U.S. stocks once again closed at an all-time high on Tuesday. As has been the case for most of the past few months, the gains weren’t exactly torrid, with the three major indices increasing roughly two-tenths of a percentage point. Still, optimism reigns heading into the holidays.
But not every stock has joined in the rally. Wednesday’s big stock charts highlight three of those names. All three sit well off 52-week highs, and actually have weakened in recent months while the rest of the market has gained.
A reversal isn’t guaranteed, or necessarily likely, for each of these stocks. But should positive market sentiment hold, they could be targets for investors looking for value in an increasingly expensive market. At the very least, these big stock charts suggest potentially big moves at the end of the year and into 2020.
PayPal Holdings (PYPL)
One curious aspect of the recent rally is that payment stocks like PayPal (NASDAQ:PYPL) have been mostly left out. But that may change. The first of Wednesday’s big stock charts shows a recent bounce that sets up a potential breakout:
- PYPL stock has exited its downtrend and made a bullish reversal out of a descending narrowing wedge. The 20- and 50-day moving averages have been cleared. And volume has picked up in recent sessions. The 200-day moving average is the last potential source of resistance to a breakout; that aside, the chart here looks exceedingly bullish from a near-term standpoint.
- Again, PYPL stock hasn’t been alone in underperforming. Payment stocks have been among the market’s best the last few years: PayPal stock, for instance, has nearly tripled in the last five years. More recent trading has been softer. Visa (NYSE:V) and Mastercard (NYSE:MA) have traded sideways for the past few months. Square (NYSE:SQ) bounced along its lows. There are signs of life, however. SQ stock has rallied and MA stock is challenging all-time highs reached in early September.
- It wouldn’t be surprising to see PYPL stock (and potentially V stock) follow those peers. The sector should in theory do well in a bull market, as it has for the past decade. A 30x forward earnings multiple for PayPal stock isn’t cheap, but it’s reasonable in the context of the 14% profit growth expected next year. Certainly, there are stocks posting lower growth with higher multiples, as Tuesday’s big stock charts showed. In that context, the case for a breakout in PYPL looks even stronger.
Intrepid investors have been willing to step into the steep decline in Macy’s (NYSE:M) stock in recent months. Support has held on several occasions above $14. M stock has rallied in recent sessions after selling off last week following disappointing earnings from rival Kohl’s (NYSE:KSS) and its own subpar third quarter release. But the second of Wednesday’s big stock charts shows that support is getting weaker:
- The multiple bottom in M stock usually would be considered bullish, as support has held repeatedly. But the lower highs create a descending triangle, which creates an increased risk that Macy’s stock will break through that support. The long-term chart is even weaker, showing a steady and concerning pattern of lower highs and lower lows, at least until the last few months.
- To be sure, Macy’s stock seems almost absurdly cheap, at less than 6x this year’s consensus earnings per share estimate. A nearly 10% dividend yield seems to add to the value case. But Q3 earnings were notably weak, and included the company’s second guidance cut this year. Commentary on the Q3 earnings call seemed to imply that the payout could be cut. If earnings are headed for a permanent decline, even a multiple under 6x isn’t cheap enough. After all, Macy’s stock has looked cheap for years, but touched a post-crisis low in August.
- And so the case for M stock seems to come down to its real estate. A partnership with Brookfield Asset Management (NYSE:BAM) sparked optimism earlier this year. Hedge fund Starboard Value pushed for real estate joint ventures in early 2016 before exiting its position the following year. If investors see value in the real estate, have trust in management, and stay as bullish as they’ve been of late, perhaps M stock finally can rally. That does seem like quite a few ‘ifs,’ however.
Iron Mountain (IRM)
Fundamentally, data storage real estate investment trust Iron Mountain (NYSE:IRM) looks like a steal. 2019 guidance for adjusted funds from operations (AFFO), a common measurement of REIT profits, suggests a roughly 11x P/AFFO multiple. A 7.5% dividend yield looks attractive as well.
But the third of our big stock charts does suggest near-term weakness, and looking closer there are fundamental concerns:
- Tuesday’s decline pushes the stock out of an ascending narrowing wedge — a classically bearish signal. IRM stock also broke through its moving averages, which leaves little in the way of near-term support. With resistance holding at $34, there’s not much case for jumping in just yet.
- Fundamentally, it’s true that IRM stock is cheap. But there are real risks here. Increasing digital storage limits the demand for Iron Mountain’s services. A plan to pivot to data centers has moved slower than hoped. Ian Bezek last month called IRM stock a potential dividend trap, and he makes a good case.
- And so there’s clear downside risk. A bull market might give IRM stock a reprieve, and better news on the data center front could change the narrative. Still, at the very least, investors might want to wait for a better entry point.
As of this writing, Vince Martin has no positions in any securities mentioned.