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  • The luxury market is performing well, suggesting it could be a good time to buy this high-end player in the bargain bin.
  • The 'charts' tell one top technician that there are better ideas than this specialty chemicals stock.

The media's stock market coverage has been pretty depressing lately, so I wouldn't blame you if you think stocks are performing terribly this week.

However, the truth is stocks have done pretty well. After making a new year-to-date intraday low on May 20th, the S&P 500  (SPY)  has climbed 6.3%. It's been even better for value stocks. For example, the Russell 2000 Value ETF  (IWN)  is up 8% since its low on May 12th.

If the recent run-up has you wondering what stocks are worth buying and if there's anything you ought to consider selling, we've got you covered.

A cheap luxury apparel play

Last week's disappointing results from Walmart and Target suggest lower-income households were shunning general merchandise like clothing. However, this week's Nordstrom and Macy's results indicate that higher-income families have yet to feel the pinch.

If that remains accurate, then this year's sell-off may prove to be a great buying opportunity for this high-end clothing stock.

In "Ralph Lauren: A Suit-able Choice for the Year Ahead," Real Money Pro's Paul Price puts Ralph Lauren's current valuation in perspective, writing:

“At $192 in 2013, [Ralph Lauren] sold for 22.8-times forward earnings. At $86.55 RL was offered for less than 10-times fiscal 2022's estimate. That was the cheapest valuation for high-quality RL during the entire decade since 2012 [emphasis his].

That's some pretty substantial revaluation of its earnings, especially since the company's business is holding up pretty well. On May 24th, the company reported its latest revenue and earnings results. 

Sales grew 18% year over year in the quarter ending March 31, its fiscal fourth-quarter of 2022, and earnings improved 29% year over year (sidebar: I always like it when earnings grow faster than revenue because it shows companies have operating leverage). Despite higher input costs, its operating margin improved by 0.20% to 3.6%.

Yet, shares hit a new low of $91 on the 23rd, giving it a price-to-earnings ratio of 11.7 on fiscal 2023 estimates. That's only a shade higher than its 5-year P/E ratio low of 10. Moreover, it's even cheaper on next fiscal year's estimates. In fiscal 2024, analysts are targeting $9.50 per share, giving it a forward P/E ratio of 10.4.

Price thinks that's too cheap. He writes:

“Assume a slightly lower than typical 16.5-times multiple and RL could easily be north of $143 by this time next year. That is far from an upper limit. RL topped out above $182 during each of the four years 2012 through 2015 on generally lesser fundamentals than are now in play.”

Ralph Lauren's stores are doing well, but another reason for its sales and profit growth is its success online. In its conference call, its CFO said about its North American business:

“Performance was strong in both our full-price and factory stores on growing domestic demand, even as foreign tourism remains muted. We drove further momentum in our own digital commerce business this quarter with comps up 27% on top of 25% growth last year.”

It also delivered double-digit growth in each of its global regions, including Asia, where despite lockdowns, it produced its "highest-ever revenue and operating profit for the region," according to management.

Technically, despite shares making a new low recently, its on-balance volume, or OBV, is higher than in January. Moreover, its moving average convergence/divergence has flipped above 0, with a positive crossover. So its shares have been beaten up, but buyers are there, hunting under the surface.

As a refresher, OBV is essentially a running total of up-day volume minus down-day volume, and when it's trending lower, it suggests sellers are in charge. MACD subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish or bearish signal triggers when that result crosses over or below zero, or the 9-day EMA.

CHART-Street-Smarts_2

Time to step away from this chemical company?

On the sell-side of the ledger, the recent rally could offer investors an opportunity to sell shares in Air Products, a specialty chemicals company marketing industrial and specialty gases to metals, chemical, and energy markets.

In "I'm Going to Let the Air Out of a Fundamental Rating of Air Products," Real Money technical analysis expert Bruce Kamich writes investors should "take a pass" on shares, despite a recent upgrade from Atlantic Equities.

Kamich bases his conclusion on his review of the company's daily and weekly charts. In the daily chart, he notes declining volume this quarter and deteriorating on-balance volume over "the past seven weeks." Also, The Moving Average Convergence Divergence (MACD) oscillator is uninspiring, given that it's below the zero-line.

The weekly chart is similar (see below). Kamich writes, "In this weekly Japanese candlestick chart of APD, below, we see a bearish picture. Prices have broken down from a large top formation. APD is trading below the declining 40-week moving average line. The weekly OBV line is struggling, and the MACD oscillator is bearish."

CHART-Street-Smarts

How far could Air Products fall? After considering point and figure charts, Kamich thinks the daily chart shows it could go up to $261 on a rally, but on a weekly chart, the downside target is $124.

The Smart Play

Ralph Lauren is an iconic clothing brand. It's nicely profitable, and it's undeniably trading cheap. Sure, if the economy weakens, it could lead to job losses that ding demand, but a lot of that risk may already be reflected given its valuation.

Management's guidance is for high-single-digit constant currency growth this fiscal year despite all the macro headwinds. Furthermore, it's encouraging that it's beaten analysts' outlooks in all but two of the past 12 quarters.

Given this backdrop, consider buying Ralph Lauren on down days as long as it's trading below its 50-day moving average, which is currently at around $106. At that point, you can sit tight and see how it behaves from there.

As for Air Products, it's discouraging that it's only beaten estimates in half of the past 12 quarters. So, if you agree Kamich's technical view is bearish, it could be worth exiting the stock on up days up to his $261 target. Shares are currently running into resistance at the 50-day moving average, near $241. 

  • The luxury market is performing well, suggesting it could be a good time to buy this high-end player in the bargain bin.
  • The 'charts' tell one top technician that there are better ideas than this specialty chemicals stock.
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