Joeskunk for this DD from Reddit. Link at bottom. tl;dr ARCE is set up similarly to VSTA, which recently had a major upwards move and is similarly poised for price action.


VSTA is an incredible case study that deserves further scrutiny.

It is a small cap that in the span of a week doubled, from 2.3 to reaching over 5 on Friday. What’s more interesting, it apparently happened without any social media buzz nor company events. Just a low key > 100% move. So what happened?

What follows is my interpretation - and based on that - what I consider a near identical set-up:

  • Brazilian stocks and this company in particular sold off hard this year. Arguably greatly oversold. With QQQ up 30% YTD as of few weeks ago. There is simply no reason to fuck with emerging market technology. Conventional wisdom was big brains trade of the year was US tech, and that’s where traders piled in.

You can see here EWZ (Brazil ETF) trades as almost an inverse to QQQ.

  • Suddenly, roughly two weeks ago taper in unambiguously on the table. The QQQ trade show signs of unwinding, and many of the high-flying tech companies start to get serious haircuts.

Traders shift their mind-set from – now that the QQQ momentum trade is unwinding – what make sense on a valuation basis? We can actually see that when SPY, QQQ, IWM were showing their greatest weakness, that is when the VSTA rally began. Clear sign of rotation.

What is the source for the discrepancy, and which is most accurate? I don’t know.

Forensic endeavors to figure out precise floats rarely turn provide a definitive answer.

Instead, the proof is found in the pudding – namely, how the stock actually reacts to volume.

Let’s use broad strokes to back down to generalizations: (a) there is some indication that VTSA might have an unusual float situation, and (b) pre-rotation there is practically no volume. I mean some days there is like 1k shares traded.

What seems to happen is that as traders suddenly wanted to establish a position – in this low vol, oversold, and potentially tight float – the price started to racquet up very rapidly. We see this occurring from Dec 3 to Dec 9.

My impression is there is nothing that algo’s like more than some low float positive momentum. And collectively, the algos were unleashed on Dec 10. It saw ~10m in vol that day.

To re-iterate. This was a stock that typically sees ~1k in volume over the past months. And it suddenly sees ~10m in vol seemingly out of nowhere.

IMO, this is a phenomenon worth sitting up and noticing. Whatever clusterfuck of conditions that gave rise to this, probably is going to give rise to it again.

Meet ARCE – identical in pretty much every respect to VSTA:

(a) oversold Brazilian company

(b) very low volume

(c) seemingly insanely tight float due to institutional ownership. https://www.morningstar.com/stocks/xnas/arce/quote

from TD

(d) demonstrated strength as a rotation target as SPY, QQQ, and IWM flagged

Bottom line, I think (a) there is a compelling story for this one on a valuation basis, and (b) there are high odds this takes a trip to funky town in the short-term as it encounters a similar dynamic to VSTA.


All credit to /u/JoeSkunk on reddit https://old.reddit.com/r/CandyAssets/comments/rfovve/arce_a_new_squeeze_pattern_revealed_by_vsta/

The Jan 21 $22.5s are $1.10, and $0.88 for the $25s.
Going to pick some of these up during the week.

I’m going to look for an entry sometime this week and pick up Jan 22.5s

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I saw this on reddit. If anyone else did not see Conq reply to this in the trade chat then I will put it shortly.

This post is gibberish, and the guy is pumping shit

Went through @Conqueror’s reddit profile. Don’t see any related comments

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Fixed to specify trade chat

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Doing some digging on $ARCE

What is Arco Platform?
According to their About Us Page:

Arco’s mission is to transform the way students learn, by delivering high quality education at scale. With a historical growth of over 35% per year, the company has been expanding its portfolio and its territorial reach, thus progressively delivering more value to a growing number of schools in Brazil.

tl;dr they’re a Brazilian edutech company.

Why has $ARCE been dumping all year?
At the start of the year, ARCE was trading as high as $40. Today they are at $22.23. Taking a look at their third quarter earnings report on November 29, it looks like COVID has been the main driver of bearishness for this company all year long. Note that before the pandemic back in early 2020, ARCE was trading between $40 to as high as double topping $59.

Net revenues for the quarter were R$183.3 million, a 12% decrease year-over-year, representing a 16% revenue recognition of ACV bookings, impacted by historically weaker seasonality for the 3Q and dropouts caused by the COVID-19 pandemic in the 2021 school year.

It looks like ARCO initially dipped on the Q3 ER results, but has been gaining from the dump probably based on a longer term bull thesis. See next section.

