- Price charts alerted traders to FedEx latest earnings miss
- A “death cross” took its short-term moving average below the long-term average
- Once the traders have punished the stock it might represent fair value
Many analysts like to read charts, putting the pricing behavior of stocks or markets on paper and trading based on the patterns. Such “technical analysis” is derided by those who look at fundamentals, but sometimes it can keep traders from getting in front of a moving train.
Take the example of Fedex (NYSE:FDX) on Tuesday, the Memphis-based package delivery company. Early in the week chartists noticed that the stock had entered a “death cross.”
The Death Cross Says Sell - What Is A Death Cross?
This happens when the 200-day moving average of a stock’s price falls below its 50-day moving average. When the long-term trend (and a 200-day average represents a year of trading) crosses the shorter-term trend (and a 50-day average represents a quarter-year of trading) it is read as a bearish signal for the stock. The same pattern, achieved by the Dow Jones average on August 13, heralded a correction the market is only now beginning to recover from.
Well, miracle of miracles, on Wednesday Fedex announced earnings that missed street estimates, earning $692 million or $2.42 per share on revenues of $12.3 billion, against estimates of $2.44. Margins were actually higher than a year ago, at 9.3%. The total net income was up 6% from a year ago, when it came in at $653 million, $2.26/share.
Still, a miss is a miss, and the chartists congratulated themselves that they had predicted it. Expect the FedEx stock to be under strong selling pressure for some time. Analyst estimates for FedEx earnings also indicate that they're expecting weakness going forward as well. Apparently, FedEx plans to raise shipping rates next year, but how that pans out for them remains to be seen.
Other Signs Of The Losses Came in May
Of course, there were other signs for those who were seeking them, other than charts. Start with the fact that the “miss” did not come out of the blue. The previous quarter, covering the period through the end of May, was also considered a “miss,” and was in fact an actual loss of $752 million, using Generally Accepted Accounting Principles or GAAP. The loss was to account for the acquisition earlier in the year of GENCO, a third-party logistics company, which fits very well into FedEx and thus takes business from rival UPS (NYSE:UPS).
Speaking of UPS and charts. Throughout most of the last year FedEx shares have been outperforming those of UPS, often quite dramatically. Back in June, the gain in the FedEx stock since the previous September was about 20%, that of UPS just 3%. All these dramatic moves and death crosses in the FedEx stock have put its shares back in line with those of its rival. If you put $100 into UPS shares a year ago you now have stock worth $102.52. Had you put shares in FedEx you now have stock worth $100.16. Had you invested in a Dow fund you would have $97.73.
Weighing The Pros And Cons For FedEx Now
The point is that there is a difference between trading and investing. Traders are going to look at charts, they’re going to try and avoid the dreaded “death cross,” and they’re going to go in-and-out of stocks quickly. Investors buy a stock they think will do well over time and ignore it. Investors in FedExs who have held for 10 years are still up 93%. Traders would have been wise to sell back in June, long before any “death cross” pattern alerted them to trouble, when the stock hit a high of nearly $185/share, and had they read the May earnings release carefully they might have done just that, because it’s been all downhill from there, and FedEx opened Wednesday below $150.
Of course, now the GENCO acquisition has been accounted for, FedEx is more powerful within its market than before, and some might start to see its 9% margins, regular top-line growth of 4% and current price as representing a fair bargain. Folks would do well to factor in the weak expectations and the potential benefits of the price hike that FedEx has in mind, and maybe charts too if they like.
But I don’t read charts, or tea leaves. I’m just an investor.