This decade-long bull market has proven the old investing adage that “the trend is your friend.” Winners generally keep winning; losers struggle to rally. Selling a stock because it’s “too expensive” usually has been the wrong choice, as has buying a stock because it’s “too cheap.”
It remains to be seen whether momentum trading holds in 2020. Whether it does or not, Tuesday’s big stock charts look like potential momentum plays early this year.
All three stocks have made reasonably big moves in recent months. And in all three cases, the chart suggests the 2019 trend will re-emerge in 2020.
General Electric (GE)
General Electric (NYSE:GE) remains one of the market’s more divisive stocks. Bulls see a path to a turnaround under chief executive officer Larry Culp, who took over on Oct. 1 of last year. Bears see a still-unfocused conglomerate with real risk from debt, pensions, and potential hidden liabilities at GE Capital.
The bulls have won the debate of late. The first of Thursday’s big stock charts suggest bulls may score another victory early in 2020:
- GE stock has established a rather clear flag pattern. The huge gains that began after third quarter earnings in late October provide the ‘flagpole.’ The modest downtrend since creates the flag. Flag patterns are classic continuation patterns, and so the chart suggests that the rally from August lows should have another leg ahead. Fourth quarter earnings, likely due around the end of this month, provide a potential catalyst.
- While General Electric stock isn’t necessarily cheap, there is a fundamental case for gains to continue. I argued last year, before Culp’s hiring, that fair value in a breakup was in the $11-$13 per share range. But the sale of GE Biopharma to Danaher (NYSE:DHR) for $21.4 billion was a better-than-expected price. The outlook for GE Aviation remains solid. And it’s worth remembering that GE stock still trades below where it closed the day Culp was hired. The turnaround has made progress since, yet that progress hasn’t been reflected in the GE stock price.
- To be sure, risks persist, and danger lurks, as I wrote last month. There’s still a concern that even a successful CEO like Culp won’t be able to fix all of the company’s problems. Cash flow remains an issue: even improved guidance only suggests at most $2 billion in free cash flow this year, against a market capitalization near $100 billion. But there is a good news here, and a bullish chart. Investors should take a look at General Electric stock — and traders should consider a position ahead of the Q4 earnings report.
The second of Thursday’s big stock charts, VMWare (NYSE:VMW), looks like GE in reverse. That’s probably not a good thing from a near-term standpoint:
- VMW, too, has established a flag pattern following a sell-off after its fiscal third quarter report toward the end of November. But in this case, a continuation pattern suggests another leg down after recent weakness. Meanwhile, VMW stock is hugging the support line of a narrowing wedge, and a downside exit would project a sell-off. If the stock stumbles at all, the technicals here look exceedingly negative.
- Fundamentally, the news looks a bit better, if still mixed. The stock is cheap, but risks abound as the company tries to pivot to the cloud. That won’t be an easy task. Microsoft (NASDAQ:MSFT) managed that transition beautifully. For the likes of IBM (NYSE:IBM) and Oracle (NYSE:ORCL), success has been harder to come by. VMWare’s competition — which now includes IBM after its acquisition of Red Hat — will make its shift difficult, a key reason why shares are down over 25% from May highs.
- The chart certainly suggests that investors at the least are concerned. And while I see the case as fundamentally attractive — I’m long VMWare’s majority owner, Dell Technologies (NYSE:DELL), albeit with some of the VMW exposure hedged — I wouldn’t be surprised to see VMWare stock get cheaper at some point in the first half of 2020, perhaps after its own earnings report in late February or early March.
Conagra Brands (CAG)
- The third of Thursday’s big stock charts isn’t quite the perfect flag pattern seen with GE, but it does share those characteristics. CAG actually has drifted higher in recent sessions after initially giving back some of its gains, albeit on low volume.
- Fundamentally, the case here still seems to hold. Conagra stock trades at a reasonable 15x forward price to earnings multiple, and yields almost 2.5%. Raised full-year guidance suggests solid profit growth after a disappointing fiscal 2019, and inspires confidence in the company’s fiscal 2022 targets — which likely would drive upside from current levels.
- And so there’s a case both in the chart and in the fundamentals that CAG at the least can challenge 2018 highs above $38. As long as Conagra keeps delivering, upside should follow.
As of this writing, Vince Martin has no positions in any securities mentioned.