The U.S. market remains in an Uptrend Under Pressure. The S&P 500 bounced off its 50-DMA after a sharp sell-off early last week.
The Nasdaq, already below its key moving averages, is bouncing into resistance at the converging 50- and 100-DMA. The distribution
day count stands at seven and four, respectively, with one day expiring on the S&P 500 this week.
Symbol: LECO
Global Laggards
Highlighted Charts
U.S.: The Chemours Company ( CC ), Aecom Technology ( ACM ), Valmont Industries ( VMI ), Aptiv ( APTV ), Molson Coors Brewing ( TAP ), Halliburton Company ( HAL ), Capital One Financial ( COF ), Henry Schein ( HSIC ), Beacon Roofing Supply ( BECN ), Qurate Retail ( QRTEA ), TE Connectivity ( TEL ), Amdocs Limited ( DOX )
Developed: Upm Kymmene Corporation ( UPM.FI; UPM FH ), Ngk Insulators ( KI@N.JP; 5333 JP ), Mazda Motor ( KO@N.JP; 7261 JP ), Orkla ( ORK.NO; ORK NO ), Equinor ( EQNR.NO; EQNR NO ), RSA Insurance Group ( RSA.GB; RSA LN ), Cochlear ( COH.AU; COH AU ), Seven & I ( SEVI.JP; 3382 JP ), Lawson ( LAWS.JP; 2651 JP ), Infineon Technologies ( IFXX.DE; IFX GR ), Toppan Printing ( PT@N.JP; 7911 JP), Deutsche Lufthansa (LHAX.DE; LHA GR)
Emerging: Hyundai Heavy Industries (HUE.KR; 00950 KS ), Fubon Financial Holdings ( FUB.TW; 2881 TT ), Bim Birlesik Magazalar ( BMI.TR; BIMAS TI )
Stocks worth focusing on in this week’s Global Laggards:
Developed
Cochlear ( COH.AU; COH:AU ) – Health Care; $7.1B market cap – global leader in implantable cochlear hearing devices with ~60% market share.
O’Neil Methodology
- The stock gapped down below its 50- and 200-DMA on February 19 following poor H1 FY19 results. We believe the stock can now be shorted following a low volume rally into the 50-DMA.
- Technical ratings: RS line at a new low, RS Rating of 48, A/D Rating of D-.
Global Laggards
Highlighted Charts
U.S.: Sociedad Quimica Y Minra ( SQM ), Huntington Ingalls Inds ( HII ), Sony Corp American Shrs ( SNE ), Scotts Miracle (
), Halliburton Company ( HAL ), Washington Federal ( WAFD ), Amerisourcebergen Corp ( ABC ), Cracker Barrl Old Cnt St ( CBRL ), Qurate Retail Inc ( QRTEA ), Dave & Buster’s Entmnt ( PLAY ),Juniper Networks ( JNPR ), Vonage Holdings ( VG ), Werner Enterprises Inc ( WERN ).
Developed: Israel Chemicals limited ( ICL.IL; ICL IT ), Kddi Corporation ( DDIC.JP; 9433 JP ), Salmar ( SALM.NO; SALM:NO ), Equinor ( EQNR.NO; EQNR NO ), Daito Trust Construction ( DITC.JP; 1878 JP ), Mitsubishi Tanabe Pharma ( EF@N.JP; 4508 JP ),Lawson ( LAWS.JP; 2651 JP ), Nintendo ( NNDO.JP ; 7974 JP ),Deutsche Lufthansa ( LHAX.DE; LHA GR )
Emerging: Sk Telecom ( SKT.KR; 017670 KS ), Remgro ( REMJ.ZA; REM SJ )
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Cracker Barrel Old Country Store ( CBRL ) – Retail ( $4B market cap ) – operates 659 rustic country-stores, each of which comprise a full-service restaurant, offering homestyle food and a gift shop.
O’Neil Methodology
- The stock is down 17% from its 52-week high and is trading weakly below key moving averages. We see the next support level for the stock at ~$142, which is ~7% below the last closing price of $153.43.
