Big ticket item seller is under pressure

By Graeme Dickson
Updated: 12:54 EDT, 11 August 2010

The markets' strength from early July through to last Monday has made it difficult to find weak sectors from a chart perspective, while finding a plausible argument for continued falls has not been easy.

However, the general retail sector has yet again emerged with cracks. In the US, certain retailers such as JC Penney, are really having a hard time staving off the bears.

The whole UK FTSE 350 General Retail sector looks ripe for another fall if we are to follow the US's lead. It can be seen in the chart below using the 20 day (green line) and 50 day (yellow line) exponential moving averages:

Within the FTSE 350 General Retailers, one of the recent weak candidates to have been thrown up in the search was that of Kingfisher (KGF).

The eight day simple moving average (pink line) has intersected the turquoise line (the 20 day simple moving average) to the downside:

The owner of B&Q issued a statement on 22 July saying it remains cautious on the outlook for consumer spending, both here in the UK and in Europe, after reporting a fall in second-quarter same-store sales.

Most retailers that sell big-ticket items are under pressure from increased taxes and public spending cuts hitting consumers hard.

Kingfisher said it remains on track to meet its first-half profit expectations, as a result of cost cutting measures and an increasing focus on higher-margin sales.

The stock trades on a historical price to earnings ratio of 12.5 and with net gearing at just five per cent, the company could hardly be described as expensive.

However, the sector headwinds and the chart signals worse is to come. Expect resistance to set in around 228p while initial support at 200p looks almost inevitable with a close below this level suggesting 175p might be possible.

Update

- Stagecoach (SGC) - suggested to sell at 177p, the stock closed yesterday at 167.5p and firmly below the 200 week exponential moving average of 171p. Expect mild resistance at 157p: below here look out for a decline towards 140p. The company is scheduled for an AGM statement on 19 August.

- Autonomy (AU.) – suggested to sell at 1685p, the stock closed yesterday at 1636p. The stock is struggling to close below 1630p, but if it does, the stock will likely drift towards 1500p.

- Ashtead (AHT) – suggested to sell half at circa 87p and half circa mid 90s, the stock closed yesterday at 97.3p. If it closes above 105p I would throw the towel in. Otherwise, the downtrend still looks good: watch for a break below 80p.

- Serco (SRP) – suggested to sell at 573.5p, the stock close yesterday at 543p. I still maintain that the stock is too highly valued at 21 times earnings and 51.8 per cent net gearing. Interims are scheduled on 25 August: support should come in at 520p and a close below this level could signal worse to come. Lower the stop to 573.5 p to limit the risk.

- Smith & Nephew (SN.) – suggested to sell at 581.75p, the stock closed yesterday at 574p. Interims last week were better than expected, yet the sector, particularly in the US, is still under enormous pressure. Watch out for resistance at 620p, otherwise support should kick-in, initially at 520-525p: through here, one should look out for 480p.

- Capita (CPI) – suggested to sell at 754.5p the shares closed yesterday at 710p. A forecast price to earnings ratio of 16.5 for 2010 and 162 per cent net gearing is still too high and therefore I continue to hold the view that the downside is greater than the upside, at least for the balance of 2010. Expect resistance to come in at 770p while support is already being tested at 700p – a close below here would suggest we look for 665/700p.

The writer does not hold any shares or derivatives in the above mentioned companies. The material for this report comes from Alpha Terminal