Stock Pick: Goodyear Tire and Rubber Co. (GT)
Goodyear Tire and Rubber Co. (GT) was founded in 1898 and is named after the person who discovered the vulcanization process: Charles Goodyear. The multinational firm develops, manufactures, and sells high-performances tires to a wide-range of vehicles including cars, SUVs, commercial trucks, airplanes, race cars, heavy farm equipment, and many others. As of fiscal June 2018, the company generated sales of $15.5 billion and has a workforce of over 64,000 employees.
Technical Analysis of Goodyear Tire and Rubber Co. (GT)
GT is a stock that looks ripe for bottom picking. It has been correcting ever since it climbed as high as $37.20 in March 2017. Almost two years into the correction, the stock lost over 51% of its value when it dropped to $17.88 this month. GT is clearly in a downtrend but it is giving us signals that a relief rally is in sight.
Technical analysis reveals that GT may be carving a short-term bottom at $18.00. This is an area that has never been breached since July 2013. If we look back further, GT struggled to take out $18 from August 2009 to June 2013. Thus, we expect the strong resistance turned into support to hold. Technical indicators support our view.
First, Goodyear is generating massive volume this week as it trades near $18. We still have two trading days left for this week, yet the stock has already printed over 200% of its weekly average. Also, the stock is printing a bullish divergence on the weekly RSI. This is a signal that the market is gathering bullish momentum.
Lastly, we can see GT forming a falling wedge on the weekly chart. We expect it to respect the diagonal resistance one more time and drop back to $18. This will enable the market to form a double bottom structure on the shorter timeframe.
Fundamental Analysis of Goodyear Tire and Rubber Co. (GT)
In addition to our technical analysis, fundamental analysis also supports our bullish view.
GT reported earnings per share (EPS) of 0.51 in Q4 2018. This is 15% below analyst estimates of 0.6. The quarter before this one GT also posted lower than expected earnings. However, what this means is that all the negative sentiment is already priced into the stock, hence the huge price decrease this past year.
In addition, the trailing twelve months price-to-earnings ratio (PE ratio TTM) of GT is 6.801. The stock is undervalued considering that the pe ratio TTM of the tires and rubber industry stands at 10.48. The potential fundamental upside of the stock is more glaring if you take into account GT’s five-year average of 14.12. Looking at these figures, the stock has room to grow.
The strategy is to buy on dips as close to $18 as possible. As long as bulls hold this level, the stock will likely generate the momentum to bounce to our target of $24.50. Take that out and the next target is $29.
The timeline for the target is less than six months.
Weekly GT Chart
Summary of Strategy
Buy: On dips as close to $18 as possible.
Targets: $24.5 and $29.
Stop: Close below $17.2.
Featured image courtesy of Shutterstock.
Disclaimer: The writer does not own shares of Activision Blizzard Inc. (AVTI).