Trade of the Day: Cemex (CX)

We expect CX to lose momentum and fall back towards support at $6.50 early in August

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Cemex (NYSE:CX), a company that produces and sells cement, ready-mix concrete and other construction materials, reported earnings last week and, on the surface, the news looked pretty good based on the reaction in the stock. The earnings-per-share (EPS) numbers were a bit better than average estimates, but revenue was a little low. Normally, a mixed reaction like this would have led to a drop in the share price. However, promises for future asset sales and additional cost-cutting probably saved the day — temporarily at least.

Following the financial crisis of 2008, CX lost its investment grade status and struggled for several years to refinance and reduce its debt and return to profitability. From that perspective, performance over the last two years has been admirable. However, we think the stock is being overbought by investors who are pricing in too much premium from possible future benefits.

One of CX’s biggest markets is the U.S., and growth rates for U.S. construction are slowing. Just look at homebuilders like PulteGroup, Inc. (NYSE:PHM) or D.R. Horton, Inc. (NYSE:DHI) for examples of the effect that slowing growth is having on demand for construction materials and builders. To be clear, we aren’t suggesting that construction-spending growth rates are negative, but the rate of change is declining quickly.

This may sound like a picky nuance in the state of construction spending in the U.S., but it makes a big difference in asset prices. The last time the rate of change took a dip lower was mid-2017, which brought CX off its highs and down to the lows we saw this May. A very similar situation occurred in mid-2015, which led to bearish selling in the stock.

From a technical perspective, we can see an argument to be made for an inverted “head-and-shoulders” (IHS) pattern, which has bullish implications. However, the $7.20 to $7.50 price range has been a reliable pivot over the last two years, which we expect to act as resistance. The position of the stock looks like a classic “sell the news” opportunity where investors are overestimating the potential gains, and some shorts may have been squeezed.

We expect CX to lose momentum and fall back towards support at $6.50 as a minimum target early in August. Enough implied volatility has come out of the options following earnings that the price is unusually low compared to previous price spikes. That should give us an edge in this trade in the short term.

‘Buy to open’ the CX August 17th $8 Put (CX180817P00008000) for a maximum price of $0.75.

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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/trade-of-the-day-cemex-cx/.

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