U.S. stocks on Tuesday posted yet another quiet rise. The Dow Jones Industrial Average did close flat — in fact, exactly flat, to the hundredth of a point — but despite afternoon sell-offs the S&P 500 and the NASDAQ Composite both finished up for the session.
That trading seems appropriate given recent market performance. As noted in this space on Tuesday morning, broad indices entered the day at all-time closing highs — yet the S&P 500 hadn’t posted a 1% single-day rise in a full month. It has been a bull run, but a quiet one at that.
Meanwhile, as noted yesterday, not all sectors or stocks have joined in the rally. Wednesday’s big stock charts highlight more of those weakening names, all in the health and beauty space. All three do have fundamental cases for upside. But all three charts suggest caution going forward, at least in the near-term.
Stryker Corporation (SYK)
The pullback in medical technology company Stryker Corporation (NYSE:SYK) seems almost textbook. A multiple top in the low $220s proved resistance SYK stock couldn’t break, even with a solid Q3 report on Oct. 29. A post-earnings sell-off pushed the stock below moving averages, raising downside risk.
Then the company’s acquisition of Wright Medical (NASDAQ:WMGI) proved a downside catalyst. And back at $200, SYK stock looks intriguing from a fundamental standpoint but questionable from a technical perspective:
- Obviously, even with higher-than-usual volume, SYK hasn’t seen investors rushing in to buy the post-acquisition dip. And Stryker stock now sits below the 200-day moving average, which often can provide support. Clearly, the market isn’t sold on the Wright deal, given that Stryker offered a 40% premium in cash. A similarly muted reaction to Q3 earnings after which Stryker raised the low end of its full-year guidance implies relatively modest investor confidence at the moment.
- Longer-term, there is a “buy the dip” case here. Stryker’s past acquisitions generally have worked out well: this has been one of the best stocks in the market of late. SYK stock has more than tripled since the beginning of 2013, during which time it has been an aggressive acquirer. Investors might well argue, with some justification, that Stryker has earned the benefit of the doubt at this point.
- That said, SYK still trades at 22x 2020 earnings per share estimates, a premium to both larger peer Medtronic (NYSE:MDT) and smaller medical appliances manufacturer Zimmer Biomet Holdings (NYSE:ZBH). The Wright deal likely won’t boost earnings until 2022. The first of our big stock charts suggests investors aren’t interested in waiting that long.
There are some similarities between SYK and animal health company Zoetis (NYSE:ZTS). Both stocks have been long-term outperformers: ZTS stock has tripled since the beginning of 2015. Both stocks have declined despite strong earnings reports — and as the second of Wednesday’s big stock charts shows, both may have more downside ahead:
- ZTS stock has broken through support, establishing a bearish pattern of lower highs and lower lows. With moving averages acting as resistance in recent sessions, the next key test seems to be the 200-day moving average around $111.
- Admittedly, here, too, there’s an intriguing bull case from a long-term perspective. Animal health is a growing business, a key reason why Pfizer (NYSE:PFE) spun off the business back in 2013. Zoetis has capitalized on that growth to drive higher earnings and a steadily increasing share price. And, as noted, there was little in Q3 — which included a raised full-year outlook — to suggest a decline.
- That said, valuation is a question mark. ZTS trades at a whopping 29x 2020 consensus EPS estimates. Those estimates suggest 11% growth, which might not be enough to support such a big multiple.
- As far as the industry goes, animal health does seem attractive as more consumers spend more on their pets. Companion animals generated 45% of Zoetis’ 2018 sales, according to the 10-K. (Livestock account for the remainder.) But pet stocks haven’t done all that well of late. The ProShares Pet Care ETF (BATS:PAWZ) has underperformed the S&P 500 so far this year. Names like Chewy (NYSE:CHWY), Trupanion (NASDAQ:TRUP) and Heska Corporation (NASDAQ:HSKA) have pulled back. It’s possible ZTS stock simply got too far ahead of its skis — and that there’s more room for a pullback, as might be the case with the first of our big stock charts as well.
The problem with beauty company Coty (NYSE:COTY) is simple. Coty took on billions in debt to buy 43 beauty brands from Procter & Gamble (NYSE:PG). The deal hasn’t worked out: after paying $12.5 billion in the deal, Coty now has a market capitalization under $10 billion.
That said, COTY stock has shown signs of life this year. Shares have more than doubled from December (and all-time) lows. But the fundamentals suggest some caution — and so does the chart:
Click to EnlargeResistance held firmly above $13 back in May and June. It held again after the company’s Q3 earnings beat last week. This isn’t a new issue either: COTY failed to hold similar levels in 2018, as the weekly chart shows.
- COTY has faded since spiking last week, and there’s an obvious risk that it will continue its reversal and completely fill its post-earnings gap up. Moving averages will need to hold as support, but another aspect of recent trading suggests that may be difficult. Volume has softened substantially after spiking in the first half: recent gains certainly look like a low-conviction rally, which further raises the risk that post-earnings strength will reverse.
- From a fundamental standpoint, there is a case for COTY stock. The forward price-to-earnings multiple sits at a reasonable 16.5x. A 4% dividend yield helps as well. But that debt still is an issue: net debt of over $7 billion is 5.5x trailing twelve-month EBITDA (earnings before interest, taxes, depreciation, and amortization). And with the company guiding for revenues that are flat to down for full-year fiscal 2020 (ending June), that debt is going to stay a problem. In that context, it’s not hard to see why the post-earnings optimism has faded — and why it may continue to do so.
As of this writing, Vince Martin is long shares of Chewy. He has no positions in any securities mentioned.