If investors are seeking the perfect investment, keep on looking. But if you’re interested in a well-positioned value stock wrapped up in a growth narrative, LM Ericsson (NASDAQ:ERIC) should be on your watchlist. Moreover and right now, buying shares today is a smart rotation trade of sorts based on what’s happening off and on the price chart of Ericsson stock.
Not all stocks are created equal. Right now many tech investors are finding that out the hard way.
After massive gains in 2020 a rotation into Covid-19 “stay away” stocks Delta (NYSE:DAL), Carnival (NYSE:CCL) and others are finding some love from Wall Street. But the improvement is occurring at the expense of some of the pandemic’s largest beneficiaries such as Zoom (NASDAQ:ZM) and Amazon (NASDAQ:AMZN). They’re among leading stocks this month which have dropped beneath the market’s broad-based corrective lows established in October.
Of course, it’s not entirely without good reason either.
A one-two dose of powerful vaccine news from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) the past two Mondays and now a third injection from AstraZeneca (NYSE:AZN) has Wall Street cheering the end is near, in a good sort of way. Yet while some large-cap tech stocks have suffered, Swedish telecom play Ericsson is demonstrating immunity from today’s broader market narrative. It’s tracking a separate theme that should continue to pay shareholders long after Covid-19 is in the rearview mirror.
As more than a couple of my colleagues have explained in recent days, Ericsson is all about owning a piece of 5G. And that growth is being served up quite nicely for today’s shareholders. Among those pounding the table, Louis Navellier, Chris Lau, and Mark Hake are all fans of Ericsson. And it’s hard not to be positive on shares.
From consistently inking commercial 5G contracts in the face of the pandemic, expansion into 5G-enabled services for enterprise customers and owning patents which print money for Ericsson whenever a new 5G smartphone is sold, the company has done an admirable job of pivoting away from its mobile phone roots spawned during the dot-com era. And unlike many other tech names today, Ericsson is inexpensive.
Bottom line, shares of Ericsson fetch just 16x the company’s forward 2021 earnings. Not only is that attractive compared to many tech stocks, but it’s also a historical discount to Ericsson’s typical 24x multiple. ERIC is in position to provide certain investors a bit more relief as shares sport a modest dividend of 1.35% and free cash flow yield approaching 5%.
And right now, another November “rotation” is happening on Ericsson’s stock chart, which reveals price action that investors should be upbeat about.
Ericsson Stock Monthly Price Chart
Click to Enlarge
Is Ericsson the perfect investment? Not that there is such a thing. But as Mark Hake thoughtfully notes, geopolitical retaliation by Beijing following Washington’s actions against China’s telecom manufacturers does make shares vulnerable and could be behind why Ericsson is so reasonably attractive.
My view on Ericsson stock is more pragmatic.
Despite the potential business threats, a rotation into shares of Ericsson have allowed the stock to hit new relative highs in November. That’s no easy feat given the broader reallocation by Wall Street out of large-cap technology stocks. Then again, Ericsson hasn’t exactly kept up with the Jones, or more aptly the likes of the Dow Jones Industrials in decades, let alone in 2020.
Technically and as the illustrated monthly chart shows, shares of ERIC are clearing a handle consolidation. The bullish price action marks a second attempt at a pattern breakout following a test of former key resistance dating back to 2011 and high of today’s slightly unorthodox ‘W’ or double bottom formation.
One flaw that does stand out on the price chart which further confirms Ericsson isn’t the perfect investment, is the stock’s bearish overbought crossover vis-à-vis the stochastics indicator. Still, if investors can appreciatively look past, but not completely turn a blind eye to those issues, an intermediate term, married put hedged stock strategy is a solid way to play growth at a discount with less regrets, regardless of future outcomes.
On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