- It has a strong EPS Rank of 71, but is expected to decline going forward, as FY 2019 EPS growth is expected at 4%, which would make it the second consecutive year of low single-digit EPS growth. Further, it has a weak Composite Rating of 57.
- Its RS line has been trending down, and its RS Rating currently stands at 29, and its A/D Rating is weak at D-.
Commentary
- Cracker Barrel reported Q2 FY 2019 results on February 26. Revenue of $811.7M ( +3.0% y/y ) beat estimates of $810M, while EPS of $2.52 (-7.7% y/y) also beat estimates of $2.51. Comparable store restaurant sales growth of 3.8% beat expectations of 1.3% on the back of strong off-premise sales growth in November.
- Even as the comparable store restaurant sales growth was strong, it did not translate into improved margins. Store-level operating margin shrank 40bps y/y to 13.9% on account of higher labor and other operating costs. At the Company level, operating margin was 9.5%, down 20bps y/y.
- For the full year, management has guided for comparable store restaurant sales to grow 1–2%, implying a deceleration in H2 from the H1 average comparable store restaurant sales growth of 2.6%. With persisting labor inflation, operating margin is guided at 9.0–9.3%, compared with 9.7% for FY 2018.
Global Laggards
Highlighted Charts
U.S.: Polyone Corp ( POL ), Trex ( TREX ), Honda Motor Co Ltd Adr ( HMC ), Edgewell Personal Care ( EPC ), Suncor Energy ( SU ), Wintrust Financial ( WTFC ), Mckesson ( MCK ), Signet Jewelers ( SIG ), Papa Johns Intl ( PZZA ), Gamestop Corp ( GME ), Cirrus Logic ( CRUS ), Take-two Interactive Software ( TTWO ), Fair Isaac ( FICO )
Developed: Kyowa Exeo ( KYEX.JP; 1951 JP ), Carsales.com ( CAR.AU; CAR AU ), Husqvarna B ( HUSB.SE; HUSQB SS ), Petrofac ( PFC.GB; PFC LN ), Asr Nederland ( ASRN.NL; ASRNL NA ), Philips Eltn. Koninklijke ( PHIL.NL; PHIA NA ), Inchcape ( INCH.GB; INCH LN ), Citizen Watch ( CW@N.JP; 7762 JP ), NOK Corporation ( IV@N.JP; 7240 JP ), Ns solutions ( NSNS.JP; 2327 JP ), Nippon Express Limited ( NX@N.JP; 9062 JP )
Emerging: Uni-President Ents. ( PRE.TW; 1216 TT ), Shin Kong Financial ( SHK.TW; 2888 TT ), SK Hynix ( HYI.KR; 000660 KS )
Stocks worth focusing on in this week’s Global Laggards:
Trex ( TREX ) – Consumer Cyclical ( $3.6B Market Cap ) – is the leading manufacturer of wood-alternative decking, railing, and fencing products for the U.S. residential and commercial markets.
- The company reported 3Q results that missed top-line estimates while also guiding down for 4Q, with particularly light guidance for the company’s core residential business. Following these results, consensus estimates for 2019 were also reduced.
- We believe top-line growth is likely to decelerate given the slowing home sales market as well as a rate-driven reduction in re-financing.
- The stock fell below its 200-DMA in mid-October and remains below that resistance level. Its Industry Group Rank continues to decline and now stands at 161 of 197.
Global Laggards
Highlighted Charts
U.S.: Lyondellbasell Ind A Nv ( LYB ), Barnes Group ( B ), Criteo SA ( CRTO ), Colgate Palmolive Co ( CL ), Plains GP Hldgs Cl A ( PAGP ), Corporate Office Pptys ( OFC ), Bio Rad Labs Inc. ( BIO ), Autonation ( AN ), Shutterstock Inc. ( SSTK ), Kulicke and Soffa Ind ( KLIC ), Manhattan Associates ( MANH ), Saia Inc ( SAIA ).
