Wow, That's Overbought.
Good morning everyone! From now on, every Thursday morning we will be highlighting our favorite trade setup of the week. This week, we will be taking a look at a short setup in A.
Agilent Technologies makes lab equipment for life sciences and chemical companies, which is a stable and growing market. The company does a lot in revenue - roughly 6 Billion over the last twelve months - and it makes solid net income margins in the mid teens. Growth is slow but stable. Over the last twelve months, demand for the company's products increased as a result of the COVID pandemic, and resulting demand bump for biotech equipment. Because of this, the company saw it's highest period of growth in the last decade with a 17% bump in revenue. The company is well run, and that top line growth will drop straight to the bottom line in the form of increased earnings.
As a result of this business catalyst, and the bump in performance, the stock, since COVID lows, has rallied nearly 200% to it's current price around $173 per share.
We are looking to short this move.
This is because the stock, on a multiple basis, has re-rated as though it will experience a higher level of growth for the long term. The valuation is incredibly stretched at a 50x FWD P/E, which constitutes a nearly 35% increase to A's long term average multiple. Given that the company will, operationally, likely mean revert to a lower rate of long term growth, this multiple expansion basically constitutes "peak sentiment", in our view. Not to mention that the stock is also one of the most technically overbought names in the entire market, at a 89 RSI and 60 ADX.
"The trend is your friend till the end". We believe that the end is near, and the stock is a short.
Cheers!
Agilent Technologies makes lab equipment for life sciences and chemical companies, which is a stable and growing market. The company does a lot in revenue - roughly 6 Billion over the last twelve months - and it makes solid net income margins in the mid teens. Growth is slow but stable. Over the last twelve months, demand for the company's products increased as a result of the COVID pandemic, and resulting demand bump for biotech equipment. Because of this, the company saw it's highest period of growth in the last decade with a 17% bump in revenue. The company is well run, and that top line growth will drop straight to the bottom line in the form of increased earnings.
As a result of this business catalyst, and the bump in performance, the stock, since COVID lows, has rallied nearly 200% to it's current price around $173 per share.
We are looking to short this move.
This is because the stock, on a multiple basis, has re-rated as though it will experience a higher level of growth for the long term. The valuation is incredibly stretched at a 50x FWD P/E, which constitutes a nearly 35% increase to A's long term average multiple. Given that the company will, operationally, likely mean revert to a lower rate of long term growth, this multiple expansion basically constitutes "peak sentiment", in our view. Not to mention that the stock is also one of the most technically overbought names in the entire market, at a 89 RSI and 60 ADX.
"The trend is your friend till the end". We believe that the end is near, and the stock is a short.
Cheers!
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