Top Stock Picks for 2021: Software Stalwart Datadog

DDOG is ripe for a short squeeze

CMT, Senior Market Strategist
Jan 27, 2021 at 4:45 PM
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Every day for the next two weeks, we're going to highlight one of Schaeffer's top 14 picks for 2021. Up today a underrated software stock. To access the entirety of the 2021 report, click here.

Software stock Datadog Inc. (NASDAQ:DDOG) recently broke out of a weekly flag pattern after quickly dipping below –and then regaining -- its 20-week moving average. This trendline was strong support during the broad-market selloff in September and could prove to be a springboard once again in 2021. With a year-over-year revenue growth at roughly 62.5% and the company free cash flow positive already, there is reason to believe Datadog stock has room to run.
A short squeeze could keep the wind at DDOG's back. The stock continued to rise in the face of short interest increasing toward all-time high levels. A healthy 8.7% of DDOG's total available float is sold short, and at the stock's average pace of trading, it would take more than three days for shorts to buy back their bearish bets. A shift in analyst sentiment is overdue as well. Of the 18 brokerages covering DDOG, 10 maintain a tepid "hold" stance.
Meanwhile, DDOG premium is affordably priced, which could draw more buyers to the table. This is according to the security's SVI of 56%, which sits in the 7th percentile of all other annual readings, which means options traders are pricing in relatively low volatility expectations at the moment. Plus, the equity's Schaeffer's Volatility Scorecard (SVS) sits at 88 (out of 100), meaning the stock has greatly exceeded option traders' volatility expectations during the past year.
Matthew Timpane, CMT, is a senior market strategist at Schaeffer's Investment Research. With over a decade of experience in investing, he has a knack for finding unique opportunistic risk vs. reward propositions. His areas of expertise include managing multi-strategy portfolios, trend-following, inter-market analysis, and trade execution efficiency. He has helped tens of thousands of traders navigate the world of options trading through live events such as Benzinga Boot Camps, MoneyShow events, and a number of popular trading podcasts. Mr. Timpane earned his B.S. in business from the University of Wisconsin.

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