Commentary
I – Turning Cautiously Positive
The iShares DJ STOXX 600 is in a Confirmed Uptrend with four distributions days. This week, the index continued
to trade constructively toward its 200-DMA, the next key resistance.
The broad recovery of European Markets year-to-date translates into a rising number of stocks breaking out
(actionable ideas) among all sectors.
Our bottom-up approach continued to drive ideas among Staples ( CPR.IT, DGE.GB, MHG.NO, and GSF.NO ) and
Health Care (AFXX.DE and VITR.SE). However, we have increased our exposure to Technology this week, adding
Nemetschek ( NEMX.DE ) and Dassault Systemes ( DSY.FR ).
Author: Tristan d'Aboville
Tristan d’Aboville is an Executive Director, Research Analyst, managing the European Research Product.
Mr. d’Aboville has more than 16 years of experience in equity research and sales. Since joining the firm in 2012, he has applied his client-centric style with analysts and portfolio managers, anticipating and exceeding their needs. He writes the well-received weekly European commentary, and follows it with a client conference call to discuss findings.
Prior to William O’Neil + Co., Mr. d’Aboville was a top-producing salesperson at Kepler Capital Markets, formerly known as Julius Baer, and at Natixis Bleichroeder, covering European equities for large U.S. institutional clients. He started his career as an equity analyst at Aurel-BGC, later moving to Natixis Bleichroeder, where he became the lead analyst for the European Hotels, Leisure and Catering Sector. He was recognized as a Top Analyst for Predictability & Recommendations by AQ Publications in 2003. Extel named him one of the top three European analysts covering the business services and hotel & leisure industries. Prior to the securities industry, Mr. D’Aboville was an auditor with Arthur Anderson.
Mr. d’Aboville earned a Master of Science in Managerial and Financial Economics from ISC Paris School of Management. Later, he studied Global Affairs at New York University. He is a Certified International Investment Analyst (CIIA).
A sportif, Mr. d’Aboville enjoys kite surfing, sailing, skiing, tennis, chess, and spending as much of his free time as possible with his wife, young daughter, and son.
European Weekly Summary
Key Points
- The iShares DJ Stoxx 600 is in a Confirmed Uptrend since January 4 (follow-through day), with only one distribution day. The index is currently testing its 100-DMA and any break through this resistance would be another positive signal this short-term momentum will persist.
- In this report, we detail our cautiously optimistic view on European markets and recommend gradually increasing exposure to the region as the market trades constructively above key supports. Our bottom-up approach leans toward defensive sectors Staples and Health Care, and indicates it is too early to jump aggressively on Cyclicals (Autos and Luxury stocks). The top picks from our Focus List include Davide Campari ( CPR.IT ), Diageo ( DGE.GB ). Carl Zeiss Meditec ( AFXX.DE ), and Vitrolife ( VITR.SE ).
- In addition to our Focus List, we also list Stocks of Interest, which have solid O’Neil Ratings and Rankings and are trading near pivot. The list includes former European Focus List names, Redrow ( RDW.GB ), Wolters Kluver ( WSG.NL ), and Halma ( HLMA.GB ).
- Lastly, we updated our list of shorts ideas after we removed Essity ( ESSI.BE ) and now look at new potential short candidates (pages six and seven).
Shifting Focus in Consumer Staples Webinar with Tristan d’Aboville and Kenley Scott — January 31, 2019
Consumer Staples’ defensive profile played well in the second half of 2018, with the sector outperforming the weak general market. However, after January’s global market rebound, William O’Neil + Co.’s historical analysis dictates that we shift gears entering 2019. Our focus has turned toward growing Staples segments in Europe (alcoholic beverages, Nordic fish farming) and APAC (Indian fast-moving consumer goods). In this webinar, William O’Neil + Co. Executive Director, Research Analyst Tristan d’Aboville and Global Sector Strategist Kenley Scott will analyze the sector’s current conditions and examine top buy ideas as well as U.S. and global stocks of interest.
Global Sector Report – Consumer Staples
Some highlights from this report:
Our recent study demonstrates the S&P 500 could be poised for a strong run in the next six months, which would lead Staples to underperform the general market. The O’Neil bottom-up approach corroborates this analysis.
That said, we still recommend some areas among Staples that offer growth prospects, and recommend names in each region. We believe these names are likely to outperform their peers based on our methodology.
U.S. Staples: we have concerns about subdued earnings growth in Q4 2018 that is expected to decelerate significantly in 2019.
Top Pick: Procter & Gamble (
)
In Europe, growth prospects for Staples look more attractive, thanks to the alcoholic beverages segment.