Developed: Rio Tinto ( RIO.GB; RIO LN ), Singapore Telecom ( TELC.SG; ST SP ), Nissin Foods Holdings ( NIFP.JP; 2897 JP ), Subsea 7 ( SUBC.NO; SUBC NO ), Partners Group Holdings ( PGHB.CH; PGHN SW ), Recordati Industria Chimica ( REC.IT; REC IM ), Izumi ( IZUM.JP; 8273 JP ), Hitachi Metals ( HM@N.JP; 5486 JP ), Fujitsu ( FT@N.JP; 6702 JP ).
Emerging: Klabin Units ( KLU.BR; KLBN11 BZ ), Mondi ( MNDJ.ZA; MND SJ ), Minor International ( RGRT.TH; MINT TB ), Pegatron ( PEG.TW; 4938 TT ).
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Shutterstock ( SSTK ) – Retail Internet, $1.36B Market Cap – operates an online marketplace for licensed commercial digital imagery for sale to media and marketing agencies. The company serves more than 1.8 million active paying users in 150 countries.
The company’s Enterprise business (40% of revenues) faces an increasingly competitive environment, with y/y sales growth for this segment decelerating from 35% in Q2 to 14% in Q3. This trend is particularly concerning as Enterprise has been the key growth driver for SSTK, while the company’s e-commerce business has only been growing in the single digits.
The stock breached its 200-DMA, previous a level of support, in mid-October before gapping down substantially on October 30 after reporting below-consensus Q3 results and reducing the high end of its guidance range for FY 2018 sales and EPS.
SSTK has missed consensus EBITDA estimates in 7 of the past 8 quarters.
The stock’s RS rating has dropped from 88 to 21 over the past month, while its weak A/D Rating (D+) indicates ongoing distribution.
SSTK trades at 25x next year’s earnings, while estimated 2019 EPS only represents 5% y/y growth.
Global Laggards
Highlighted Charts
U.S.: Royal Gold ( RGLD ), Jefferies Financial ( JEF ), Honda Motor ( HMC ), MGP Ingredients ( MGPI ), Enbridge Energy Partners ( EEP ), Cyrusone ( CONE ), Bio Rad Labs ( BIO ), Sothebys ( BID ), Power Integrations ( POWI ), Q2 ( QTWO ), Allegiant Travel Company ( ALGT )
Developed: EMS-Chemie ( EMS.CH; EMSN TQ ), Legrand ( LRRS.FR; LR FP ), Umicore ( UMI.SE; UMI BB ), Modern Times ( MOTB.SE; MTGB: SS ), Asics ( FD@N.JP; 7936 JP ), Subsea 7 ( SUBC.NO; SUBC NO ), CK Asset ( CKPH.HK; 1113 HK ), Recordati ( REC.IT; REC IM ), Shimamura ( SHIM.JP; 8227 JP ), Canon ( CN@N.JP ; 7751 JP ), Capcom ( CAPO.JP ; 9697 JP ), Ryanair ( RY4C.IE; RYA ID )
Emerging: Klabin Units ( KLU.BR; KLBN11 BZ ), Hero MotoCorp ( HER.IN; HMCL IN ), Samsung Electromechanics ( SEM.KR; 009150 KS ),
Stocks worth focusing on in this week’s Global Laggards:
Developed
Capcom Limited ( CAPO.JP ) – Technology Software ( $2.64B Market Cap ) – develops and publishes video games ( console, online, mobile, and arcade ) and manages amusement arcades.
The stock is currently rolling over after a strong uptrend from late 2017 through September 2018 and facing upside resistance at the 200-DMA. The next level of support is at ¥2,000. RS line is at 52-week lows, RS and A/D Ratings are deteriorating.
The Company reported Q2 FY2019 results on 10/29/18, showing EPS of ¥26.91 ( 0% y/y ), operating profit of ¥5.4B ( +28%y/y ), and revenue of ¥26.1B ( 19% y/y ), all slightly below consensus expectations. Despite strength from Monster Hunter: World ( MHW ), FY2019 guidance remains unchanged and below consensus. The Company sees FY2019 EPS of ¥109.60 ( +10% y/y ), operating profit of ¥17B ( +6% y/y ), and revenue of ¥96B ( +2% y/y ), below expectations of ¥124, ¥20B, and ¥98B, respectively.
