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Bear of the Day: Newmont Corp. (NEM)

Newmont Corp. NEM is engaged in the exploration and production of gold, copper, silver, zinc and lead. NEM conducts business primarily in North America, South America, Australia, and Africa. The Colorado-based firm was founded in 1916 and operates several active mines in Peru, Australia, Ghana, and Nevada.

The Zacks Rundown

Newmont, a Zacks Rank #5 (Strong Sell) stock, has been severely underperforming the market since experiencing a climax top back in April. Shares have lost nearly half of their value after the peak in price and have been in a sustained downtrend ever since. The stock is hitting a series of 52-week lows and represents a compelling short opportunity as the market continues its volatile start to the year.

NEM is a component of the Zacks Mining – Miscellaneous industry group, which ranks in the bottom 37% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months.

Candidates in the bottom tiers of industries can often be solid potential short candidates. While individual stocks have the ability to outperform even when included in a poor-performing industry group, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more treacherous.

NEM is also overvalued relative to its industry group, irrespective of the valuation metric used:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Recent Earnings and Deteriorating Forecasts

Earnings misses have been a sore spot for NEM during the past year. The mining company has fallen short of estimates in three of the past four quarters, with an average miss of -9.75% over that timeframe. NEM most recently reported Q2 EPS back in July of $0.46/share, missing the $0.60 consensus estimate by -23.33%. When you’re consistently missing earnings estimates by a wide margin, you’re going to be fighting an uphill battle when it comes to the stock price.

Analysts covering NEM are in agreement and have slashed their earnings estimates across the board. For the year, estimates have decreased 20.91% over the past 60 days. The Zacks Consensus Estimate now stands at $2.61/share, reflecting negative growth of -11.82% relative to last year. These are the types of negative trends that the bears like to see.

Zacks Investment Research
Zacks Investment Research
Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Technical Outlook

NEM stock has been steadily falling since April, declining -47.8% since the peak and has now established a well-defined downtrend. Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping down. Shares have declined more than 60% in the past year. The stock continues to trade below both averages, while the 50-day moving average has acted as steady resistance throughout the down move:

StockCharts
StockCharts


Image Source: StockCharts

NEM was unable to rally over the summer along with the general market. When a stock continues falling even when the market is rallying, it’s telling us “I’m very weak.” Shares have fallen nearly 30% year-to-date and are showing no signs of an end to the downward movement.

While not the most accurate indicator, NEM has also experienced what is known as a ‘death cross’, wherein the stock’s 50-day moving average crosses below its 200-day moving average. NEM would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock.

Final Thoughts

The recent earnings misses in addition to deteriorating estimates are both huge red flags and need to be respected. These will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

NEM’s characteristics have resulted in a second-worst possible Zacks Value Style Score of ‘D’, and a Zacks Momentum Style Score of ‘C’, indicating further downside is likely. The fact that NEM is included in a bottom-performing industry group simply adds to the growing list of concerns. Investors will want to steer clear of an overvalued NEM until the situation shows major signs of improvement, or possibly include it as part of a hedge or short strategy.


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