Almost quietly, U.S. stocks have made new all-time highs. At least the S&P 500 has, with the Dow Jones Industrial Average and the NASDAQ Composite not far off.
The Dow and NASDAQ may join the festivities on Thursday. A Federal Reserve rate cut boosted stocks in afternoon trading Wednesday. Blowout earnings from Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) followed after the bell. Just a couple of weeks ago, this looked like a critical stretch, and a critical earnings season for the market. So far U.S. companies have delivered.
That broad market optimism provides an interesting backdrop for Thursday’s big stock charts. Not all of the stocks have been big winners of late. One in fact was one of the bigger losers this earnings season. But each of these big stock charts suggests a path to potential upside — particularly if investor sentiment continues to cooperate.
Pharmaceutical giant Merck (NYSE:MRK) has been one of the most impressive stocks in the market over the past two years. A 58% return over that stretch admittedly has been topped by many other names in this bull market. But MRK has outperformed pretty much every large-cap rival in its industry — many of which still trade below prior-year peaks.
As the first of our three big stock charts shows, the gains have slowed of late. And that puts MRK stock in a critical spot after a two-session, 5% gain following strong third-quarter earnings on Wednesday morning:
- Technically, there’s an obvious path to a breakout here. Recent trading has established a range between support at $82 and resistance at $87. But the longer-term channel remains bullish. MRK stock bounced quickly after dipping 3.8% on Oct. 22 following successful results from a Bristol-Myers Squibb (NYSE:BMY) lung cancer study. Those results suggested increased competition to Merck’s blockbuster Keytruda — but investors quickly shrugged them off. A move through near-term resistance would return the stock to that channel — and that in turn implies upside to $90 and beyond.
- Fundamentally, there’s a case for the rally to continue as well. MRK stock is somewhat expensive by pharma standards, at 17.5x 2019 consensus earnings. But the Street sees profits increasing 11% in 2020. That growth underpins an average price target of $96. Merck increasingly looks like the jewel of mega-cap pharma, and as long as that holds the stock can rally. That’s doubly true given that the sector has rallied nicely in recent weeks.
- That said, there is a risk on both fronts. The multiple top at $87 is a bearish sign. Eli Lilly (NYSE:LLY), which we highlighted in this space last week, saw a similar formation earlier this year. LLY has fallen 15% from its highs.
- Meanwhile, pharmaceutical stocks are rallying — but investors may decide they prefer value plays. The likes of BMY and even Pfizer (NYSE:PFE) look much cheaper, and Merck’s reliance on Keytruda becomes more concerning as multiples expand. If MRK can break through $87, it’s cheap enough to keep rallying. But if it stalls out again, buyers may look elsewhere in the sector for value.
Anheuser-Busch InBev (BUD)
Admittedly, it’s difficult to see the post-earnings plunge in Anheuser-Busch InBev (NYSE:BUD) as anything close to bullish. BUD stock faded into the report — with moving averages providing clear resistance — yet even lowered expectations proved too high. As a result, a 50%-plus rally off December lows has come to an end.
But the second of our big stock charts shows some reason for near-term optimism — while the fundamentals still suggest longer-term caution:
- As it has since March, $80 has held as support. It’s probably too early, and too optimistic, to believe that BUD stock can fill the gap down and return to over $90. But the chart does show that even after an ugly quarter, investors still see value here. Rising optimism toward the U.S. and global economies certainly could help on that front.
Click to EnlargeThat said, the longer-term trend here remains concerning. BUD stock had rallied from December levels, but those levels represented a six-year low. This year’s gains could be a false rally. Even in the near-term, moving averages will again create resistance if BUD can bounce off support.
- Fundamentally, there are concerns as well. The same strategy executed at A-B by 3G Capital has failed spectacularly at Kraft Heinz (NASDAQ:KHC). Looked at a certain way, Anheuser-Busch looks a bit like Kraft Heinz: heavily indebted and serving an industry under potentially secular pressure as beer consumption actually is declining.
- Worth noting: KHC managed to trade at similar mid- to high-teen earnings multiples. But once the story broke, earnings fell and those multiples compress. KHC now trades at 11x forward earnings. A similar multiple would value BUD at $52, 60% below 2016 highs. A bull market can give Anheuser-Busch time to reinspire confidence — but if it doesn’t, 3G could have another disastrous investment on its hands.
PPG Industries (PPG)
Technically and fundamentally, paints and coatings manufacturer PPG Industries (NYSE:PPG) looks like a sneakily attractive play for macro bulls. PPG already has seen a breakout, but the third of our big stock charts seems to signal more upside ahead:
- PPG already has busted through 20- and 50-day moving averages, which set up a move through resistance that had held for several months. A secondary rally to new highs, combined with a reasonable 18x forward price to earnings multiple, suggests that more buyers could arrive to send PPG stock higher.
Click to EnlargeBut the breakout looks even more important in the context of the monthly chart. $120 has held as resistance not just in 2019 — but for several years. PPG’s ability to finally bust through suggests significant pent-up momentum.
- As a cyclical stock, meanwhile, PPG is sensitive to broader economic and market sentiment. That sentiment seems to be going in the right direction. Even rival Dow Inc. (NYSE:DOW), which has disappointed since being part of the DowDuPont breakup, has rallied nicely of late. A market at all-time highs suggests a continued tailwind for the sector — while the charts suggest more upside for PPG.
As of this writing, Vince Martin has no positions in any securities mentioned.