3 Big Stock Charts for Wednesday: Alibaba, Hewlett Packard, and Chipotle Mexican Grill

Stock Market

Tuesday was a quiet day in the U.S. stock market. Major indices barely moved. The S&P 500 closed down less than a tenth of a percent, after hovering around flat for the entire session. The Dow Jones Industrial Average did much the same.

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That said, there were some big movers, including two well-known growth stocks. Earnings disappointments led Beyond Meat (NASDAQ:BYND) and GrubHub (NYSE:GRUB) to plunge. GRUB stock, after weak guidance for the fourth quarter, dropped a stunning 43%. BYND, despite a Q3 beat, fell 22%.

Meanwhile, pharmaceutical giants Pfizer (NYSE:PFE) and Merck (NYSE:MRK) both rallied after solid earnings reports. One session does not a trend make, but Tuesday’s action supports an apparent shift from growth to value that we highlighted in this space last week.

So do Wednesday’s three big stock charts. Here, too, ‘cheap’ stocks appear to be back in favor. It remains to be seen whether that will hold — and what that shift might mean for broad markets as earnings season rolls on this week.

Alibaba (BABA)

Alibaba (NYSE:BABA)

To bulls, there is no bigger value stock than Chinese e-commerce giant Alibaba (NYSE:BABA). This is a company valued at 20x fiscal 2021 consensus earnings per share estimates, while those estimates project 20%+ increases in EPS both this year and next. That suggests a so-called ‘PEG ratio’ — price to earnings to growth — under 1, which is exceedingly difficult to find in a market trading at all-time highs.

So if investors are going to focus on fundamental value, BABA stock would seem to be a natural beneficiary. Indeed, the first of our three big stock charts shows a stock seemingly headed in the right direction:

  • Trading since late May lows clearly is in an uptrend. Meanwhile, the rally in the last few sessions has moved BABA above its 20-, 50-, and 200-day moving averages. That’s an usually bullish signal.
  • The narrowing channel from early May highs does suggest resistance may be at play at the moment. Investors have been selling at $180 in recent months as well. An intraday high of $179.64 on Monday looks concerning from that perspective — but if BABA can rebound and finally bust through those levels, there’s clear room to run.
  • For that to happen, however, investors have to see the attractive fundamentals as outweighing the very real risks. Save for a 2017 rally, BABA has been a stock that’s consistently looked cheap, and consistently stayed cheap. But the good news for BABA stock at the moment is that investors seem willing to take on risk in return for value. If that continues, a breakout looms into, or potentially out of, earnings next month.

Hewlett Packard Enterprise (HPE)

Hewlett Packard Enterprise (NYSE:HPE)

One of the cheap value stocks investors have been buying is Hewlett Packard Enterprise (NYSE:HPE). HPE has executed an almost textbook reverse head-and-shoulders formation. It bounced off the 50-day moving average earlier this month, and promptly broke out to challenge early-year highs.

After a 30%-plus bounce from August levels, there’s one obvious question for HPE stock:

  • Click to Enlarge
    Has the rally run its course? Looking at the weekly chart, there’s reason to think that it has. There has been a pattern of lower highs going back to an all-time peak reached in early 2018. The reverse H&S pattern, too, likely has played out. It wouldn’t be surprising to see some near-term profit-taking (though it’s worth noting that HPE stock strengthened in afternoon trading on Tuesday).
  • Fundamentally, however, there’s still a solid bull case for HPE. Valuation is more than reasonable at just 9x forward earnings. Meanwhile, the company last week guided for solid bottom-line growth in fiscal 2020, which helped drive the rally in recent sessions.
  • But broader investor sentiment may determine in which way HPE stock heads from here. Investors mostly have shunned old-line tech firms. IBM (NYSE:IBM) stock has headed in the wrong direction for years now. Rallies in names like Oracle (NYSE:ORCL) and Cisco Systems (NASDAQ:CSCO) have reversed. There might well be value in HPE stock, but it’s not yet guaranteed that the market will perceive that value.

Chipotle Mexican Grill (CMG)

Chipotle Mexican Grill (NYSE:CMG)

One of the long-running questions in this bull market has been: at what point does valuation matter even for a high-quality business? For the better part of a decade, the answer has been: not much. Investors have been willing to pay almost any price for growth.

The last of our big stock charts, Chipotle Mexican Grill (NYSE:CMG), suggests that might be changing:

  • Fundamentally, there’s nothing wrong with Chipotle’s business. The company’s fiscal Q3 earnings report was hugely impressive. Revenue and earnings crushed Wall Street expectations. Same-restaurant sales increased a whopping 11% year-over-year.
  • And yet, resistance clearly has held, with a usually bearish multiple-top formation around $850. The chart now looks downright ugly, with CMG stock falling through moving averages and recent support. The next level to test seems to be roughly $740, which held as resistance in June, followed by $700.
  • Meanwhile, CMG stock still isn’t cheap, or close. The forward P/E multiple remains above 42x. And so the stock at this point looks like an interesting test for the broader market. If CMG keeps falling, what does that mean for other dearly-valued growth names who don’t have quite the same spectacular performance?

As of this writing, Vince Martin has no positions in any securities mentioned.

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