Through TheFly's Eyes: YRC Worldwide Inc.
YRC Worldwide (YRCW), the company formerly known as Yellow Roadway, announced yesterday after the close that it was lowering its Q1 earnings guidance by 35c a share. Trading of the company's stock was also halted after hours.
This announcement was not greeted warmly by Wall Street. Morgan Keegan removed YRC Worldwide from their Focus List. BB & T Capital Markets lowered their investment rating to Hold from Buy, citing a lack of visibility into the second half of the year. JP Morgan Chase, which maintained a Neutral rating on YRC Worldwide, took the opportunity to point out that it does not see other less-than-truckload carriers like Arkansas Best (ABFS), CNF Transportation (CNF) and Old Dominion (ODFL) having margin pressure in Q1. Even Deutsche Bank, which still rates YRC Worldwide a Buy, was forced to lower their price target and estimates after the pre-announcement.
Our Options strategist notes that YRC Worldwide’s option implied volatility of 29 was below its 26-week average of 33, which suggests a decreasing price risk.
News that YRC Worldwide’s shipping volumes for the quarter are projected to be lower than the company’s expectations sent the trucking freight sector tumbling in mid-morning trading Thursday. In addition to YRC’s $6.20 loss to $39.05, Arkansas Best Corp. was down $2.15 to $40.35 and CNF was down 85c to $50.70. The consensus on Wall Street appeared to place a “What have you done for me, lately?” attitude toward the sector. That’s because trucking has experienced several consecutive years of double-digit growth – a healthy expansion in any analyst’s estimation. Even so, Wall Street punished the sector early Wednesday – an overreaction in the view of one analyst, given the sectors good, recent, performance history. Moreover, the sell-off seems in-tune with the Street’s current psychology, where investors are quick to exit sectors in favor of “the hot sector of the moment.” Still others see the Street’s sell-off response as rational and evidence-based, given the possibility of decelerating earnings growth from the major trucking companies. To be sure, it will be the sector’s earnings in the quarters ahead that will go a long way toward determining whether Wednesday’s sell-off was prudent, or panicky.
Our Technical Analyst was excited by YRC Worldwide’ s chart, because the stock presents a rare opportunity to see a near textbook example of a bearish Head and Shoulders pattern. It should be stressed that patterns do not always work, but they can increase the probabilities for being on the right side of a trade. In the chart below we can see the characteristic "humps" in the chart which explains the name of the pattern. It consists of a left shoulder, a head (peak in price) and a right shoulder. What is really important is the neckline. This type of pattern is not valid unless the neckline is "broken" (price drops below the neckline, or support). What the pattern told us is that there was a strong possibility on a break of the neckline of the stock falling some $8 dollars in price (and we are measuring conservatively here, not to the tip of the peak). As we can see from the price action today, the stock fell almost exactly to the pattern objective. Where the stock might go from here is now no longer related to the pattern. It has fulfilled, or completed and we need to look at other technical clues such as trendlines and support and resistance to get a better idea of where the stock might be headed. As it turns out the stock today stopped right at an important support area ($38.38-$38.25). The next support levels are at $37.75, $37.13, $36.50. Resistance, a price the stock may have difficulty rising against, is at $39.62, $40.14 (today's high) and $40.63.