Although demand has been strong for MHW across multiple platforms (console, mobile), sales of the game have been halted in China since August. Tencent was informed by Chinese regulators to remove MHW from its PC download service (WeGame) just days after MHW’s debut. The removal was due to numerous complaints regarding MHW’s adult and violent content and how it did not fit into China’s strict gaming regulations.
Since March 2018, China’s regulators have frozen the approval of game licenses amid a government shake-up and concerns over censorship and children’s health. This has impacted multiple video game developers including Capcom.
Despite Capcom already achieving ¥10.5B or 62% of its operating profit through the first half of 2019 and ahead of the seasonally strong holiday season, the Company remained conservative and left its FY2019 operating guidance unchanged at ¥17B.
Global Laggards
Highlighted Charts
U.S.: Univar Incorporation ( UNVR ), Berry Global Group ( BERY ), Nordson ( NDSN ), Toyota Motor Corp ADR ( TM ), Travelport Worldwide Ltd ( TVPT ), Western Gas Partners Lp ( WES ), Regions Financial Corp ( RF ), Chemical Financial Corp ( CHFC ), Alkermes ( ALKS ), The Gap ( GPS ), Sothebys ( BID ), Waters Corporation ( WAT ), Mindbody ( MB )
Developed: Symrise ( SY1X.DE; SY1 GR ), Nomura Research Institute ( NMRS.JP; 4307 JP ), China Unicom ( UNIC.HK; 762 HK ), Kirin Holdings ( KB@N.JP; 2503 JP ), Dcc ( DCC.GB; DCC LN ), Phoenix Group Holdings ( PHNX.GB; PHNX LN ), Novo Nordisk ‘B’ ( NON.DK; NOVOB DC ), Rocket Internet ( RKETX.DE; RKET GR ), Rakuten ( RAKT.JP, 4755 JP ), NextDC ( NXT.AU; NXT AU ), Rentokil ( RTO.GB; RTO LN ), MTR Corporation ( MTRC.HK; 66 HK )
Emerging: Hero Motocorp ( HER.IN; HMCL IN ), Nedbank Group ( NEDJ.ZA; NED SJ ), Quanta Computer ( QUM.TW; 2382 TT )
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Hilton Worldwide ( HLT ) – Leisure Lodging ( $23B market cap ) – Hospitality company operating more than 5,300 properties (~879,000 rooms) through 14 brands across 106 countries. Its brands include Hilton Hotels & Resorts, Waldorf Astoria, Embassy Suites, and Hampton.
The U.S. Leisure-Lodging ( G7011 ) group continues to underperform the general market, reflected by its poor RS Rating and IG Rank of 182 out of 197 groups (1 being the best).
Our bearish call in July was based on concerns about supply surpassing demand growth in the near term, currency volatility, increasing alternative accommodations, rising interest rates, and stretched valuations.
HLT reported Q3 results this week and revenues grew a modest 7.7%. RevPAR grew 2.0%, lagging the 2.5-3.0% expectation. The occupancy rate in the U.S. was 79.1%, down 0.5% y/y. System-wide occupancy was down 0.1% y/y, which reinforces our belief that demand has topped.
HLT remains under distribution: RS line at multi-year lows, RS Rating of 21, and A/D Rating of E. Next level of support is ~$61.
