Part 6

Honeywell (HON)

Company Background

Based in Morris Township, NJ, Honeywell International Inc. is a global diversified technology and manufacturing company with a wide range of aerospace products and services.

The company has operations in the United States, Europe, Canada, Asia and Latin America.

Honeywell International is a global leader in refrigerants, aerosols, and foam-insulation blowing agents that are used to replace ozone-depleting Chlorofluorocarbon and Hydro Chlorofluorocarbons. These products also improve the energy efficiency of homes, appliances, and commercial refrigeration systems.

The company operates through four business segments as discussed hereunder: Aerospace; Performance Materials and Technologies; Honeywell Building Technologies; Safety and Productivity Solutions

Honeywell is a leading global provider of integrated avionics, engines, systems and service solutions for aircraft manufacturers, airlines, business and general aviation, military, space and airport operations. This is the largest company segment responsible for nearly 40% of the total company revenues. An important and qualitative addition was made to the segment back in April 2018, when the company announced its decision to develop laser communication products for satellite communication in collaboration with market partners.

The company also specializes in the development of leading technologies and high-performance materials, including hydrocarbon processing technologies, catalysts, adsorbents, equipment and services. This segment includes its wholly owned subsidiary, Honeywell UOP, which is an international supplier and licensor of process technology, and consulting services to the petrochemical and petroleum refining industries. Honeywell derives 28.3% of its total revenues from the Performance Materials and Technologies segment.

Current position – Financial Performance and Future Growth Prospects

Honeywell has demonstrated consistent strength across its defense and space businesses, which in turn has been supported by healthy demand for guidance and navigation systems along with strong backlog, which we believe will all act as tailwinds in the quarters ahead.

Additionally, going forward, another important driver will be the impressive growth in the demand for warehouse automation products and supply-chain analytics, which is also likely to support the company’s Intelligrated business. Furthermore, surge in demand for personal protective equipment, medical sensors, and hand sanitizers will definitely act as tailwinds for Honeywell’s Safety and Productivity Solutions segment. In addition, the company has taken active steps to expand its manufacturing operations and capacities at its Smithfield and Phoenix facilities for the production of personal protective equipment. This will unquestionably boost its top-line performance during the coronavirus-led global market downturn. Last but definitely not least, Honeywell’s focus on investing in product introductions and next-generation innovation across its portfolio will be a long-term growth catalyst, which will have a continuous positive impact for the years to come. In response to the recent coronavirus crisis, the company has been executing several cost-control measures to maintain a healthy capital structure. Some of the actions taken by the senior management include the reduction of discretionary expenses, a hiring freeze and repositioning actions. In the quarters ahead, the measures will likely help the company to maintain a healthy margin performance amid the crisis. From a financial standpoint Honeywell’s position is far from being great as the company is bogged down by lower revenue numbers and higher debt levels as the Q1 revenue for this year declined 4% from last year’s number. However, the company reported better-than-expected earnings for the March-ended quarter. Strong cash flows on the other hand allow the company to effectively deploy capital for making acquisitions, repurchasing shares and dividend payouts.

Technical Analysis

From a technical standpoint the stock looks vulnerable at the moment as it has already appreciated substantially in the last 8 weeks moving from the $104 lows up to $165. This represented a 59.6% increase in less than 2 months for Honeywell’s stock, which we now believe is due for a stronger pullback. As you can see the chart for the stock is almost identical with the chart of XLI and shares a lot of similarities with the SPY – a strong initial rebound, challenged by the 100-day moving average where we saw a false break and a quick dive right back below the average. The retracement of the strong downtrend was also stopped by the 78.6% Fibonacci retracement level at the $165 mark. Additionally, the RSI has moved sharply lower and is currently sitting below 60, which is another signal that there might be more weakness ahead for the stock. However, we believe that a bigger decline in the stock would present a tremendous long-term buying opportunity for our followers.

We will be interested in opening our initial BUY positions around the $140 support zone and then in case the price continues to slide we will look to further add to our long Honeywell’s exposure at the $125 level. On the upside we will be targeting the $175 and $195 levels for collecting our profits from the stock.

Costco Wholesale Corporation (COST)

Company background

Based in Issaquah, Washington, Costco Wholesale Corporation sells high volumes of foods and general merchandise (including household products and appliances) at discounted prices through membership warehouses. It is one of the largest warehouse club operators in the United States. The company also operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan and Japan.

The company’s warehouses offer an array of low-priced nationally branded and select private labeled products in a wide range of merchandise categories. Costco offers three types of memberships to its customers: Business, Gold Star (individual), and Executive.

