Investing Primer: Sherwin Williams Paints the Tape Red (SHW)

Sherwin Williams Co. (NYSE:SHW) provides colorful chemicals to splash on walls and other surfaces, poisoning those who occupy those spaces thereafter as the inevitable ‘outgassing’ occurs.

But we’re not here to knock the corporate world and its myriad means of profiting from wholesale death and disease.

Why get into all that?

We’re here to make money.

That way, we’ll no longer have to rely on their lunatic products, services and brandings.

We’ll have our own operating farms and gardens to sustain ourselves.

We’ll play the game…

Sherwin Williams missed both revenue and earnings estimates last month, but the stock kept climbing.

Why?

Because that’s the world we live in.

There’s talk that the purchase of the SIKA line of chemical adhesives will boost their numbers down the road – and it’s very possible.  But not by the margin currently reflected in the stock price.

Fundamentals

Consider:

• The stock’s P/E is far too high at 37.95,
• Its dividend yield is 0.73%,
• Its Price to Book is a grossly exaggerated 28.02,
• Debt to Equity is 3.19, and
• Consensus earnings estimates have been revised DOWNWARD for the last month.
• And to top it off, insiders have sold nearly one third of their holdings over the last six months.

It’s a filthy business!

So just paint over it.

Those insiders, by the way, unloaded to the tune of $120 million over the period – of which a full $83 million was dumped in just the last 30 days!

Do they know something we don’t?

Is their financial hygiene superior to ours?

Did they take more than one towel?

Have a look at the daily chart –

Technically, we have –

1. An RSI overbought reading from two weeks back that triggered an immediate underperformance against the broader market averages (in green).
2. MACD, too, began to roll lower shortly thereafter – a further sign that momentum is waning.
3. Since the latest rise began in March, volume has also declined, demonstrating an overall lack of commitment on the part of the bulls.  We’d normally prefer to see volume expanding on a rise of this magnitude (in black).
4. Price itself is now at the lower end of a ten-week trend channel (in blue) AND a bearish rising wedge formation (in red).  However you chart the latest action, any decline below support at 300 will almost certainly trigger immediate technical selling.
5. Next support arrives at the rising 137 day moving average at 270 (not seen on chart).

And that’s a long way down…

Now check the weekly –

1. As the stock rose by better than 180%, average volumes declined from ten million shares a week to just over 5 million today (in green).  As above, this bespeaks a lack of investor commitment.
2. Last week’s action marks a potential turning point, with a weekly bearish engulfing pattern emerging (enlarged, in black), a sign that leadership has now changed hands, from bulls to bears.
3. Simple Fibonacci calculations present retracement possibilities to 233 and/or 187 (in purple) – both levels situated far below what we require to cash in maximally from today’s trade.

And that trade is shaped thus –

A Jew and His Money recommends you consider selling the SHW October 15^th 300/310 CALL spread* for a credit of $3.50 (9.30/5.80) and buying two (2) SHW October 15^th 290/280 PUT spreads** for $1.90 (4.00/2.10) each.  Total debit on the trade is $0.30.

[*Sell the 300 CALL and buy the 310 CALL.  **Buy the 290 PUT and sell the 280 PUT.]

Rationale: with precious little upside expected from the stock, we feel safe selling a 10 point spread to earn premium.

We also like the opportunity to buy TWO PUT spreads with the money collected.

That gives us a maximum gain on the trade of $19.70.

While max loss chimes in at $10.30.

Time-wise, we’re in possession of just over 30 trading sessions to book a 7.5% decline for full profit – not an unreasonable expectation considering the market’s current fragility.

Breakeven arrives at $289.70, a decline of just 4.7% from the current price of $302.87.

As we approach the Day of Judgment, we wish you and yours find only favor in the eyes of the Al-mighty living G-d of Abraham, Isaac and Jacob.

And may you bring Him only נַחַת רוּחַ.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew