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Dead in the Water: Xylem Swims with the Fishes (XYL)

Posted on December 13, 2021

We played XYLEM (NYSE:XYL) for a 156% profit earlier this fall and feel it’s now time to raise our swords again.

Venture forth!

You’ll recall that it took us but a month last time to fetch our loot from the trade, and with G-d’s help in this dark month of Tevet, we’ll once again turn the elements to our favor and change wind and snow into cold hard cash in a hurry.

XYLEM is a manufacturer and service provider of pipes and other water infrastructure to consumers worldwide.  No blockchain.  No social media.  No phony vaccines.

So, we were more than a little surprised to see the following fundamentals –

  • The company boasts a waterlogged P/E of 48.23,
  • A Dividend Yield of 0.91%, and
  • A completely drenched Price to Book ratio of 7.16.
  • Again, this is not a growth outfit, according to all definitions, viz –
  • EPS this year are DOWN 36.60%,
  • EPS for the last five years are DOWN 5.60%, and
  • Sales for the past five years have grown by a soggy 5.90%.

And now the monsters are coming home to roost –

Yes, the company posted an earnings beat for Q3 (on November 2nd), but sales didn’t meet expectations, and management offered lower guidance going forward.

That was enough to stall an autumn rally and push analysts to lower estimates.

The outlook is dimming, the waters are muddying, and we feel there’s more downside to come.

Have a look at the daily chart –

Technically, we have classic bearish signals –

  1. Price is moving lower in step-stair fashion, with lower highs and lower lows for better than three months now (in red),
  2. The short-term moving average is about to roll below the 137 DMA (in blue), and price is locked beneath them both.  That should put a roof on price at roughly 126/127.
  3. Indeed, we may get some play in that range before moving lower to next support at 115 (in purple).
  4. Volumes are picking up, meaning momentum behind the selling is building (in black). That’s in keeping with management’s lower guidance and analysts lowered estimates.
  5. And finally, both RSI and MACD – the most important of all technical indicators – are continuing their sub-waterline meander, signalling control is currently in the hands of the bears.

Now the weekly –

Here, we see a broader (and clearer) picture of where the XYL euphoria has led –

  1. In the first place, we have several touches (and flirts) with the weekly RSI overbought line (in green), the latest of which occurred in late August and aligned with the stock’s all-time high.
  2. Since then, MACD has rolled over and RSI has moved sub-waterline bearish.
  3. Price broke lower from a bearish rising wedge directly after posting the late August high (in red), and
  4. Support at 115 will now likely be tested (in blue).
  5. Fibonacci support emerges at 106 (in purple) – and we may eventually get there.  But because our trade has a relatively short time horizon, we’re shooting for something more modest.

And it looks like this –

A Jew and His Money recommends you consider selling the XYL January 21st 120/125 CALL spread* for $1.00 (5.30/4.30) and buying the XYL January 21st 120/115 PUT spread** for $2.15 (3.60/1.45).  Total debit on the trade is $1.15.

[*Sell the 120 CALL and buy the 125 CALL.  **Buy the 120 PUT and sell the 115 PUT.]

Rationale: the trade pays a maximum $3.85 NET for $1.15 laid out (334%).

Time is the major concern here.  With just 39 days until expiry, we have to see a downside move of 6.3% to realize full profits.

It’s not unreasonable, but it is five and a half weeks – and that’s a shorter time horizon than we usually play.

Caveat emptor.

Max loss on the trade is $6.15 (the difference between the CALL strikes plus the initial credit), an outcome we deem less likely to occur, considering the technical cap now forming at 125 (and falling).

We’ll break even at precisely $118.85, exactly 3.2% lower than today’s price.

And we’ll win if and only if the Ribono Shel Olam wants it.

May we ever find favor in His eyes.

With kind regards,

Hugh L. O’Haynew

 

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