Global Laggards
Highlighted Charts
U.S.: Arcelor Mittal Cl ( MT ), News Corporation ( NWS ), Hyatt Hotels ( H ), Schlumberger Ltd ( SLB ), Packwest Bancorp ( PACW ), Varian Medical Systems ( VAR ), Cheesecake Factory ( CAKE ), HD Supply Holdings ( HDS ), Finisar Corporation ( FNSR ), Pegasystems ( PEGA )
Developed: Orica Limited ( ORI.AU; ORI AU ), Nidec ( NDEN.JP; 6594 JP ), Telefonica ( TEF.ES; TEF SM ), Salvatore Ferragamo ( SFER.IT; SFER IM ), Kose ( OSEC.JP; 4922 JP ), Inter Pipeline Fund ( IPL.CA; IPL CN ), ASX ( ASX.AU; ASX AU ), Sonova ( SOON.CH; SOON SW ), Compass Group ( CPG.GB; CPG LN ), Rocket Internet ( RKETX.DE; RKET GR ), Brother Industries ( BI@N.JP; 6448 JP ), Square Enix Holdings ( ENIX.JP; 9684 JP ), Ana Holdings ( ANAW.JP; 9202 JP )
Emerging: Larsen & Toubro ( LST.IN; LT IN ), Sun TV Network ( NSV.IN; SUNTV IN ), Lg Electronics ( JHD.KR; 066570 KS ), Shin Kong Financiual Holding ( SHK.TW; 2888 TT ), Quanta Computer ( QUM.TW; 2382 TT ), SK Holdings ( C&C.KR; 034730 KS )
Stocks worth focusing on in this week’s Global Laggards:
U.S.
HD Supply Holdings ( HDS ) – Retail ( $7B market cap ) – Industrial distributor in North America
HDS shares have come under pressure since the Company reported Q2 FY 2019 results on September 5 and are now 16% off highs. The next level of support is at ~$35 (-10%).
For the quarter, HDS delivered revenue and adjusted EPS growth of 18% and 90%, y/y, respectively, to $1.6B and $0.74. For the full year, it raised its guidance and now expects sales to reach $5.95B-6.00B, compared with $5.12B in FY 2018.
Despite the beat-and-raise quarter, we believe the market is concerned about margin compression, which is expected to continue in the near term.
For Q2, gross margin was down 100bps y/y to 38.9%, out of which 40bps was attributed to the product mix following the acquisition of A.H. Harris by the Company’s Construction and Industrial business ( 49% of Q2 FY 2019 revenue ). In the Facilities Maintenance segment ( 51% of Q2 FY 2019 revenue ), gross margin declined 50bps from a high base due to higher growth of lower-margin HVAC sales and installation and the property improvement business.
HDS is expected to meet its target of revenue growth of more than 300bps above that of the market. For FY 2019, the Company sees its end markets growing ~3%, a key assumption of which is mid-single digit growth in the residential construction market. In our view, residential construction market growth will slow going forward on account of the rising interest rates in the U.S., which will impact the Company’s prospects.
If the Trump administration’s proposed tariff hike to 25% on $200B of Chinese imports goes into effect, it will put further pressure on the Company’s gross margin.
Developed
Kose ( OSEC.JP; 4922:JP; $9.3B market cap ) – Personal care company whose products include cosmetics, skin care, and hair care
Expected Slowdown in Earnings Growth — Japanese Tourism Badly Affected
Kose relies on its international presence for its sales. As of Q1 FY 2019, about 26% of revenues were international. Including sales made to consumers touring in Japan, international customers represented 35% of total sales.
Per data from Japan’s National Tourism Organization, the number of visitors to Japan fell 5.3% y/y in September, the slowest growth since January 2013. Tourists from China fell 3.8%, while visitors from South Korea plunged 14%. The primary reasons for the decline include natural disasters such as earth quakes and typhoons.
This impacted Japanese companies that have revenue exposure to market inbound sales ( foreign visitors to Japan ). With about 10% of Q1 FY 2019 revenues from sales to foreign tourists in Japan, the Company’s Q2 revenues will be affected.
Media reports quoted a customs official announcing that Chinese visitors returning from foreign trips should declare goods if they surpass the tax-exempt amounts for travelers. This is expected to negatively impact the Company’s top-line, as it derives about 76.7% of its revenues from the cosmetics segment (high prestige), which has the highest margins. The increased scrutiny will deter tourists from purchasing high-end cosmetics, which will also impact margins.
Decaying Technical Factors
With Japanese tourism badly affected, the Company’s EPS growth has been revised down to 18% and 8%, y/y, respectively, for FY 2019 and FY 2020.
A/D Rating has declined to E due to above average selling for the past three weeks.
Sharp deterioration in RS Rating to 39 currently ( versus 75 on August 24 ), reflecting the poor stock performance compared with the markets.