Are they ready to make a comeback?
Playing on the COVID thesis, I think the answer is yes. Brazil cases have been plummeting even during the recent Omicron wave. In contrast, USA cases are beginning to skyrocket. The Q3 ER forecasts a bullish 2022 based on the declination of COVID cases in Brazil. Check it out:

Brazil:

USA:

They seem to be doing a good job with vaccination rates, and yes Omicron is already in Brazil.

Large and Ongoing Institutional Holding
The Reddit DD referenced a 105.78% institutional holding in the stock, which is nuts. Nasdaq indicates 89.52%. Talking with Conqueror about this, the 100%+ number could be from an overlap of filings. Nonetheless, the stock is largely held by institutions.

On December 1, 2021, Arco announced the closing of a large $150M investment by Dragoneer and General Atlantic Partners here. Note that the current marketcap of ARCE is 1.28B, but the investment consists of convertible notes with an equivalent of $29 per share. At $29 a share, the marketcap would be 1.67B. 150M / 1.67B = ~9% stake. However, although the notes imply a significant premium from current stock price, the notes mature in 7 years on November 15, 2028.

Share Buyback Program until January 6, 2023
On January 6, 2021, Arco announced a buyback program of up to 500,000 shares over a 2-year period from January 6, 2021 to January 6, 2023. Announcement

On March 31, 2021, Arco announced a share buyback limit increase up to 2,500,000 shares. Announcement

“The Repurchase Program demonstrates the confidence we have in the fundamentals, strategy and long-term outlook of the Company,” said Ari de Sá Neto, CEO and founder of Arco.

Analyst Price Targets
There are not a lot of analyst price targets, but the 2020 and 2021 PTs indicate lots of upside from current levels. Screenshot below is from MarketBeat

Options Flow
The options chain is very light. Nothing particularly noteworthy here.

I peeped Unusual Whales for weird flows this month. As noted by UW, if I filter the search for showing results greater than 24 hours, UW will only show me larger trades. There is no definition of “larger trades” but here is what I found. All “larger trades” are bullish, but the premiums are not particularly noteworthy, I think.

ARCE vs SPY
This past month, ARCE has been a safe green oasis in the desert of market volatility. Check it out:

image

Technical Analysis
Here is my chart with what I think are key support/resistance lines going back to IPO in November 2018. A break above ~23.55ish to me should signify a clear bullish reversal heading into the $30-$34 range. So far it looks like ARCE is on track to testing at least ~23.55, which is a 6% move upwards in the short-term.

Potential Positions
I am thinking either shares, or April 25c or 30c. The Jans look interesting though to capture short-term upside if retail sentiment picks up. They’re pretty cheap.

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A couple quick observations to add to this one.

The original Reddit DD calls this a “TUTE SQUEEZE”, basically the thesis here as I understand it is that because of its high institutional holdings, it’s going to undergo a “squeeze” when additional institutions attempt to acquire it over the course of the next ??? days/months/years. The reasoning is because when China cracked down on tutoring companies like TAL, institutions were left with a void in their “educational technology stock” budget that they’re going to fill with ARCE stock.

As far as this squeeze theory goes: Nah. The true institutional/insider holdings put this one at around 86-89% held, which is definitely high, but it’s not abnormally high. Secondly, institutions aren’t just waiting around looking for something to dump into after TAL. That money is already reinvested in other things so thinking that there is some sort of cash sitting in a bucket called “education tech” is misguided.

However, I do think that this may be a solid setup for a swing play. It was definitely beaten down during COVID and it looks to be setting up what could turn into a long term trend reversal. I’d be interested in seeing if Brazilian schools are still in the reopening process, or if they’re now 100% back to normal.

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Haven’t been trading ARCE but just checking in on it every now and then. Looks like it’s still on a bullish uptrend and is currently at the ‘bottom’ of said trend. Maybe a decent time for entry, and this pattern would get confirmed if ARCE is green tomorrow.

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Still at the trend line. Testing if the trend is real or not. If you’re bullish on this play, it wouldn’t be terrible to enter here I think? Cut if it actually goes notably below the trend.

I think Joeskunk’s price catalysts in the DD make sense, but I don’t see any sector rotation in the near future into emerging markets and specifically Brazil for the next couple months. Maybe after tapering and a couple rate hikes (June or so), the Emerging Markets sector might be more attractive to investors.

I might watch and f it bounces buy an ATM call 3-6 months out and see how that goes.

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Possible trend confirmation today with the bounce.

3-month chart:

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Regarding current situation in Brazil right now - it’s currently summer break. So nobody is in school until February.

Last semester, schools became fully open however kids had the option to join remotely. Only about a third of kids actually went in-person.

Source: currently in Brazil staying with wife’s family. Talked to her niece about school situation here. City is Recife

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