The U.S. equity market is trading at all-time highs and we remain bullish on the technical trend. In general, we believe the current market trends are unfavorable to shorting stocks. However, we do see some opportunities in shorting laggards as relative shorts. Due to strong bullish momentum in the market, we recommend using tight stops along resistance levels to keep losses minimal.
Author: Heetae Kim
Heetae Kim is a Senior Equity Analyst at William O’Neil + Co., a registered investment advisor serving 400 top-performing institutional portfolio managers worldwide. The firm employs 150 associates in Los Angeles, New York, Boston, San Francisco, and London.
Heetae lends his expertise in growth investing to the U.S. Equities Committee and currently focuses on generating ideas for the firm’s Global Laggards product. He also covers the Americas region and the Retail sector. Heetae has also served on the Global Focus List Committee, which approves all equity recommendations for developed, emerging, and frontier markets. His deep knowledge of technical and quantitative analysis has allowed him to work extensively with alpha capture programs, generating positive alpha returns based on client-specified strategies.
Mr. Kim joined the firm in 2006, after graduating from the University of California, San Diego with a dual major in economics and political science, with an emphasis on international relations. He also holds a Series 65 license. He enjoys traveling, reading and is an avid sports fan. When time permits, he plays basketball and likes watching basketball, football, and baseball.
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Snap Inc. (
) – Technology ($16.5B market cap) – Snapchat, the Company’s flagship product, is a camera application that allows people to communicate through videos and images.
* The stock is finding resistance near its 10-WMA and we believe the stock will trend lower to test the next support level near $11-12 (11-18% downside).
* RS line is at all-time lows.
* A/D Rating of D has worsened over the last three weeks.
* The stock reversed gains for the week on Thursday after news that Twitter was working on a “Snapchat-style” video product. This follows other competitors like Facebook having already copied Snapchat’s features in Instagram.
* Furthermore, reviews for Snapchat’s redesign (still awaiting full rollout) has been largely negative, scoring poorly on app store reviews, according to TechCrunch. Although still early, negative reviews could be concerning considering the importance of the redesign on potential revenue for the Company.
* Their foray into hardware with Spectacles was disappointing and the Company had to write off $39.9M in Q3 2017.
* The Company reported Q3 revenue of $207.9M, well below expectations of $235.5M. User growth also failed to meet expectations in the quarter. It added 5M users compared to expectations for 8M.
* The Company has yet to report positive earnings and expectations for 2018 are for another year of negative earnings growth.
Emerging
Catcher Technology ( CTH.TW ; 2474 :TT ) – Technology ( $8.5B market cap) – Manufactures metal cases for the communications, computer, and consumer electronics industries. Sales of metal casing for Apple ( AAPL ) products account for more than 50% of revenue. Competitors include Taiwan’s Foxconn ( FNN.TW ) and Casetek ( CSL.TW ).
Equity Research
We remain bullish on European markets, but believe there are stocks that will lag market performance. In this report, we highlight various European stocks that are showing increasing technical weakness with the potential for further downside.
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Ambarella (AMBA) – Technology ($1.8B market cap) – Designs system-on-a-chip semiconductor processing solutions used in cameras for the wearables and security markets.
- The stock is breaking below its 40-WMA and 20% off highs. Its A/D Rating has been rolling over as the Company reported negative revenue and EPS growth for Q3 FY2018 in late November 2017. Consensus EPS forecasts for FY2018 and FY2019 were recently revised down.
- The Company’s main OEM customer is GoPro (GPRO). Therefore, Ambarella depends on the success of GoPro’s new offerings. Higher-than-normal customer inventory levels at GoPro have significantly impacted AMBA’s revenue since FY2016. In addition, last year, GoPro began using non-Ambarella chips in one of its recently introduced mainstream cameras, which AMBA anticipates will have a negative impact on its revenue growth in FY2018 and beyond. In FY2017, the revenues for direct shipments to GoPro accounted for approximately 19% of AMBA’s revenue, and revenue for shipments to GoPro’s various ODMs represented an additional 5% of total revenue. Ambarella expects that revenue from GoPro will represent a significantly smaller percentage of its total revenue going forward.
