One rule in this bull market has been that winners keep winning — and losers stay stuck. There have been exceptions: some high-flyers have crashed, and some turnarounds have worked. But, overall, investors have succeeded by betting on growing companies in attractive sectors.
For most of this market, observers have wondered when that would change, and when the long-awaited shift from growth to value would arrive. With cheaper sectors like energy, financials, and retail still weak early in 2020, that shift doesn’t seem to set to arrive any time soon.
Monday’s big stock charts focus on names that have struggled to varying degrees in recent years. For all three stocks, shareholders are hoping for a rebound. But the near-term charts, and long-term trends, both suggest some reason for caution.
Johnson Controls (JCI)
Industrial stocks have been hit-or-miss in recent years, with widely-held names like Caterpillar (NYSE:CAT) and Deere (NYSE:DE) trading mostly sideways. For its part, Johnson Controls (NYSE:JCI) has been a bit of both. But the first of Monday’s big stock charts suggests that a recent pullback should continue:
- The chart suggests near-term trading could get worse. Shares unsurprisingly have pulled back after a double top was established in November and since then, the indicators remain bearish. The pullback after fourth quarter earnings along with a modest bounce establishes a flag pattern after the previous pattern led to more downside. A “death cross” looms, with the 50-day moving average set to cross the 200-day. A narrowing wedge could set up a reversal, but JCI stock needs a reasonably big bounce to challenge the top line of that wedge.
- Fundamentally, JCI stock admittedly looks more attractive. Shares are valued at less than 14x current 2021 earnings per share estimates. A 2.6% dividend yield tops that of the 10-year Treasury bond. And Johnson Control is one of the world’s largest companies, with a nicely diversified portfolio across product lines and geographies.
The worry is that the long-term attractiveness of the business model has done little for JCI stock for years now. Shares trade back where they did in mid-2014. Even with Wall Street seeing sharp earnings growth in coming years. Perhaps, this time, investors come around, but, as the old saw goes, the four most dangerous words in investing are “this time is different”.
For Hanesbrands (NYSE:HBI), the long-term trend has been worse: shares are down over 55% from 2015 highs. HBI stock is even cheaper than JCI, but the second of our big stock charts suggests at least equal reason for caution:
- The good news is that HBI has bounced from late January lows, which established a bullish multiple bottom. But steadily lower highs going back to July create a bearish declining triangle pattern, which suggests increasing pressure on support around $13.50. The bounce of late offers some hope, but HBI still has a lot of work left to do.
- The fundamentals for Hanesbrands look attractive. Shares trade at a little over 8x the midpoint of EPS guidance for 2020. That guidance suggests flat EPS year-over-year, if admittedly with the help of a 53rd week in the fiscal year. HBI stock yields over 4%, which adds to the value-based case for the stock.
- But as with so many ‘cheap’ stocks in this market, valuation hasn’t been enough. One analyst even downgraded HBI to a rare “sell” rating in December, citing slower growth from the Champion brand — a recent bright spot — and the loss of a sales at Target (NYSE:TGT). Hanesbrands needs to prove it can drive real, consistent growth — and until it does, HBI stock may well struggle.
Mohawk Industries (MHK)
Until recently, flooring manufacturer Mohawk Industries (NYSE:MHK) was a major beneficiary of the bull market. At the beginning of 2018, shares had gained 271% in a decade, and well over 1,000% from 2009 lows. But MHK stock since has lost over 50% of its value, and the third of Monday’s big stock charts looks like it could get worse:
- Back-to-back declines of at least 2.5% have sent MHK stock out of a narrowing wedge pattern. A death cross should arrive shortly. The gap up following a well-received earnings report in October now has been filled. Either support from last month needs to hold, or MHK likely heads to $120, with August lows at $110 the next apparent key level.
- Once again, fundamentals look attractive, with a 12x forward price-to-earnings multiple. Mohawk has spent up in the near term to roll out its luxury vinyl tile offering. But LVT may well be pressuring sales of legacy products with higher margins. The market’s concern over the past two-plus years has some validity.
- Mohawk will have a chance to change investor minds on Thursday afternoon with its fourth quarter earnings report. The selling in the last two sessions suggests that at least some investors are looking to get out ahead of that release. Mohawk will have to post an upside surprise this week to establish a new uptrend.
As of this writing, Vince Martin has no positions in any securities mentioned.