Clorox: Hurry Up And Wait As The Stock Makes New Highs

seekingalpha11-25 23:35

Clorox has experienced a significant rally, but momentum indicators suggest caution in the short term despite bullish long-term prospects.Analysts have consistently revised EPS estimates upward, but ...

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MoMo Productions/DigitalVision via Getty Images Former pandemic high-flyer Clorox (NYSE:CLX) spent most of this year languishing. However, a summer rally saw the stock hit comfortable new 52-week highs, and shares find themselves in a similar spot now. During raging bull markets – which is the only way to characterize 2024’s action – defensive stocks don’t tend to see massive gains as money rotates towards more risk-oriented areas of the market. But Clorox persists, and in this article, we’ll take a look at what I think investors can do with the stock going forward. A big breakout That’s the key on this chart, as we saw a textbook example of a bull flag that was confirmed with a breakout at the end of October. A bull flag is when you have a big rally (the “flag pole”) that is then followed by a sideways or slightly downward consolidation (the “flag”). This is only confirmed after an upside breakout, which we finally got at the end of October. I’ve noted the flag in black below to help illustrate.   StockChartsThat’s a very bullish pattern, and we’ve seen nothing but buying since. That, however, has created a separate issue, which is that momentum is in no way confirming this latest move. While I value momentum indicators, they are secondary to price action. That said, they are still telling me not to chase this rally. I’ve marked in blue dotted lines the negative divergence that is occurring on the PPO. Basically, we have higher prices, but much lower momentum. We generally want both to make highs at the same time. When we don’t have that, as is the case now, it essentially means there aren’t that many buyers. That can mean bullish momentum is waning, signaling a potential top not far away. The Chaikin Money flow indicator in the bottom panel is showing a similar thing, as it’s been negative since before the breakout, and hasn’t gone positive. Again, just a secondary indicator, but I’m far from seeing a lot of confidence in this rally at the moment. If we move to the weekly chart, I will say it starts to look more bullish.   StockChartsThe CMF and PPO on the weekly chart are indeed confirming strong price action, so we have none of the same concern here. If you’re a long-term buy-and-hold type, I think you can look at the weekly chart and have confidence Clorox is more likely to go up than down for the foreseeable future. It’s what happens in the shorter-term that the daily chart is warning us on. Seasonality is decent this time of year for Clorox, although not exactly foolproof.   Seeking AlphaWe have strong Novembers generally, but this month is almost over. December has a slightly positive return, but only 60% up moves in the past 10 years. That’s about what we see from the broader indices, so I’d be mostly neutral on seasonality, with the caveat we are likely to drift higher in December if history repeats. With all of that information in mind, I think there are concerns short-term from the momentum indicators, but long-term, Clorox looks setup nicely. Is there fundamental support for higher prices? That’s the key here, as any big rally in a stock should eventually be supported by better fundamentals. As we can see, analysts are getting more and more bullish on Clorox.   Seeking AlphaEach of the last 20 revisions to EPS for this year have been higher. You literally cannot do better than that, so it’s worth noting. Where I start to wonder about the fundamentals is in the growth rates that are forecast here, even after so many upward revisions. We’re looking at mid-single digit EPS growth over the medium term, which is fine, but shares are also trading at 22X 2027 earnings. You have to ask yourself if you’re willing to pay for a price-to-earnings-growth ratio of ~4. That’s generally outside of my comfort zone (I like PEGs of 1 or lower), but to each their own. More on the valuation in a bit. First, let’s take a look at the company’s ability to grow EPS. There are three major components to EPS for any company. First, there is revenue growth. Second, there is margin expansion. And third, there is reducing the share count via buybacks. All of these can boost (or reduce) EPS, so it’s instructive to look all three. We have revenue growth above, and it’s slated to be basically nothing this year, and ~3% in the next two years. That’s our baseline, and we’ll use 3% as an average. Below, we have trailing-twelve-months margins to look at the second component.   TIKRGross margins are still below their pandemic peaks, perhaps unsurprisingly, as we’ll recall the pandemic saw massive demand and pricing power for staples like Clorox. Still, gross margins are down ~200bps from their highs, while operating margins are down ~2.5X as much. Despite the big move up in the most recent quarter, Clorox’ margins are weak. That means there’s a lot of room to the upside, but it also means that in the past four years or so, the company simply hasn’t managed to expand margins meaningfully. Is this time different? Maybe, but in my view, you’re betting on this if you buy the stock today. Jeffries is quite bullish, but my counterpoint to that would be that shares are already at 52-week highs; isn’t some or all of this already priced in? Margin improvements will need to be the catalyst for higher earnings, and Jeffries thinks we’ll get them. I’m more skeptical based on the company’s track record, I suppose. The third component, the float, is a non-factor for Clorox as it doesn’t meaningfully dilute or reduce the share count. My assumption here is zero change when it comes to the impact on EPS. If we boil all of this down, I’m assuming no change from the float, a 3% average gain from revenue, leaving another 3% or so from margin expansion. That sounds possible, but keep in mind it would also need to be from what is the company’s highest TTM operating margin figure since the pandemic. We shall see, but it’s helpful to understand the assumptions built into EPS estimates, and you’re betting on margin expansion here. What about the valuation? If we look at the past year’s trading data in terms of forward P/E, Clorox is right near the top, and ahead of its average. Not egregiously so, but it looks slightly overvalued.   TIKRThe valuation generally doesn’t move a ton in either direction, but for what it’s worth, it’s meaningfully more expensive than it was over the summer. Indeed, this implies a lot of the rally we’ve seen in those months was due to multiple expansion, rather than growing earnings expectations.   Seeking AlphaThe yield is showing a similar trait, with 10 years of the yield above. There are two distinct periods here, with blue showing a range of 3% to just under 2%, and black showing a range of 3% to 4% (roughly speaking, of course). We’re right at the bottom of the range, and to me, this implies again that shares are at the high end of their valuation (as yield and price move inversely). Given Clorox’ importance as a dividend stock, this is perhaps at least as important as the forward P/E ratio. Both, in my view, are saying this stock is overheated.  If we take that with the bullish price chart that momentum isn’t confirming, I think the best I can do on Clorox is a hold. In my view, if you wanted to own this stock, you’ll get a chance to do so at a lower price than today.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2486342590"}