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Hi everyone! Today, we start a new research category, which is "Trading Ideas." Here we will post some interesting topics, which partially were included in the Sharpedge Portfolio before we have started Weekly journal and some ideas which we do not implement in terms of Sharpedge Portfolio simply because of the overall risk we take. So, with this in mind, let's analyze our first trading idea! The link to TradingView post with the idea is available here.
Right now, XRX offers a trade with, probably, one of the best risk-return ratios you can find on the stock market right now. Before I continue, however, I'm obliged to disclose the fact that I hold XRX stocks, and they were bought before the Weekly Journal. As usual, please note that this analysis is my point of view, and trading is a risky activity.
First of all, XRX is a big multinational technological company, which, before coronavirus, tried to buy HP for $35 billion. We saw that IT companies did pretty well during the COVID-19 crisis. Why does Xerox price decrease more than 50%? The lockdown and digitization of the economy hindered the company's sales, and the revenue in Q1 2020 fell... 14.7%. Yes, just 14.7%. Comparing to losses that some companies report, this is just a minor fluctuation. Still, the price corrected just like the price of airline companies or Casinos, which is a little bit strange.
So right now, XRX reached the lower border of the coronavirus range, which is about 15 dollars, and I believe it has a chance to come back to pre-coronavirus levels in 6 or 9 months. With the stop level being somewhere below 14 dollars and the take profit being above 29 dollars, we have the risk-reward ratio of about 14. I believe it's a good value for a half-a-year trade. Now, let me support this thesis we additional arguments.
If you analyze Xerox fundamentals, first of all, you will see low debt. In the Covid-19 era, debt is the biggest threat for companies because of liquidity issues. When a company doesn't have any operational inflows, it still has to service and cover its' debt. If it cannot, then it has to fill to bankruptcy. So Xerox has pretty low debt, with the biggest part of it being long-term debt, which means that it's relatively on the safe-side right now.
The second interesting thing in fundamentals is the company's P/E ratio. The company is among the top 10 companies with the lowest P/E ratio in the Technological industry. The company's EPS, which was growing steadily for the last several quarters, is partially the key reason for such a low value of the P/E ratio. Excluding outliers, EPS increased from $1.41 to $5.89 in 5 quarters, with the price rising from $20 to $37. With the last report, the company now has the lowest P/E ratio it had in the 12 years.
The next good thing is dividends. XRX didn't cut dividends in Q1 2020, and the current dividend yield is 6.6%. This is a fantastic yield worth buying.
Now, a little bit more of technical analysis. The company's relative strength (which is the ratio of changes in XRX and changes in S&P ) is at the lowest levels for the last ten years as well. Apparently, such a value doesn't mean that the price will go up because if the market, as a whole, drops a lot and XRX stands where it is, the RS line will grow. Still, with the reopening economy and more and more vaccines tests on the way, I think the market can be in pretty good shape in the next 6 or 9 months.
Finally, we see really low values of ADX. In my educational videos, I explain the best way of working with ADX (at least from my experience and my researches), and this is entering into a position with low ADX values. Low ADX values mean the market has no trending direction, or the trend is changing. Since ADX has cycles, you can expect ADX surge in the next months. Apparently, ADX may surge because the price continues to fall. However, taking into account all the arguments above and the risk-return ratio, I was willing to take the risk.