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ASX.Express Weekly Round Up Narratives

Major stock moves and 1H20 earnings – CWY, SVW, EHL, LOV, AX1, IMD

Industrials

Cleanaway Waste Management (CWY)

The stock broke above the line of resistance upon the release of their 1H20 results, signalling a change in sentiment towards the waste management company. The stock’s previous uptrend came to an end in July 2019 and culminated in a decline of more than 30% that was accompanied by heavy volume. 

The stock then settled into a 20-week trading range that never made it back to the previous highs. 

With the release of results on Wednesday, that showed margins recovering, revenue stabilising and earnings reaccelerating, the stock has now broken out of its trading range. It is now on the way back to the old high. 

A break to new highs would be very positive. However, the stock will likely encounter some selling pressure at the old highs, before it can establish itself in a new uptrend.

Seven Group Holdings (SVW)

SVW had been trading in a range for the whole of last year before emerging briefly in January 2019. A brief pullback followed the breakout from the trading. This type of behaviour is typical, especially as the stock approached the old all-time high.  

However, with the release of 1H20 results on Wednesday this breakout has now been confirmed to the upside. The results showed the business in excellent shape, particularly in the Westrac and Coates Hire divisions. Both divisions are benefiting from high levels of demand in the mining and infrastructure sectors. The old highs above $23 now await.

Emeco Holdings (EHL)

EHL has been in a trading range since the end of 2018. The stock had been in a powerful uptrend that saw it appreciate more than 300% and lasted more than a year. However, it is now more than 50% off the highs that marked the end of this previous uptrend. 

The fundamentals of the company are looking good. The company expects utilisation rates across its rental fleet to continue improving and revenue to continue growing. The company also expects free-cash-flow to increase significantly in 2H20, which will allow the company to pay off debt and restart dividends. 

The stock has shown some signs of accumulation in the base, with the above-average volume on up weeks. With the release of 1H20 results on Wednesday, the stock showed further signs of life. 

The stock has now made a break above its trading range. However, there will be plenty of overhead supply as it makes its way back to other areas of previous resistance. 

Consumer

Lovisa (LOV)

Lovisa fell more than 50% from June 2018 until the end of December 2018. This followed a strong uptrend that lasted just less than a year and saw the stock appreciate more than 200%. 

Since the end of 2018, the stock recovered sharply back to its old highs but has not made any progress beyond this level. The past highs have consistently acted as significant resistance.

The stock has gone nowhere for more than 20 months, despite the company making significant progress on its global store rollout program. They’ve now all but proved the validity of their business model in large foreign markets, including the UK and more recently the US. 

The company has a compelling growth agenda; however, they are also facing several short-term headwinds. These include coronavirus impacting sales in Asian markets and their supply chain and currency weakness affecting gross margin %.

There are signs of accumulation in the base with lots of high volume up weeks. This behavior is in stark contrast to the period between June and December 2018 when the volume was highest when the stock was its weakest. 

A definitive break above $12.50 that was able to hold above this level would signal the beginning of a new uptrend. However, for this to happen, the market might require more certainty around the impacts of the issues outlined briefly above. 

Accent Group (AX1)

AX1 has achieved escape velocity and looks to have entered a new uptrend after spending 18 months moving sideways in a trading range. 

The stock broke above resistance in December, however, has spent the last few weeks pulling back to the support area (previous resistance). Following the release of 1H20 results, demand is now firmly in control and the stock has now left the trading range.  

The company released a robust set of 1H20 results on Thursday, which showed like-for-like retail sales growth of 2.4% and overall sales growth of 14.1%. More importantly, the company was able to articulate a vision for future growth that included multiple drivers, including more stores, digital and new store concepts.  

Materials

Imdex (IMD)

Imdex left a 15-month trading range in September 2019 and has retested the top of the range on multiple occasions. However, upon the release of 1H20 results, the stock appears to be showing signs that a new uptrend is now underway with the force of demand, overwhelming supply. The pattern of advances on widening price spreads and increasing volume and reactions on smaller spreads and diminished volume is further evidence of this. 

The 1H20 results released on Monday delivered earnings growth driven by margin expansion. The company also has a compelling strategy to grow top-line revenue by expanding into the larger adjacent mining market. 

Mining represents a broader addressable market with excellent growth opportunities and is also less cyclical than exploration and development. The mining market currently only accounts for approximately 20% of the company’s current revenues.       

By Danny Sandler

Founder of Ocean Asset Management.