Trade of the Day: Short the Breakdown in ECL Stock

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Ecolab Inc. (ECL) — This company is a leading marketer of water, hygiene and energy technologies and services for food service and processing, hospitality and health care worldwide. But recent acquisitions in the energy sector are likely to increase market volatility.

Even though the company has a strong balance sheet and cash generation, ECL stock appears overvalued.

S&P Capital IQ Equity Research estimate revenue will fall 2.7% in 2015 due in part to oil prices, which hit new lows last week, and a strong U.S. dollar. While sales are expected to grow 5.9% in 2016, these same factors could continue to have a negative impact.

On Nov. 2, Capital IQ changed its opinion on ECL stock to “hold” from “buy” and reduced its 12-month target by $7 to $116. This target price is 22.7 times its analysts’ 2016 EPS estimate of $5.11, which they note is a nearly 50% premium to its peers.

Following a jump from $60 in 2012 to $100 in early 2014, ECL stock consolidated between $100 and about $120 for almost two years. Shares broke to a new high above $122 in October.

But on Friday, ECL stock broke its support line at $115 and gapped through the 200-day moving average at $114.83. The breakdown occurred following three days of below-average volume and one day of what now appears to be a buying climax.

Sell ECL stock short at $115 or higher for a minimum downside target of $106 to $107 for a potential return of at least 7%. If that target is hit, we will evaluate it again based on volume and momentum.

A stop-loss order should be entered at $118 to protect against a breakout and the possibility of a theoretically unlimited loss. As with all shorts, check with your broker for any special restrictions and their ability to borrow the stock on your behalf.

ECL Stock Chart
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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/ecolab-inc-ecl-trade-of-the-day/.

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