Top Picks: Davide Campari ( CPR.IT )
In APAC, leadership has emerged in India’s FMCG market, due to rising consumption of packaged foods, the GST implementation, improving rural demand, and premiumization.
Top Picks: Nestle India ( NES.IN ), Britannia ( BRI.IN ), Hindustan Unilever ( HDL.IN ), and Marico ( MRC.IN )
European Weekly Summary
Key points:
- The iShares DJ Stoxx 600 is in a Confirmed Uptrend since January 4 (follow‐through day), with only one distribution day. To remain constructive in the near term we want to see the index continuing to hold its 50‐DMA.
- However, we remain cautiously optimistic given the poor economic environment, and recommend gradually allocating more risk toward European equities.
- New addition to our Focus List this week: Edenred ( EDEN.FR ).
- Actionable ideas from the Focus List include Davide Campari ( CPR.IT ).
- Outside of the Focus List, stocks of interest include: Marshalls ( MSLH.GB ) and
Interparfums ( ITP.FR ).
European Weekly Summary
Key points:
- The Stoxx 600 is in a Confirmed Uptrend and we recommend gradually allocating more money
toward the region as stocks break out of consolidation. - From our Focus List:
Actionable ideas include Vitrolife ( VITR.SE ), Carl Zeiss Meditec ( AFXX.DE ), and Davide
Campari ( CPR.IT ).
Ideas forming the right side of a base: Givaudan ( GIVN.CH ) and Mowi ( MHG.NO ). - Outside of our Focus List, stocks of interest include: Edenred ( EDEN.FR ) and Ei Group ( EIG.GB ).
Global Consumer Discretionary Sector Update
Key points from the report:
Short-term revival of global Consumer Discretionary is likely to fade
Over four weeks, momentum among Consumer Discretionary stocks has been improving, led by leisure service and apparel manufacturers, reflecting positive sentiment among investors with respect to the ongoing U.S.-China trade talks. However, the sector is still underperforming the general market over 26 weeks in the U.S. and is performing in line with the market in EMEA.
We recommend underweighting the sector, as it is unlikely to outperform the general market in a global economic slowdown. Recent trade data from China and industrial production data from Germany are reminders of the weak economic environment in 2019.
Since our bearish call on Luxury and Lodging in summer 2018, the number of Focus List Discretionary recommendations has fallen considerably. Removals from our Focus List include PVH ( PVH ), Kering ( KER.FR ), Moncler ( MONC.IT ), Page Industry ( PI1.IN ), Canada Goose ( GOOS.CA ), Sixt ( SIX2.DE ), Basic-Fit ( BFIT.NL ), Aeon Fantasy ( AEFA.JP ), Aristocrat Leisure ( ALL.AU ), and Tosho ( T@SH.JP ).
We recently re-added Li-Ning ( LNIN.HK ) to our Focus List. One of the most attractive growth players among apparel shoe manufacturers, Li-Ning operates mainly in China and is benefiting from a buoyant sportswear market. Since it initiated operational changes in 2015, the company has delivered low double-digit revenue and a greater than 30% EPS growth CAGR. This trend is likely to persist on the back of healthy brand momentum, an emphasis on ecommerce, and process streamlining. Li Ning’s EPS growth estimates for 2018 and 2019 are 27% and 33%, respectively.
Actionable Focus List names:
Planet Fitness (
): Since being added in June 2017, shares have not undercut their 40-WMA despite weakness in the U.S. market in H2 2018. The stock’s RS line has been rising to new highs with a positive A/D Rating (money inflow). Currently trading 8% from its 10-WMA, we recommend adding the name to portfolio.
Global Lodging: Don’t catch the falling knife
Since our negative call on Lodging on July 18, the Leisure-Lodging Index (G7011) has lost 17% and is 23% off its 52-week high. However, following the short-term U.S. market rally (moved into a Confirmed Uptrend on January 4), the sector bounced from long-term support (monthly chart) but is still finding resistance at its declining 50-DMA (daily chart).
We do not recommend overweighting the sector yet and reiterate our bearish view. Technically, the Leisure-Lodging index (G7011) continues to have poor characteristics, although it has been improving over the past eight weeks. Of the 27 global Lodging stocks covered in this report, 22 are still trading below their 200-DMA and, on average, display below average technical O’Neil Ratings and Rankings.
Our previously expressed concerns that the lodging industry cycle is nearing its peak remain intact due to supply surpassing demand growth, currency volatility, and a growing number of alternative accommodations.
Third-quarter results led to lower full-year guidance for key players. After their recent drop, average forward valuations appear supportive but are based on forecasts that are still too aggressive, in our view.
