Key points:
We released our weekly Global Laggards report yesterday . The stocks highlighted in this report are laggards relative to their own domestic markets. We recommend that they be underweighted as they may be vulnerable to further downside risk and underperformance.
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 )
I – Europe Falling Back to a Downtrend
The IShares Dj Stoxx 600 (in a Downtrend – See Page 5) breached its oneyear low yesterday and is now in unchartered territory. This is the second time this year that its follow‐through day failed. We see the 30.70 low of June 2016 acting as the next level of support.
Heavy distribution on Thursday followed a rout in U.S. futures after Canadian authorities arrested Huawei’s CFO at the request of the U.S., delivering a blow to the ongoing peace talks in the China‐U.S. trade war.
The yield curve inversion of the five‐ and three‐year treasury notes that occurred Monday for the first time in more than a decade added to investors’ worries.
In the wake of Ishares Dj Stoxx 600 weakness, we downgraded France, Germany, Norway, Sweden, Austria, Portugal, Spain and Luxembourg to a Downtrend. A majority of the 17 markets we cover are now in a Downtrend.
II – Defensives Continue to be the Best Bet Right Now
Amid extreme volatility with multiple variables like Italy’s debt crisis, a slowdown in the U.K. housing market, Brexit, etc., defensive stocks continue to relatively outperform the market. Of stocks with improving Relative Strength Ratings (over the past four weeks) and decent fundamental (SMR>50) that are under accumulation (A/D Rating >0), a majority are from:
1. Utility‐Electric Power, which includes Iberdrola (
), Terna (
), REN (
), and Focus List name Telecom Plus (TEP.GB – see Page 3). The latter continues to display strong technical characteristics and is actionable after breaking out of a 36‐week cup last week.
2. Staples: Among others, included are Unilever (ULVR.GB), Nestle (
), and Diageo (
). From our Focus List, Davide Campari (CPR.IT – See Page 4) is holding well, trading above its 50‐DMA.
3. Telecom: Swisscom (
) and Proximus (
).
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.
I – Failing follow-though day? Europe downgraded to Uptrend Under Pressure
The clustering of distribution days that occurred across the region indicates that the November 7 follow-through day is failing. As a result, yesterday, along with many European markets, the Stoxx 600 was moved to an Uptrend Under Pressure after recording a third distribution day. The index will be downgraded to a Downtrend should it cut below its October 26 low.
Along with the rising number of distribution days across markets, we are not seeing any leaders emerging in the form of breakouts. There are very few places to hide currently.
II – Implementing a defensive approach
We reiterate our cautious stance and advise raising cash if possible or focusing on stocks that offer fundamental defensive profiles. Among other indicators, look at the stock’s O’Neil stability factor, dividend yield, and RS line.
In this report, we provide a list of stocks with these characteristics (see page 3): RS line at a new high, dividend yield greater than 2%, and stability factor less than 30, which guarantees constant earnings growth. These stocks are likely to continue outperforming the general market on a relative basis.
III – Focus: Staples & Healthcare
It is not surprising that the list is dominated by Staples ( e.g. ULVR.GB, DGE.GB ) and large Healthcare Caps ( ROG.CH, AZN.CH ), given their defensive profile and cash flow, which supports strong shareholder return.
From this group, AztraZeneca ( AZN.GB ) was recently added to our European Focus List. We recommend building a position in this name.
In Staples, we reiterate our bullish call on Davide Campari ( CPR.IT ), recently added to the EFL.
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.
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.
The Stoxx 600 failed its attempted rally after closing below its September 7 low. The index is in a Downtrend. We see the next support for the Ishares Dj Stoxx 600 ( EXSA.DE ) at 35.69, i.e. 3% below the index’s current level.
We remain bearish on European equities and do not recommend bottom-fishing until new leadership emerges. The small number of breakouts across sectors highlights the broad-based weakness. There is no place to hide, although Energy and Healthcare have been relative outperformers since the index was moved to a Downtrend on June 21.
Similarly, stocks with Relative Strength lines reaching new highs, i.e. outperforming in a weak environment, remain very concentrated in insurance groups, but these stocks have below average fundamental profiles: Unipol ( UNI.IT ), Scor Se ( SCO.FR ), Asr Nederland ( ASRN.NL ), and Hannover Re ( HNR1X,DE ).
Damage has been particularly visible among extended growth stocks. Although still outperforming the Ishares Dj Stoxx 600 YTD ( EFL +4.05%, versus -2.98% for the EXSA.DE ), our Focus list lost 403bps last week, versus 188bps for the index.
The best ideas from our Focus List to hold are those that still have top Relative Strength Ratings along with positive accumulation (money inflow).
Key points:
We have little faith in the recent market rebound. The Ishares Dj Stoxx remains in a Rally Attempt.
This is largely reflected in the historically low number of stocks on our Focus List. Only three names were added in the past month ( ADYE.NL, NOFI.NO, and DNO.NL ).
The best ideas to focus on this week include:
Thales ( CSF.FR, Focus List ) and Ashtead ( AHT.GB, Focus List ) in Capital Equipment
Dassault System ( DSY.FR, Focus List ) and Nemetschek ( NEMX.DE, Focus List ) in Software
We recommend building position in tech names related to the gaming industry such as Keywords Studio ( KWS.GB, Focus List ) and Evolution Gaming ( EVOG.SE, EFL name )
We again reiterate our bullish call on Healthcare.
