Trash isn’t usually so trendy, but Waste Management (NYSE:WM) has been all the talk as of late.
For those that didn’t catch it, WM shares were included among several year-end short-covering candidates that we listed in late December. The list identified companies that were trading with strong technical trends that were likely to get the short sellers scrambling to cover their losing positions.
For what it’s worth, the majority of the stocks identified that day — names like Expedia (NASDAQ:EXPE), Lennar (NYSE:LEN) and Leggett & Platt (NYSE:LEG) — have been outpacing the market through January with the help of the short covering rally.
So, back to WM and why its shares prices spiked Monday. As indicated in December, the shorts were heavily betting against the stock with eight times its average daily volume sold short. (Typically, we look at stocks with short interest ratios higher than five or six as short squeeze candidates.) But while the high short interest is good, it’s not typically enough to get a stock to jump out of its shorts (pun intended) they way WM shares spiked lately. You really need a catalyst.
Enter the WM chart.
In this case, we’re looking at a weekly chart of the company to get some perspective on what might have spooked the shorts. It’s no secret that traders like to watch round numbers — in this case, $35 (identified with the red line). Since breaking below this level in mid-2011, WM shares have been rebuffed at their attempt to break higher than $35 twice lately. Put simply, the break above this handy round-number resistance level is what acted as an ignition to the short-covering rally that has helped to bolster WM returns through January.
So, now that we know what drove WM to its recent spike, the question remains: How do we play Waste Management from here?
Conveniently, WM is set to announce earnings in a few weeks on Valentine’s Day. During the past year, the company has been in-line with analyst expectations. This quarter’s results are expected to show a bottom line profit of 60 cents per share — the same number analysts expected a quarter ago.
“Street Sentiment” runs low on WM, which is good for the bulls as it means that it is easy for WM to impress. Currently, 0% of the analysts tracking the stock have it ranked a “buy.” That’s right … zero! 77% rank it a “hold” and the remaining 23% have it in their books as a “sell.”
The shares have put in a choppy performance over the last year as WM has been mired in a trading range between $32 and $35, but the recent breakout above $35 might be ready to ignite more than a short squeeze.
We’re expecting the market to test the $35 level on WM during the next few weeks as the broader market works off some overbought conditions. Expect to see WM try to hold the $35 level as support during this pullback, which will then be a sign to the bulls that the stock is ready to make an intermediate-term run at its 2007 highs around $40 (a 14% run).
We expect this move to occur on positive fundamentals from the upcoming earnings report, which should garner the attention of the analyst community and likely drive some positive comments or upgrades. From there, the negative sentiment on WM should really begin to unwind.
For now, traders should expect to see a price target of $40 achieved over the intermediate-term time frame (typically three to six months) as this market performer starts to attract the attention of the Street.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.