As of May 28, 2020, Costco operates 787 warehouses, comprising 547 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, two in Spain, and one each in Iceland, France and China.

Costco generates revenue from two sources: 1) Store sales (Net sales; 97.8% of fiscal 2019 total revenue) and 2) Membership fees (MFI; 2.2% of fiscal 2019 total revenue).

Costco offers myriad varieties of food products as well as a vast range of household and lifestyle products, stationeries and appliances. The company also sells gasoline to customers at cheap prices and offers merchandise in the following categories:

1) Food and Sundries (including dry foods, packaged foods, groceries, snack foods, candy, alcoholic and nonalcoholic beverages, and

cleaning supplies)

2) Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio)

3) Fresh Foods (including meat, produce, deli, and bakery)

4) Softlines (including apparel and small appliances)

5) Ancillary (including gasoline and pharmacy businesses).

Current position – Financial Performance and Future Growth Prospects

In the evolving retail ecosystem, Costco has been able to create a niche for itself on the back of growth strategies, better price management, strong membership trends and increasing penetration of e-commerce business. Certainly, these helped the company to continue with its decent comparable sales run. Comparable sales for third-quarter fiscal 2020 improved 4.8%, reflecting an increase of 5.9% and 6.2% in the United States and Other International locations, respectively, partly offset by 2.5% decline in Canada. Excluding the impact of foreign currency fluctuations and gasoline prices, the company witnessed comparable sales growth of 7.8% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales growth of 8%, 3% and 12.2%, respectively. Average transaction improved 9.3% on a year-over-year basis. Markedly, shares of the company have increased 4.2% in the past six months compared with the industry’s rise of 0.4%.

Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on a growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. In the wake of the fast-spreading coronavirus, the company has been witnessing increasing demand for toilet paper, disinfectants, packaged water and related food staples. A differentiated product range enables Costco to provide an upscale shopping experience for its members, resulting in market share gains and higher sales per square foot.

The company is also gradually expanding its e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia. To drive its online sales, the company launched CostcoGrocery to deliver non-perishable items to buyer’s home, and expanded same day grocery delivery service in collaboration with Instacart. These delivery systems have been yielding favorably and driving more traffic. The company has also launched same day prescription Rx delivery and same-day alcohol delivery through Instacart. Also, Costco acquired Innovel Solutions, a leading provider of third-party end-to-end logistics solutions, for a purchase price of $1 billion from Transform Holdco. The buyout boosts Costco’s e-commerce capabilities and facilitates it to sell “big and bulky” items such as appliances, furniture, mattresses, televisions, grills, patio, fitness equipment and wine cellars. We note that e-commerce comparable sales advanced 64.5% year over year during the quarter under review. Excluding the effect of gasoline prices and foreign exchange, the same exhibited an improvement of 66.1% year over year. We note that e-commerce comparable sales soared 85.7% during the month of April. This follows an increase of 48.3% in the month of March. Going ahead, the company plans to continue improving online merchandise and discovering ways to further enrich shopping experience.

Technical Analysis

From a technical standpoint the stock looks vulnerable at the moment as it has moved generally in a range since the beginning of the year and there are signs of exhaustion on the daily chart. The initial boundaries of the range have been the $296 support and the $326 resistance, with one major extension to the downside of this general range, which occurred back in March and took the price down to the $280 level. The sideways price action has formed both a double-top and a head and shoulders patterns on the daily chart, which are both considered to be bearish reversal trading patterns. Additionally, we must also note that the Bollinger Bands have narrowed greatly in the last 4 weeks, which is an indication that a volatile expansion could be expected moving forward. The RSI has also moved sharply lower and is currently sitting below 40, which is another strong sell signal showing that there might be more weakness ahead for the stock. As you can see the chart for the stock is much more stable in terms of its price fluctuations than the charts of XLI and the SPY – consistent range trading, regular crossover of the 50-day and 100-day moving averages, rather flat RSI action around the 50 mark. However, the recent broad based market weakness has started to translate into Costco’s stock chart as we are seeing some major breakdowns and exhaustions on the daily timeframe. Thus, we believe that our followers need to be patient at the moment if they are interested in buying into the stock, as the price is expected to drop to more favorable levels in the coming weeks. However, we believe that a bigger decline in the stock would present a tremendous long-term buying opportunity for our followers.

We will be interested in opening our initial BUY positions around the $280 support zone and then in case the price continues to slide we will look to further add to our long Costco’s exposure at the $260 level. On the upside we will be targeting the $315 and $335 levels for collecting our profits from the stock.

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In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the SPY and XLY that have a big impact on the overall performance of the two ETFs.

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