Bear of the Day: Stepan Co. (SCL)
Stepan SCL produces and sells specialty and intermediate chemicals to manufacturers for use in various end products. The company offers surfactants that are used as principal ingredients in cleaning products such as detergents, fabric softeners, disinfectants, and lubricating agents. The company also provides raw materials for coatings, adhesives, and sealants. Furthermore, Stepan provides emulsifiers and flavors for use in food and nutritional supplement applications.
The Zacks Rundown
SCL, a Zacks Rank #5 (Strong Sell), is a component of the Zacks Chemical – Diversified 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. Note how this group has widely underperformed to start the year:
Image Source: Zacks Investment Research
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 poorly performing industry group, the industry association serves as a headwind for any potential rallies and the journey forward is that much more difficult.
SCL hit a 52-week low in April of this year and has failed to produce any meaningful rally, all while markets have recovered nicely. When a stock fails to rally while the general market is bullish, it’s telling us that buying pressure remains weak. The share price remains in a downtrend, and a recent uptick presents a compelling short opportunity.
Recent Earnings Misses & Deteriorating Outlook
SCL has fallen short of earnings estimates in three of the past eight quarters. Back in April, the company reported first-quarter earnings of $0.71/share, missing the $0.94/share consensus EPS estimate by -24.47%. Consistently falling short of earnings estimates is a recipe for underperformance, and Stepan is no exception.
SCL has been on the receiving end of negative earnings estimate revisions as of late. For the current year, analysts have decreased estimates by -18.21% in the past 60 days. The 2023 Zacks Consensus EPS Estimate is now $4.58/share, reflecting a -31.13% regression relative to last year.
Image Source: Zacks Investment Research
Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.
Technical Outlook
As illustrated below, SCL is in a sustained downtrend. Notice how the stock has plunged below the 200-day moving average (signaled by the blue line). The stock is making a series of lower lows, with no respite from the selling in sight. Also note how the 200-day moving average is sloping down – another good sign for the bears.
Image Source: StockCharts
A recent uptick over the last month presents traders with a potential short entry, as the moving average is acting as resistance. SCL 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. The stock remains in negative territory this year while the general market is showing strength.
Final Thoughts
A deteriorating fundamental and technical backdrop show that this stock is not set to produce new highs anytime soon. The fact that SCL is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.
Our Zacks Style Scores depict a weakening outlook for this stock, as SCL is rated a second worst-possible ‘D’ in our Growth category and ‘C’ for our overall VGM score. Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of SCL until the situation shows major signs of improvement.
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Stepan Company (SCL) : Free Stock Analysis Report
