The longer you invest in the stock market, the more familiar you become with a lot of the concepts that are used to define and justify the various investing methods that drive them. Years ago, as I began to incorporate technical analysis and shorter-term trading strategies into my system, one of the first technical patterns I learned to recognize was what a trend reversal looks like.
Sometimes visuals provide a better frame of reference for putting concepts in their proper context. Since all trends are finite, it’s smart to learn how to recognize signs that a stock’s immediate trend could be poised to reverse. When that trend is a downward trend, signs that the price could be setting up to reverse higher provide good opportunities to start thinking about ways to work with the stock’s bullish upside.
Westrock Company (WRK) is a stock that appears to be setting up exactly the kind of reversal pattern that can signal a good bullish opportunity is coming up for short-term, momentum-focused traders. After forming an intermediate upward trend from last July to mid-May that saw the stock more than double in price, the stock has dropped back a little over -19% before finding support in mid-July and the first part of August. When you factor additional technical concepts like Fibonacci trends in the analytical view, the stock is sitting in an area that has provided strong support for the longer-term trend, which is still up over the past year. Following its latest earnings announcement, the stock also boasts an improving fundamental profile. What about its value proposition? A -19% decline is interesting to a contrarian, value-oriented investor, but is it enough to also provide the basis for a good long-term opportunity? Let’s dig in.
Fundamental and Value Profile
WestRock Company, incorporated on March 6, 2015, is a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. The Company also develops real estate in the Charleston, South Carolina region. The Company’s segments include Corrugated Packaging, Consumer Packaging, and Land and Development. The Corrugated Packaging segment consists of its containerboard mill and corrugated packaging operations, as well as its recycling operations. The Consumer Packaging segment consists of consumer mills, folding carton, beverage, merchandising displays, and partition operations. The Land and Development segment is engaged in the development and sale of real estate primarily in Charleston, South Carolina. WRK has a current market cap of $13.4 billion.
Earnings and Sales Growth: Over the past year, earnings increased 31.58%, while sales rose 13.69%. In the last quarter, earnings were more than 85% higher, while sales grew by more than 8.5%. Over the past year, WRK’s operating profile dipped into negative territory, reflected by the fact that Net income as a percentage of Revenues was -3.54% over the last twelve months. Given the difficulties every sector has dealt with during the pandemic, that isn’t particularly surprising, but the good news is that the number swung back to positive territory in the last quarter, at 5.19%. That pattern is also a confirmation of a similar pattern in the quarter prior, with Net Income over both the trailing twelve-month and quarterly period showing positive improvement over the last six months. WRK has historically operated with a very narrow margin profile; even so, this is a metric that will continue to be worth paying attention to in the quarters ahead.
Free Cash Flow: WRK’s Free Cash Flow is healthy, at $1.7 billion, and which translates to an attractive Free Cash Flow Yield of 12.63%. It also marks a significant improvement over the last year, when Free Cash Flow was $1.12 billion. Growth in this metric offers a useful counterpoint to the difficult operating profile I just mentioned using Net Income.
Debt to Equity: WRK has a debt/equity ratio of .71, which is pretty conservative. The company’s balance sheet is also improving, with cash and liquid assets of about $550 million in the last quarter versus long-term debt of about $8.1 billion; that means that cash has increased from $253 million over the last six months and $151.6 at the beginning of 2020.
Dividend: WRK pays an annual dividend of $.96 per share, which at its current price translates to a dividend yield of about 1.87%. After cutting their dividend by 57% in 2020 to preserve cash during the early stages of the pandemic, management increased the dividend by 20% in May of this year, a move that indicates their increasing confidence in the underlying strength of their business.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target a little above $58 per share. That suggests that WRK is undervalued by about 16% from its current price, and a very useful bargain price at around $46.50.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of price activity for WRK. The diagonal red line marks the stock’s upward trend from August 2020 to mid-May, with the peak at around $62. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that peak the stock slid steadily back into a short-term downward trend that finally found significant support at around $49, inline with the 38.2% retracement line. After bouncing off of that level last week, the stock has retraced again, and is right around $50 as of this writing. A drop below $49 should see next support at around $45, where the 50% retracement line waits, while immediate resistance is at around $52 where last week’s peak occurred. A push above that level should see a short-term rally to about $54, with additional room to about $57 to $59 if bullish momentum accelerates.
Near-term Keys: WRK’s stabilization right around $49 is a very good sign that the current, short-term downward trend could be about to reverse; however the stock would need to push above $52 to provide the signal to confirm that is the case. If that happens, and you prefer to work with short-term trading strategies, you could consider buying the stock or working with call options, using $54 as a good, quick-hit profit target and $57 to $59 providing additional room for a new upward trend to develop. A drop below $49 would be a good signal to think about shorting the stock or buying put options, with $45 providing a good profit target on a bearish trade. The stock’s improving fundamentals, along with the stock’s short-term downward trend also means that there is an interesting opportunity if you prefer to think about working with WRK on a long-term, value-oriented basis.