U.S. stocks may have an interesting week ahead. Rising tensions with Iran pressured the market on Friday. The S&P 500 closed the session down 0.71%, its worst performance in a month. A mid-day rally failed, suggesting that choppy trading, at least, may persist in the coming days.
Monday’s three big stock charts focus on names for whom trading already has been somewhat choppy. All three names have seen resistance in the second half of 2019, which sets up interesting outlooks for 2020.
In two cases, there’s hope for a move through resistance, after which a breakout often follows. In another, resistance looks worryingly solid. But all three stocks share two things in common: they will need to find a way to drive positive sentiment, and likely will need some help from the market.
Coca-Cola (NYSE:KO) has stalled out. As a result, the first of Monday’s big stock charts may have some interesting implications for the market as a whole:
- Coca-Cola stock has failed, at least for now, after challenging resistance for a second time. At the moment, it’s difficult to see how that changes. A solid Q3 report in October sent KO stock higher, but the gains quickly reversed. Fourth quarter earnings, likely in mid-February, could provide a spark. Still, it looks like KO stock is more likely to re-test support below $52 than break out to $56 and beyond.
That trading is somewhat interesting in the context of the longer-term chart here. Coca-Cola stock has moved higher in recent years, including a nice move from early 2018 levels. But essentially all of the gains have come from multiple expansion rather than earnings growth. Non-GAAP earnings per share in 2012 were $2.01; the consensus estimate for 2019 is $2.10.
- And so KO stock highlights a key question for the market: at what point does price matter? To be fair, investors are expecting growth to finally accelerate going forward as the company’s transition to a more asset-light model winds down. But this still is a stock trading at 26x this year’s earnings despite a poor long-term growth profile.
- So how investors view that valuation could read across to other consumer names. Should Pepsi (NASDAQ:PEP), which is growing its EPS at a faster rate, merit a premium to a current 24.6x P/E? Mondelez International (NASDAQ:MDLZ) and Colgate-Palmolive (NYSE:CL) are also dealing with near-term growth challenges and have struggled since early September. Those names may need big earnings reports to rally. More broadly, for investors who believe U.S. stocks as a whole has run too far, the first of our big stock charts suggests that valuation concerns are starting to build, at least in some parts of the market.
The Trade Desk (TTD)
Shares of The Trade Desk (NASDAQ:TTD) have failed to clear resistance. But the second of Monday’s big stock charts suggests TTD stock should be able to break out:
- Shares have shown strength in recent sessions, on decent volume, one of several bullish indicators. TTD saw a golden cross a couple of weeks ago, with the 50-day moving average crossing above the 200-day. There’s even something close to a cup and handle formation of late. The chart suggests that TTD is gathering momentum for another run at $280 following a bounce of the 20DMA.
- Fundamentally, TTD stock is not cheap, or close to cheap. But as I wrote last month, it looks like one of the more attractive growth stocks in this market. The opportunity in online advertising should be enormous as share gains by Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Facebook (NASDAQ:FB) are starting to slow. And The Trade Desk has a clear competitive edge over other rivals thanks to its buy side-only model.
- That said, market dynamics will be important. TTD looks attractive in the context of current valuations among growth stocks. But those valuations may not hold; indeed, the declines in The Trade Desk stock that began in late July came amid a sell-off among high-multiple, high-growth stocks. TTD has a good chance to break through resistance and break out again, but it will need the broader market to cooperate.
SAP SE (SAP)
German software company SAP SE (NYSE:SAP) doesn’t get the attention that its $168 billion market cap would imply. But the third of our big stock charts suggest the stock could see a breakout in 2020:
- The chart here isn’t perfect, by any means. But a nice gap up last week on big volume pushed the stock back above near-term moving averages, which could provide support. The gentle fade from early November highs, following a big spike up after preliminary third quarter results in October, looks a bit like a pennant formation. Those usually are continuation patterns, which means SAP could have another rally ahead.
- Fourth quarter results, likely due at the end of January, could be the catalyst. In conjunction with the Q3 report, SAP announced a cloud migration partnership with Microsoft (NASDAQ:MSFT). That should allow the company to keep customers who want to transition from SAP’s legacy on-premise applications. And it should help growth in 2020, potentially expanding the multiple assigned SAP stock.
- Again, the question is valuation. A 22x multiple to current 2020 estimates is not necessarily cheap for a large-cap software name. SAP stock already has incorporated at least some of the good news in Q3 — which means the company will need to deliver another beat with fourth quarter results to bust through resistance.
As of this writing, Vince Martin has no positions in any securities mentioned.