- To offset declining demand from GoPro, AMBA is focusing its efforts on the development of Computer Vision (CV) chips, primarily used for autonomous vehicles and home monitoring. The Company currently derives 8% of revenue from its Automotive business. Excitement around AMBA’s CV chips was high heading into 2018’s Consumer Electronics Show (CES) in Las Vegas. The Company demonstrated its CV technology in its Embedded Vehicle Autonomy (EVA) vehicle, but unlike what we saw with Nvidia (
), no new OEM partnerships were announced. Meanwhile, on the eve of CES, GoPro announced plans to exit the drone business, cut 250 jobs, and cut its Q4 2017 revenue estimate.
- With shares trading at a P/E of 21x currently and 35x FY2019, we believe AMBA will remain under selling pressure until it can prove that the new CV chips are gaining traction in terms of commercialization. We think the stock‘s weakening technical trend will lead to a break of near-term support along its 200-DMA ($53.72). We see the potential for the stock to retest prior lows of ~$40.
Hasbro (HAS) – Cyclical ($11B market cap) – Manufactures traditional and high-tech toys, games, and interactive products. Popular brands include Transformers, Playskool, Nerf, and GI Joe.
- Shares remain under pressure, trading near short-term support levels (~$88). If this level is broken, we view downside of about 10-15% or near $77.
- RS line in decline with RS Rating of 19.
- A/D Rating of D+ and worsening.
- Shares fell on Thursday due to news of “Star Wars” toy sales declining y/y in 2017. Hasbro owns the main license for Star Wars toys. Entertainment-related toys account for approximately 38% of the industry’s revenue and Star Wars merchandise was the top-selling brand with over $700M in sales.
- The Company is the leading manufacturer in a $25B U.S. toy industry, but has been negatively impacted by Toys ‘R’ Us bankruptcy news.
- Toys ‘R’ Us plans to reorganize, which will carry into at least H1 2018. Street estimates could be too optimistic in the coming quarters due to tighter-than-expected inventory controls and retailer uncertainty.
- HAS lowered Q4 revenue guidance to 4-7% due to this uncertainty. Toys ‘R’ Us accounted for 9% of revenues in 2016. Consensus expects Q4 EPS of $1.83 on revenue of $1.7B. The Company is expected to report in early February.
Developed
Morinaga (MF@N.JP) – Food-Confectionary ($2.7B market cap) – Japanese manufacturer of confectionaries & food (caramel, biscuits, chocolate, cocoa, cake mix: 59% of revenue), frozen desserts (ice cream, etc.: 20% of revenue), and health products (jelly drinks, etc.: 17.5% of revenue).
- The stock gapped down 10% on November 10, breaking below its 40-WMA after the Company released H1 earnings that showed top-line growth slowing down in Q2 (+5% vs. +9% in Q1), due to weather conditions. Operating profit growth (+3% in Q2 vs. +16% in Q1) was also disappointing due to higher marketing costs.
- Since earnings, the stock has been trading along its declining 10-WMA and has been under distribution. The RS line has been in a downward trend since June.
- Consensus expects sales deceleration to continue in 2018 (~5%) and earnings to grow at HSD versus a three-year earnings growth rate of 41%.
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Check Point Software Technologies (CHKP) – Technology ($16.7B market cap) – Israeli provider of Internet security software, hardware, and services for enterprises and consumers.
- We see CHKP continuing to lag its industry group and the market overall. We recommend the stock as a relative short paired with leaders showing stronger RS and A/D Ratings. We seeSMYC and CHKP acting weaker than FTNT and PANW.
- The stock gapped down 12% on November 1, 2017 after reporting good Q3 results, however, Q4 guidance was below expectations.
- After gapping down, the stock has consolidated in a sideways range, while finding upside resistance at its downward sloping 50-DMA.
- The Company expects Q4 adjusted EPS and revenue of $1.50 and $505M (midpoint of guidance range), respectively. Top- and bottom-line growth rates have decelerated over the trailing three quarters.
Developed
Skylark (LARK.JP; 3197:JP) – Retail ($2.8B market cap) – Operator of family restaurant chains across Japan. Also sells food and provides delivery services.
- The stock is heavily underperforming the Nikkei as evident in the RS line breaking down to new lows. The stock has a weak RS Rating of 7 and a poor A/D Rating of E.
- The stock is finding resistance at its 40-WMA. Its 10-WMA and the 40-WMA are now pointing lower as the stock is breaking the lows of its recent base. We expect the stock to continue trending lower to test the uptrend line of support along ~¥1450 (9% below current price).
- Monthly SSS and traffic have been negative over the past three months.
