At Ockham, we prefer to analyze the markets from a fundamental perspective, but we are not so proud as to think that nothing can be gained by looking at the technical perspective from time to time. One well known technician, Robin Griffiths of Cazenove Capital was interviewed on CNBC on Monday, and he discussed some bearish findings from the charts of such economic bellwethers as FedEx (FDX) and BHP Billiton (BHP). In the case of FedEx, it is often regarded as a proxy for the strength of the US economy because shipping activity often mirrors general economic activity. His CNBC interview was light on details of why he sees trouble in the chart other than the fact that FedEx management has acknowledged the distinct possibility of a double-dip. He argues that they would be among the first to know about this and confirm any such evidence.
While Griffiths bases this bearish outlook on Fedex because of technicals factors as well as management’s own outlook and comments, we actually draw a similar conclusion but through a different process. There is no doubt that has been on one heck of a run as the US economy has rebounded, and the stock has advanced 131% over the last twelve months. The fundamentals have improved over this time, but we are not sure that the earnings
growth or sales have been revived enough to warrant such a run. So, accordingly we have downgraded FedEx as of this week to Overvalued based on valuation concerns.
We did an analysis on how the market has historically valued FDX based on a given level of revenue and cash earnings per share. The price-to-sales analysis showed that FDX is currently trading at .83x, which is within the normal range even though sales are expected to fall more than 5% in fiscal 2010. However, our analysis of price-to-cash earnings yields a different picture. Over the past ten years (with the most recent years weighed more heavily) the market has paid 8.3x to 14.6x cash earnings per share, but the current price-to-cash earnings stands at 15.7x. According to our analysis, if FDX were to trade in the middle of its historically normal price-to-sales and price-to-cash earnings ranges, based on current fundamentals, the price would be in the mid-$70’s.
We cannot deny that the fundamentals are improving and analysts are upping estimates for this year and the next, but based on our way of looking at stocks it has simply become overheated. Griffiths warns that FedEx may be signaling to investors that a double-dip could be coming, and urges them to stay away. Investors should always be looking for stocks that are priced attractively no matter if you are technically minded or lean towards fundamentals. Based on our research, investors would be much better served looking at FedEx competitor United Parcel Services (UPS), which operates in a similar manner to FedEx and has seen business pick up and yet has not seen their stock appreciate nearly as much.
Technical Strategist: Trouble Brewing Because of FedEx’s Chart
