After the last few weeks, trading Thursday seemed almost normal. Following eight straight sessions in which the S&P 500 had moved at least 4.9%, U.S. stocks moved gently higher.
To be sure, there were intraday fireworks, as early losses reversed and midday gains faded. Overnight futures presage potential declines on Friday. The VIX, often referred to as the ‘fear gauge’ for the market, remains at an enormously elevated 72. Any investors who believes the worst is over probably is being too optimistic.
Still, it does seem like U.S. authorities are getting their arms around the potential impact of the coronavirus. That raises hopes that investors will do the same.
Of course, one key question remains: are U.S. stocks actually cheap? Yes, the S&P 500 declined 29% in a month. But there was no shortage of investors who believed valuations were questionable heading into 2020. Recession risk almost certainly has risen, and the short-term effects of the coronavirus-driven shutdown will add up to be material. There’s a case that most, and maybe all, of that decline is justified.
Friday’s big stock charts focus on three large-cap names for which investors are debating that very question. As they show, the question has not been answered.
Like the market, Nvidia (NASDAQ:NVDA) has found a bit of a bottom. And the first of Friday’s big stock charts does suggest the bottom might hold:
- Most notably, NVDA has managed to find support basically right at the 200-day moving average. That comes after a bearish inverted cup-and-handle pattern played out, and on reasonably solid volume. This does look a chart where selling is starting to peter out. Simply put, Nvidia is starting to consolidate.
- That’s almost certainly good news for the market, because Nvidia stock largely is a valuation play. To be sure, investors can debate how much market share the company might take from Intel (NASDAQ:INTC) in data center, or the pace and value of revenue growth in the automotive business. Still, from a broad standpoint, most investors would agree that the business is attractive; the question is what it is worth.
- There’s still work left to do and NVDA is going to need market sentiment to at least hold up from here. At 23x forward earnings, the stock is expensive enough that it can continue to decline if selling pressure returns to the broad market. But the fact that Nvidia has found temporary support does provide a small bit of optimism that the market itself can do so more permanently.
On the industrial side of the market, however, the news isn’t quite as good. Danaher (NYSE:DHR) has been considered one of the world’s best companies, but as the second of our big stock charts shows, that hasn’t triggered a bottom yet:
- One key reason for concern is that during this decline support barely held. DHR stock fell through the 20-day moving average, blew through the 50DMA, and briefly paused around the 200DMA before continuing its descent. 2019 support around $135 didn’t hold, either. There’s really little evidence right now that buyers are on the way.
- One possible reason why is that DHR stock is not cheap. This is an industrial company that still trades at 20x 2021 earnings per share estimates (estimates which haven’t yet moved, and thus don’t appear to incorporate any impact from the recent economic disruption). That’s not cheap by any historical fundamental standard.
- That fact colors the recent decline as well. As steep as the sell-off has been, the current price doesn’t on its face seem like a multi-year buying opportunity. The stock is down just 8% from where it traded in November. Even with these declines, it’s rallied 43% over the past three years, and 88% over the past five. This is not a 2009-style sell-off. It’s not even necessarily a late 2018-type opportunity.
- DHR highlights the key fundamental worry here: that the huge decline in the market isn’t coming solely because investors are panicking now, but also because the market was far too optimistic in January and February. In other words, this is a correction more than an opportunity. At least for now, that seems to be the tack investors are taking with Danaher stock.
Crown Castle (CCI)
The case for cellular tower operator Crown Castle International (NYSE:CCI) somewhat splits the middle between Nvidia and DHR. CCI hasn’t seen quite the same rally — or the same valuation. But as the third of Friday’s big stock charts shows, it is looking to find support:
- Buyers have stepped in around $130 in the past, most recently in November and December. They will need to do so again. Thursday’s decline, on reasonably steep volume, isn’t necessarily comforting, even though shares did manage to close above the lows.
- To be sure, support may hold. This is not a business whose prospects should be materially impacted by a recession. Wireless operators like Verizon Communications (NYSE:VZ) and T-Mobile (NASDAQ:TMUS) are close to utilities at this point. Consumers are not going to give up their smartphone plans right now.
- Still, it might be that stocks as a whole have to re-rate. And if that’s the case, the decline in Crown Castle stock may have further to go. This simply might be a ‘new normal’ for stocks as the bull market ends. And that in turn means that investors expecting a return to bull market valuations are going to be disappointed.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.