- Decembers SSS -1.5%, traffic -3.4%
- November SSS -1.2%, traffic -3.4%
- October SSS -5.1%, traffic -7.5%
- Nine-month operating profit was down 3% y/y. SSS was up 0.9%, driven by average tickets increasing 1.4% offset by traffic decreasing 0.5%.
- Consensus EPS expectations for 2017 have been revised lower. Revenue growth remains relatively subdued at +LSD.
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Walgreens Boots Alliance (WBA) – Retail ($71B market cap) – Operates pharmacy-led health and wellbeing retail stores.
- The stock is finding resistance along a previous horizontal line of support with its RS line breaking down toward new 52-week lows. The stock has been a laggard and we expect this trend to continue.
- The Retail-Drug industry group is ranked one of the worst industry groups, at 188 out of 190.
- WBA sold off after reporting Q1 FY 2018 earnings that beat consensus expectations for revenue and EPS. Total retails sales were down 2.8% w/ comps -0.9%, with declines in consumables and general merchandise and personal care.
- Personal care and general merchandise segment sales may continue to face pressure as consumers can easily purchase these products online and get quick delivery.
Developed
Marks & Spencer (MKS.GB; MKS:LN) – Retail ($6.8B market cap) – Operates a network of stores selling clothing, accessories, homewares, and premium food.
- The stock is trading in a long-term downtrend with its RS line breaking down to multi-year lows. The stock is failing to hold its declining 10-WMA and its Accumulation/Distribution Rating remains poor at D+. We believe the stock will continue to trend down toward new 52-week lows.
- Top-line growth has been relatively stagnant and consensus expectations call for flat earnings growth in FY 2019.
- MKS.GB sold off yesterday on a profit warning from Debenhams (DEB.GB; DEB:LN), a London-based department store chain, which stated that full-year profit would be below analysts’ expectations. DEB.GB fell 14% on the news and dragged down MKS.GB.
- Shoppers continue to shift their spending online, which has negatively impacted brick-and-mortar sales. Marks & Spencer is currently planning on reducing store space over the next five years.
- U.K. consumer confidence has been weak and hit a four-year low in December. Expectations are for sentiment to fall further in 2018. Inflation has been tracking ahead of wage growth and negatively impacting consumer spending.
Global Retail Sector
U.S.
- The U.S. Retail sector has the highest three-month RS Rating out of all sectors. We still see further upside for the sector, driven by improving investor sentiment, increasing technical strength, and benefits from the tax reform.
- Top pick: Five Below (
) and Ollie’s Bargain Outlet (
)
. Both companies remain on trend in terms of consumers seeking bargains and will see a boost in EPS from the tax reform.
- We see poor technical action in Alibaba (BABA), but believe the stock is in the process of a consolidation period that will ultimately end with shares hitting new all-time highs.
EMEA
- The EMEA Retail sector is the fourth-worst performing sector over the past four weeks, but we are seeing increasing momentum and recommend increasing exposure to the sector. We recommend focusing on retail stocks with strong RS Ratings.
- We recommend focusing on Supergroup (SGP.GB; SGP:LN) and B&M European Value Retail (BME.GB; BME:LN), which are both showing increasing relative strength driven by strong top-line and bottom-line growth. Both stocks are emerging from multi-year sideways trends and we believe there is still tremendous upside. Shares are actionable.
APAC
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Hess (
) – Energy ($13.5B market cap) – Engaged in the exploration, development, production, transportation, purchase, and sale of crude oil, natural gas liquids, and natural gas.
The stock broke through its 40-WMA this week and also broke through November lows of $42.72 today, leaving the next downside support level at ~$41. Below that, $38.5 is the next support level.
Despite a 39% y/y increase in revenue, the Company reported an eleventh consecutive quarter of negative earnings in Q3.
The Company is selling non-performing assets in Europe and focusing on developing reserves in the Bakken shale region, which is expected to curb losses in 2018 and 2019. Bakken oil/gas production is expected to grow significantly over the next five years, while management is targeting sharp operating cost reductions as well. However, overall production will still likely be lower y/y in 2017 and 2018 and will likely not see any significant increase until the Company develops its Guyana (South America) assets.
Even with the asset sales, EPS and net cash flow (which turned negative in 2017) are expected to be sharply negative for the next two years as the Company increases investments in Guyana.
The stock‘s EPS Rank is very weak and will likely continue to weaken given consensus expectations for the next two years. Its SMR Rating of E is the worst possible.
