Warren Buffett’s well-known adage to “be greedy when others are fearful” is often cited as a cornerstone of investment philosophy. However, contrarianism should not be mistaken for a reliable investment strategy. This distinction was clearly illustrated in the recent performance of Zscaler, whose stock experienced a significant downturn following its earnings report.
Investor sentiment surrounding Zscaler initially appeared optimistic, driven by the belief that the company had been unjustly punished. My thesis for a potential bearish-to-bullish reversal was predicated on the expectation that the stock’s 50-day moving average was beginning to trend upwards. Zscaler did surpass expectations for both revenue and earnings per share for the last fiscal quarter. Yet, the positive earnings report was overshadowed by disappointing guidance for fiscal 2027, which projected approximately 16.5% growth—well below analyst forecasts.
The situation worsened with the unexpected resignation of two senior sales executives. Such leadership changes, especially during periods of decelerating growth, contribute to investor unease and raise critical questions about the company’s direction. In light of these developments, one must wonder whether it’s prudent to wait for further clarity.
Additionally, the broader market dynamics highlighted by Jim Cramer cannot be ignored. Institutional investors are reallocating their assets, moving away from tech stocks like Zscaler towards the surging semiconductor sector. This shift is driven more by momentum than by traditional valuation metrics, leading to further downward pressure on Zscaler’s stock.
On the options front, a July call spread risk reversal that was initially implemented for a modest credit has incurred a loss of approximately $35 against a backdrop of a $59 decline in the underlying stock. While the strategy succeeded in limiting exposure, it ultimately misjudged the market’s direction. As the stock has fallen below its 50-day moving average, the saying, “the first loss is the best loss,” becomes pertinent.
Now may be the time to cut losses and close positions to safeguard capital, as better opportunities are likely to present themselves in the future—potentially even in Zscaler itself, but that is a conversation for another day.
