One interesting aspect of this bull market has been the starkly divergent performance among sectors. Broad market gains in the past often have seen the rising tide lift all boats.
For instance, during the dot-com bubble, companies with little or no tech exposure still did rather well. Macy’s (NYSE:M) rose nearly 200% in a matter of years. Ford Motor Company (NYSE:F) more than tripled in less than three.
That hasn’t quite been the case in this market, however. Macy’s and Ford have struggled, as have most of their peers. Energy stocks are plunging at the moment. Old-line consumer staples stocks have posted mixed performance; for every Procter & Gamble (NYSE:PG) that has rallied, there has been a Kraft Heinz (NASDAQ:KHC) that has fallen. The same is true in health care, where stock-picking has been paramount.
Investors mostly have had to be in the right place — and that place generally has been high-growth tech. Certainly, it has not been any of the sectors featured in Tuesday’s big stock charts. All three stocks come from industries that investors have shunned to at least some extent during this market. And all three stocks have fared particularly poorly of late.
In each case, the short-term question now is simple: will support hold?
For the last few years, Merck (NYSE:MRK) had been perhaps the best mega-cap pharmaceutical stock to own. But as the first of Tuesday’s big stock charts shows, performance has reversed in 2020:
- MRK actually is down over 9% so far in 2020 — a reasonably big move for a defensive, low-volatility name. Technically, however, Friday’s modest bounce does suggest the declines may be at an end. $82 clearly is a key level, and support has come in repeatedly around that price. Notably, going back to September, even intraday declines repeatedly have reversed once MRK breached that level.
- Fundamentally, the case gets a bit trickier from a near-term perspective. MRK stock sold off sharply earlier this month on plans to spin off a new business, along with a soft earnings report. The spin-off won’t be completed until the first half of next year, meaning it could weigh on the stock. So, too, could concerns over competition to cancer drug Keytruda, which has been responsible for much of the recent gains in MRK stock.
- Long-term, Merck does remain attractive, and even from a short-term standpoint I’d bet on a bounce here. Support clearly has been established. A forward price-to-earnings ratio just over 13x and a dividend yield just shy of 3% looks attractive.
- It’s even possible that yield is driving support as well; MRK yields exactly 3% just over $81. We’ve seen names like IBM (NYSE:IBM) and Exxon Mobil (NYSE:XOM) hold support at round-number dividend yields. But, as XOM stock shows, even for the market’s largest stocks, a dividend alone isn’t enough. Merck probably needs to re-inspire investor confidence in coming quarters to get a big bounce, even if support looks solid.
In late August, steel manufacturer Nucor (NYSE:NUE) touched its lowest level in almost three years. Almost six months later, NUE stock is back near those levels. In that context, the second of our big stock charts does look concerning:
- NUE stock obviously is in freefall. Meanwhile, the declining 50-day moving average suggests a “death cross” will form this week. Volume has been reasonably heavy during the decline. And fourth quarter earnings in late January, as well as guidance, both looked reasonably strong. Investors sold NUE anyway, which raises a near-term catalyst issue.
- Fundamentally, there are risks as well. NUE trades at 12.5x 2020 consensus earnings per share estimates. A 3.4% dividend yield helps the case as well. But this is a highly cyclical and volatile business. Steel prices have been all over the map, and while Nucor sees improvement early in 2020, earnings still are heading in the wrong direction on a full-year basis.
- That said, Nucor stock is an interesting name to watch at the moment. Steel prices — and steel stocks — are notoriously sensitive to macroeconomic conditions. The decline in NUE so far in 2020 suggests at least some investors see macro risk as rising. But that risk doesn’t appear priced in to the broad market. So is the fall in NUE a possible leading indicator, or an unjustified sell-off?
Auto parts manufacturer BorgWarner (NYSE:BWA) has had an ugly start to 2020, dropping some 21% already. As the third of Tuesday’s big stock charts, support needs to hold:
- Save for a dip this summer, investors have stepped in around the $33-$34 mark. So far this month, BWA stock at least has been able to hold that level. A “death cross” looms here too, which is a risk. But heavy volume since a plunge after Q4 earnings last month suggests there are buyers at this level as well as sellers.
- It’s worth noting that BWA isn’t alone in struggling. American Axle & Manufacturing (NYSE:AXL) fell 14% after earnings last week. Lear (NYSE:LEA) is down double-digits year-to-date. Ford stock is threatening a post-crisis low. General Motors (NYSE:GM) is off 5% so far in 2020.
- Of course, there’s one automotive stock that’s posted spectacular performance: Tesla (NASDAQ:TSLA), which is up 91% so far in 2020. And in that context, the weakness in legacy automotive stocks makes some sense. If Tesla gains share, its rivals — and their suppliers — will struggle.
- In other words, the market isn’t pricing Tesla’s success into just TSLA stock, but other stocks in the sector as a whole. And so an investor wanting to time the bottom in BWA or other auto parts suppliers might be betting against the electric vehicle giant as well.
As of this writing, Vince Martin has no positions in any securities mentioned.