We do not currently hold any stocks from the industry on our Focus List.
We recommend looking at Whitbread ( WTB.GB ) in the U.K., which is actionable after breaking out of an 18-week flat base. It’s a defensive play through its leading position (40%) in the budget segment with Premier Inn as well as shareholder return, since it has agreed to sell its Coffee Costa business to Coca-Cola for £3.9B.
We reiterate our bearish call on Hilton ( HLT ) and Hyatt ( H ). Both companies cater to higher-end segments in the lodging industry, which tend to be hit first in a downturn. Hilton continued to lose revenue for the third consecutive quarter and is vulnerable to a downturn with poor operating and adjusted EBITDA margins compared with the industry.
European Weekly Summary
Market Summary
The Stoxx 600 is in a Confirmed Uptrend. The index has made significant progress since the follow-through day on Friday, January 4. The broad index as well as many individual market indices are set to test resistance at their respective 50-DMA. While we look for the index to close above this key resistance level along with an increasing number of breakouts in individual names in order to turn more bullish, the current action has increased our hope for a strong start to the year.
- The number of stocks breaking out (actionable), although still historically low, started to increase this week, particularly in Cyclicals (Pearson ( PSON.JB ), Jm ( JMBF.SE ), and Betson ( BETS.SE ) and Retail ( Whitbread ( WTB.GB ), Greggs ( GRG.GB ) and Ei Group ( EIG.GB )).
- The number of ideas on our Focus List has stabilized. Although it remains at an historical low (currently 13), we have not removed any names due to technical deterioration in the past two weeks. Only Cherry ( CHER.SE ) was removed this week after it received a cash offer from a consortium led by British private equity firm Bridgepoint Advisers. Carl Zeiss Meditec ( AFXX.DE ) was added to the Focus List this week.
- In the past five days, growth sectors such as Cyclical and Capital Equipment have been leading the market, while defensive sectors (Utilities, Health Care, Staples) have been lagging although still outperforming over 52 weeks.
We continue to recommend a selective approach as we wait to see if indices can clear resistance at their respective 50-DMA and consolidate above that level. We will look for leadership to broaden, which would lead to additional ideas being added to the European Focus List.
In the report attached, we provide a list of stocks of interest that have strong fundamental characteristics and are currently setting up well, trading near pivot or breaking out. We recommend taking a deeper dive into these stocks as they may become poised for a strong run should the market confirm its uptrend.
European Weekly Summary
Commentary
I – Europe out of Downtrend but Still Bearish
The IShares Dj Stoxx 600 ( EXSA.DE ) was moved to a Rally Attempt today after holding above its low for three consecutive trading days. However, the index is not showing any signs of a revival, reflected by the lack of stocks breaking out of consolidation and the historically low number of stocks on our Focus List.
As of today, nine of the 17 markets we cover are in a Rally Attempt, and the remainder are in a Downtrend.
II – Defensive or Nothing
Amid extreme volatility from multiple factors such as the continuing global selloff, U.S.-China trade talks, a slowdown in the Chinese market, and declining oil prices, defensive stocks continue to relatively outperform the market.
The majority of stocks with improving Relative Strength Ratings that are still under accumulation (A/D Rating >0) with defensive characteristics, including a high dividend yield, are from Real Estate and Utilities:
- Real Estate: Aroundtown ( AT1X.DE ) and Castellum ( CAST.SE ).
- Utilities: Terna ( TRN.IT ), Red Electrica ( REE.ES ), Elia ( ELI.BE ).
III – Focus List Top Ideas
We added Diageo ( DGE.GB ) to our Focus List this past week due to its defensive nature. The stock has relatively good technical characteristics compared with its peers, with an RS Rating of 89, and positive accumulation, with an A/D Rating of B+. Its Industry Group Rank improved to 13 from 29 in the past nine weeks and it has top defensive profile characteristics: a three-year stability factor of 5, a dividend yield of 2.4%, and an SMR Rating of B.
Telecom Plus ( TEP.GB ): RS line at a new high, RS Rating of 97, a positive A/D Rating, and a dividend yield of 3.2%.
European Weekly Summary
Key points:
Europe: no end in sight: The chance of seeing the Ishares Dj Stoxx 600 breach its Monday Dec 10 low is very high. Such action would send the index back in a Downtrend.
Cash is king – Real Estate remains the best relative out performer. Top defensive plays: Around town ( AT1X.DE ) and Catena ( CATE.SE ).
Still relatively bullish on Nordic fish farmers. In the long run, low supply coupled with strong demand from emerging countries will continue supporting the price of Atlantic salmon. Buy Marine Harvest( MHG.NO )
