This bull market, now nearly eleven years old, has been marked by a preference for growth over value. Particularly over the last few years, “cheap” stocks, at least by traditional fundamental metrics, quite often have stayed cheap. Expensive stocks seemingly only get more expensive.
To market skeptics, that split is the sign of a market that is in something close to a bubble — or at least has decided that “valuation doesn’t matter.” But there’s a somewhat more benign explanation: valuation doesn’t matter that much for quality companies. Whether it’s growth name Shopify (NYSE:SHOP), titans Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), or a consumer play like Procter & Gamble (NYSE:PG), investors are willing to pay ever-increasing multiples for businesses they can trust.
And those investors, for the most part, are selling those businesses that they don’t. Wednesday’s big stock charts focus on three names that have lost that trust of late. As a result, all three stocks have struggled for reasons that make some sense. Now, all three are hoping for a rebound, even though these charts, and history, suggests it may be an uphill climb.
Exxon Mobil (XOM)
Many energy investors would dispute the contention that Exxon Mobil (NYSE:XOM) isn’t a quality company. But XOM certainly hasn’t been a quality stock. Shares are down 25.7% over the past five years and, perhaps more incredibly, now are negative over the past decade. The S&P 500 has nearly tripled over that stretch.
Trading has been any better of late, and the first of Wednesday’s big stock charts suggests at least a risk that it could get worse:
- The good news is that support has held repeatedly just below current levels. The concern is that steadily lower highs have created a bearish descending triangle pattern. Those lower highs suggest increasingly negative momentum, which raises the chance that support will break. XOM stock already touched a nine-year low in October; technically, at least, the chart suggests it could get worse.
- That said, there is at least one fundamental reason why support will hold: Exxon Mobil’s dividend yield. It doesn’t seem like a coincidence that buyers repeatedly have stepped in at current levels, at which the yield clears 5.1%. I argued this summer that $70 might represent a floor for XOM given that yield, and it’s possible that case simply was a couple of dollars off.
- Yield aside, there are real concerns here. Exxon Mobil promised that earnings would double by 2025, but investors clearly are skeptical. Natural gas prices are falling. Equity market investors haven’t quite responded to the short-term rally in crude prices. Those that have instead have looked to Chevron (NYSE:CVX), whose shares have significantly outperformed those of Exxon Mobil, for returns, or BP plc (NYSE:BP) for an even higher yield.
- At less than 19x forward earnings, with promises of steady profit and cash flow growth, it’s tempting to argue that Exxon Mobil stock is too cheap. But, again, “too cheap” hasn’t been much of a bull case for a decade now. Few stocks have better proven that than XOM stock itself, and until value stocks return to favor, sideways trading may be all Exxon shareholders can hope for.
U.S. Bancorp (USB)
U.S. Bancorp (NYSE:USB) picked the wrong time for a weak earnings report. Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) both beat Street expectations with fourth quarter results and weren’t rewarded. As the second of Wednesday’s big stock charts shows, U.S. Bancorp missed estimates, and its stock was punished. The question now is if, and when, investors will step into the decline:
- With Tuesday’s 1.7% decline pushing shares below the 200-day moving average, there’s not much sign of support at the moment. Technically, USB stock seems to have a path to at least $52, where it bottomed in early October, with $51 a more important level. It’s worth noting that volume has been reasonably heavy in recent sessions, which adds some import to the price action so far this year.
- And that price action seems bearish. USB stock already has declined 8.2% so far in 2020 — a much bigger move than it sounds like. According to a finviz.com screen, of 153 financial stocks with a market capitalization over $10 billion, USB has had the 7th-worst performance year-to-date. That’s particularly worrisome trading given that U.S. Bancorp generally has been a safer play, for instance dodging much of the housing exposure that crushed American banks late last decade.
- Admittedly, there is a nice fundamental case for USB stock after the pullback. Shares trade at 12.5x the 2020 consensus earnings estimate, and 1.8x book. A 3.1% dividend yield is higher than that of many peers. But, again, cheap hasn’t been enough in this market — USB stock likely needs another catalyst. With 2020 guidance soft, it’s difficult at the moment to see what that catalyst can be.
Restaurant Brands International (QSR)
After sliding to a 10-month low on Jan. 8, Restaurant Brands International (NYSE:QSR) has caught a bid. The owner of Burger King, Tim Horton, and Popeye’s is hoping for a rebound that echoes the one made by its primary fast-food rival. And the third of our big stock charts suggests some room for optimism:
- It does seem like support has held, even if that support arrived a little bit late. Negative trading following a “death cross” in late November likely has played out, and support could be strengthened by the 50-day moving average. Right now, it seems like QSR at least has a path to continue its rally to the 200-day moving average above $68.
- Fundamentally, the stock looks attractive. QSR stock isn’t necessarily expensive, at about 22x next year’s consensus earnings per share estimate. Same-store sales in Q3, outside of Tim Horton’s were strong, with Burger King benefiting from its Impossible Whopper and Popeye’s chicken sandwich drawing comparisons to Chik-Fil-A.
- MCD) instead. MCD stock does have a higher valuation — but its long history and recent performance seemingly merit that premium. MCD stock itself has posted a rally after an October decline. QSR shareholders are hoping for a similar bounce, but it may take a big fourth quarter report next month to get it. That said, it’s fair to wonder how the chains will perform once those near-term drivers dissipate. And given broad market trading, it’s also fair to wonder if investors simply will choose McDonald’s (NYSE:
As of this writing, Vince Martin has no positions in any securities mentioned.