Developed
Ryanair (RY4C.IE; RYA:ID) – Transportation ($23.3B market cap) – Provider of low-fare passenger airline services to destinations in Europe.
The stock is failing to hold its 10- and 40-WMA. Its Relative Strength Rating deteriorated to 68 as distribution increased (A/D Rating of D-). We see the stock re-testing its uptrend line of support on the weekly chart at ~€15, which is near recent lows set in October.
The Company reported Q2 FY 2018 results, with fares per passenger falling 10% y/y. The Company upped its expectations for FY fares, but still expects them to be down 4-6%. The Company expects reduced traffic growth in the current year and next year. Monthly growth from November 2017 to March 2018 will slow from 9% to 4% and traffic to March 19 will slow from 142M to 138M (+7% y/y).
Consensus EPS expectations for FY 2019 have been revised lower.
Earlier this week, Dublin-based pilots, part of the IALPA organization, voted in favor of industrial action. Ryanair has been notified of a potential strike up to and including a 24-hour strike on December 20.
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Dorman Products ( DORM ) – Consumer Cyclical ( $2.2B market cap ) – Supplier of automotive replacement parts and fasteners.
- The stock is finding resistance near its 10-WMA, setting up for a move toward 2014 highs ( ~$60 ). Its A/D Rating ( D- ) has consistently remained weak since share prices peaked in June 2017. Relative Strength is making new lows for the year.
- In October, the Company reported Q3 results below consensus expectations. Revenue growth was impacted by 3% due to an inventory reduction initiative from a major customer ( likely AAP ) which began in Q2.
- Additional cutbacks from more customers could be on the horizon due a light demand environment. This could bring more headwinds in the near term.
- The Company missed earnings expectations in three of the last five trailing quarters. Annual expectations have been adjusted downward.
Developed
K + S ( SDFX.DE ; SDF:GR ) – Basic Material ( $4.4B market cap ) – Germany-based salt producer and potash provider.
- The stock is in a trend of making lower highs and lows over the past six months. The RS line is breaking down to new 52-week lows and the stock has been under increasing distribution. We see shares trending lower to the next level of support along ~€17.50.
- Q3 revenue of €726.5M and EBIT of €12.3M came in well below consensus expectations for revenue of €789.6M and EBIT of €16.3M. The Company reported adjusted FCF of -€215.2M.
- Consensus EPS expectations for 2017 and 2018 have been revised lower.
- Potash prices remain in a long-term downtrend and further weakness in prices for fertilizer could put downward pressure on share prices.
Global Laggards
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Electronic Arts ( EA ) – Technology ( $32.5B market cap; $331M ADV ) – Develops videogame software and content for various platforms.
- The stock is rolling over and trading below its 50-DMA. It is currently breaking its 200-DMA, which coincides with lows from the June 10 earnings gap-up.
- Reported mixed Q2 FY 2018 results ( EPS beat/revenues in line ) along with conservative Q3 FY 2018 guidance that was below consensus expectations.
- Many viewed the November 17 release of Star Wars Battlefront 2 ( SWBF2 ) as an opportunity to exceed the Q3 FY 2018 conservative guidance. However, SWBF2 was met with controversy related to in-game/loot box monetization. Pressure from the user base caused EA to disable all in-game transactions related to SWBF2 until further notice.
- In addition to an unhappy SWBF2 user base, a growing number of U.S and European politicians view in-game transactions as gambling that unfairly targets minors.
- We believe that the current issues with the SWBF2 release further hurts the EA brand, which already has a poor reputation within the gaming community. This could negatively impact sales of future games.
Developed
Salvatore Ferragamo S.p.a ( SFER.IT; SFER:IM ) – Consumer Cyclical (€3.8B market cap) – Italian luxury goods company specializing in shoes, leather goods, and ready-to-wear for men and women.
- Shares are trading at their declining 10-WMA and have consistently failed around this level over the past 8 months.
- A/D Rating has been weak and deteriorating over the past two months, along with a declining RS line. RS Rating remains poor at 19.
- Shares gapped down on November 15 after the Company released poor Q3 revenue. They have since have bounced back to their 10-WMA on low volume.
- In Q3, EBITDA margin declined 760bps, 14% below consensus. The Company released flat organic revenue growth, although the sector overall has enjoyed HSD organic growth.
- The stock’s growth profile is broken: the Company has not delivered any revenue growth since 2015, versus a revenue CAGR of 13% from 2010–2015.
