On December 21, Cintas (NASDAQ:CTAS). posted a 33% increase in quarter over quarter earnings and heightened future expectations. Since that date the stock has rallied 21%. However, this rally in Cintas stock is unsustainable. Strongly overbought technicals and the pricing overly optimistic employment trends make me strongly bearish on Cintas.
Cintas is America's leading uniform rental company that specializes in lending uniforms to both small and large businesses in service industries. Uniform rentals account for 74% of the company's earnings and 81% of revenues. As a result, Cintas' success is dependent on the size of the low skilled service industry workforce that compromise the majority of workers who wear uniforms on a daily basis. This sector of the labor force has shed less jobs that other parts of the economy over the past few years, but post-Christmas retail layoffs and a slowing down of the economy will reduce demand for uniforms.
On the technical side, Cintas is ridiculously overbought. The stock has a RSI measure of 79.8, which is the third highest of any company with a market cap over $4 billion. The full stochastics of Cintas is also indicating the stock is overbought with a rating of 98 (maximum is 100). Price movement has been parabolic since a 9.3% gap up after earnings. The MAC-D has flattened and is on the verge of crossing bearish. Cintas is also trading above its upper Bollinger band. Just about every technical indicator is uniformly pointing bearish. The unanimity of technicals to such extremes is rare and makes Cintas an excellent short to medium term shorting opportunity.
Overall, both economic fundamentals and technical analysis point to CTAS being overbought and overvalued. At its current price, Cintas has the potential (but unlikely) upside at $40 per share, but odds favor a significant downtrend. My target price is at $31 which is the price at the bottom of the island gap created by earnings news.
Disclosure: I am short CTAS.