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European markets: the lack of direction and leadership offer very little to investors. The low number of new ideas added to the portfolio this month ( only two:DNO.NO and NOFI.NO ) reflects our current bearish view.
Longs: Health Care remains the “sweet spot” in our view. Top Pick: Straumann ( STMN.CH ). Among the Focus List names, Sixt ( SIX2.DE ) and Keywords Studios ( KWS.GB ) are actionable.
Shorts: we reiterate our “Short” idea Renault ( RENU.FR ) and added Unicredit ( UCG.IT ) and Dufry ( DUFR.CH ) to the list.
Attached is the latest Global Laggards report from our analysts.
This report has been curated by our sector analysts to find stocks showing technical weakness. We believe these stocks 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.
The IShares Dj Stoxx600 ( EXSA.DE ) has been trading constructively since it bottomed on June 27. The index has regained its 50- and 200-DMA, but the absence of a follow-through day pushes us to remain cautious. It remains in a Rally Attempt.
Our lack of conviction is also driven by current rotation in leadership.
Momentum among long-term underperforming sectors Financial and Transportation, both displaying average/poor growth characteristics relative to the market, has been improving over the past four weeks.
Among Financials, our recommendations (Focus List) are concentrated in the Fintech/Payment industry. Wirecard ( WDIX.DE ) and Simcorp ( SIM.DK ) are too extended, so we recommend looking at Wordline ( WLN.FR ). Shares are consolidating and trading near the pivot ( €55.15 ). Ex-EFL name NOFI ( NOFI.NO ) is actionable after breaking out of a 13-week flat base.
We do not recommend any stocks in Transportation. DSV ( DSV.DK ) is actionable after the company reported beating figures in Q2 driven by impressive air freight volume growth.
We are concerned that weakening momentum in Autos is spreading to other Cyclical industry groups, especially luxury names.
Former leading stocks and EFL names Kering ( KER.FR ) and Moncler ( MONC.I T) are now trading below their 50-DMA and 12% on average from their recent top, despite releasing strong Q2 earnings.
Other Cyclical names on our Focus List have similar characteristics: Technogym ( TGYM.IT ) and Puma ( PUMX.DE ) are trading below their respective 50-DMA. We recommend holding those names unless they break below key support, i.e. their respective 200-DMA. Basic-Fit ( BFIT.NL ) is re-gaining its 50-DMA today, after the company reported 22% and 26% revenue and Ebitda growth respectively in H1.
We reiterate our bullish view on Healthcare. The sector displays leading characteristics, with 76% of stocks in the group having their 50-DMA in an uptrend. The current average RS Rating of the sector is 66 and has risen the last four weeks from 62 (99 being the best).
From our Focus List, Straumann ( STMN.CH ) is actionable. We recommend holding Vifor ( VIFN.CH ), Swedish Orphan ( SOBI.SE ), and Ipsen ( IPN.FR ).
The Stoxx 600 is attempting to rally, but it is still too early to turn positive. In order for us to move bullish, we are looking for a follow-through day, rising volume, and for leadership to emerge. We are not there yet and the index remains in a Rally Attempt.
Our Focus List is a good indicator of market health. The decreasing number of ideas reflects our cautious stance toward European equities. We have been lightening up our exposure to Cyclical and, adversely, strengthening our exposure to Health Care.
Actionable Focus List ideas in Healthcare include: Ipsen ( IPN.FR ) and Swedish Orphan ( SOBI.SE )
The new format for this report introduces a list of Shorts displayed in the Sector Score Cards. It Includes:
Solvay ( SOL.BE ): Solvay’s three divisions suffering from adverse FX and higher raw materials, offsetting volume growth.
Adidas ( ADSX.DE ): Topping characteristics. / Short term momentum eroding / (Too) high expectations from the street.
Renault ( RENU.FR ): Momentum deteriorating due to escalating trade tensions between the U.S. and China / Negative newsflow surrounding the alliance between Renault and Nissan / Highly exposed to EM currencies.
Essity ( ESSI.SE ): Raw material price increases, particularly pulp, putting pressure on margins / Aggressive expectations from sell-side analysts.
Siltronic ( WAFX.DE ):Ongoing concerns over iPhone production adjustments, falling NAND prices, and softer demand in the cryptocurrency space.
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Arch Coal (
) – Energy ($1.6B market cap) – Coal producer with operations in West Virginia, Virginia, Kentucky, and Wyoming.
generates two-thirds of its revenues from the U.S. and one-third from overseas, mostly in Europe/Asia.
Reiteration of short idea from 5/24/18.Shares fell 15% on 700% above average volume after the Q1 earnings miss, breaking through the 200-DMA.
Shares recently failed in an attempt to retake both their 50- and 200-DMA. In addition, the 50-DMA ($84.41) is now below the 200-DMA, creating a declining level of resistance.
Immediate support is at May lows of $76, with the next level of support just below $70. This would be a 13% gain on a short position from current levels. A break above $88 would signal a stop-loss on the short position.
After emerging from bankruptcy in Q3 2016, with a large reduction in debt and operations that were once again profitable, the Company reported five quarters of solid growth.
From Q4 2016 to Q4 2017, it averaged 16% sales growth and 40% EPS growth. It also beat consensus EPS estimates by double digits in four of the five quarters.
However, Q1 2018 EPS missed consensus by 33% as sales declined by 4% and missed consensus by high single-digits. It was hit by a trifecta of lower volume, lower realized prices, and higher cash costs in the quarter.
The Company also lowered guidance for full-year 2018 volume for coking and thermal coal, and raised cash cost guidance by high single-digits.
Consensus now expects sales and EPS to decline an average of 4% and 11%, respectively, for the next eight quarters. Full-year 2018 consensus EPS estimates have come down 26% since the Q1 miss. 2019 consensus estimates have come down by 11%.
Despite pledges by the Trump administration to keep the coal industry alive, competition from natural gas in the U.S., and natural gas and other renewables overseas, will likely continue to erode the industry’s revenues.
U.S. natural gas production is at an all-time high and supply is expected to continue growing along with domestic demand for the next two decades.
Coal production increased in 2017 for first time in three years, but remains 35% below its 2008 peak. However, demand did not increase and is expected to fall by single digits annually going forward. Supply is expected to fall this year, but flatline thereafter, which could put more pressure on prices.
Despite the cheap valuation (7x trailing 4Q EPS), declining earnings for the next few years could create a value trap.
Since our last review two days ago, the Stoxx 600 has not been able to hold its May 31 low of 382.14. Yesterday, the index lost 0.9%, breaching its 100‐SMA. Although volume was lower, we are downgrading the index’s market status to a Downtrend.
This move was accompanied by several downgrades among European countries: France and the Czech
Republic were moved to a Downtrend while the U.K. and Finland were downgraded to Uptrend Under
Pressure.
We reiterate our extremely cautious approach to European equities. Since the Stoxx 600 topped on May
22 after the follow‐through day on April 5, it has been accumulating a high number of distribution days,
translating into a rotation of leadership. Momentum among defensive sectors, namely Staples and
Healthcare, has been rising.
The Stoxx 600’s uptrend has been under pressure since the end of May, reflected by the increasing number of distribution days. This week through Thursday, the Stoxx 600 gained two additional distribution days, bringing its total to six. The index is down 0.46% on a weekly basis, adding to last week’s 1.07% decline. This was its third consecutive weekly decline.
The index is trading near its 50-DMA, which remains a key support level; as long as it holds, the uptrend should remain intact. However, with the recent rise in and concentration of distribution days across different markets, we recommend being very selective in adding new names and sticking to leadership.
