A wait-and-see stock market continues to, well, wait and see. U.S. equities were positive on Wednesday, but modestly so. The S&P 500 did retake a 3,000 level that has generally acted as resistance in recent months. But with earnings season mixed so far, the market simply hasn’t decided which direction it wants to head in.
Of course, relatively flat overall trading, as we’ve discussed, has obscured interesting shifts in key areas of the market. Most notably, there has been a preference for value over growth in recent months, which is a noted reversal from most of this bull market.
As Thursday’s three big stock charts show, however, not all value stocks, or ‘cheap’ sectors, have benefited. With one notable exception, major pharmaceutical stocks look cheap, with a post-earnings sell-off leaving one key name in a very interesting spot. An old-line tech company has faded after value investors stepped in. And a consumer giant, somewhat surprisingly, has declined into earnings despite strength at peers.
To some eyes, all three stocks look like potential opportunities. But these big stock charts suggest some potential caution as well.
Cisco Systems (CSCO)
Cisco Systems (NASDAQ:CSCO) quietly has been one of the better large-cap stocks in the market in recent years. At July highs above $58, CSCO stock had more than tripled in seven years. Those gains came despite often-weak networking demand that pressured other stocks in the sector; indeed, rival Juniper Networks (NYSE:JNPR) has been ‘dead money’ for most of this decade.
But sector weakness has finally made its way to the stock in recent months. CSCO started falling along with the broad market in late July amid concerns about demand. Disappointing guidance given with the fiscal Q4 report added to those concerns, and sent CSCO stock down even further. But, as the first of our big stock charts shows, some investors see value:
- Since the decline, support has held repeatedly at $46. It’s worth noting CSCO stock offers a 3% dividend yield below $46.66. That’s likely not a coincidence. Stocks as disparate as Exxon Mobil (NYSE:XOM) and IBM (NYSE:IBM) have seen support hold at round-number yield levels, which is hardly surprising in a low interest rate environment.
- That said, Wednesday’s decline looks a bit concerning. $46 may have held as support, but declining moving averages have provided resistance. It seems like CSCO is likely to make a move before earnings, either breaking through the resistance — or falling through support.
- Fundamentally, CSCO stock is cheap. But with revenue likely to grow in the range of 2% in fiscal 2020, a valuation at 14x FY20 earnings estimates doesn’t seem unreasonable. It does seem like Cisco is going to have outperform expectations to reverse the declines seen in the last few months.
Eli Lilly (LLY)
The second of our big stock charts, Eli Lilly (NYSE:LLY), is in the eye of the beholder. LLY stock dropped 2.2% on Wednesday despite beating third-quarter earnings estimates and raising full-year guidance. LLY stock touched a 52-week low, falling as much as 7% in midday trading.
But an afternoon rally leaves LLY in an interesting position, both technically and fundamentally:
- Buyers did step in in afternoon trading — as they usually have around the $170 mark going back to July. That does suggest that LLY should be able to avoid further declines.
Click to EnlargeAt the same time, the weekly chart shows a relatively consistent downtrend since March. Support may hold, but that alone doesn’t suggest a bounce. LLY now has dropped 19% from its highs, and it’s not alone.
- A number of major pharmaceutical stocks have pulled back. Pfizer (NYSE:PFE) is down 21%. Merck (NYSE:MRK) has slipped. At the same time, there have been some gainers, with Bristol-Myers Squibb (NYSE:BMY) climbing steadily in recent months, GlaxoSmithKline (NYSE:GSK) breaking out, and AbbVie (NYSE:ABBV) rallying. Like the market as a whole, different stocks have taken different paths.
- But that mixed trading seems a problem for LLY at the moment. Investors looking for value and yield can look to PFE. BMY remains cheap. Merck has been a leader, and GSK has momentum. In the context of the sector, it’s tough to pound the table too aggressively for LLY right now. The chart doesn’t yet show much in the way of near-term upside, either.
Ahead of earnings on Nov. 1, Colgate-Palmolive (NYSE:CL) is headed in the wrong direction. The chart puts a lot of pressure on the earnings report — and so does valuation:
- CL stock isn’t cheap, at 22.5x forward earnings. To be fair, in context, that multiple isn’t all that high. Procter & Gamble (NYSE:PG) sits at nearly 24x on the same basis.
- That said, PG clearly is getting a premium at this point — and an impressive fiscal Q1 report this week shows why. Fellow consumer play Kimberly-Clark (NYSE:KMB), however, posted a disappointing quarter, and tumbled 7%. That stock now trades at almost 19x forward earnings per share.
- And so Colgate’s earnings report seems key. A strong quarter can reverse some of the recent pessimism. It likely would get CL stock above moving averages, which could portend a rebound toward this summer’s highs and a valuation in line with that of PG. Anything less, however, and the concerns that are pressuring CL can mount. Based on the multiple assigned KMB, and a clear downtrend on the chart, the selling pressure on CL stock would no doubt continue in that scenario.
As of this writing, Vince Martin has no positions in any securities mentioned.