Argan: Buying Opportunity Could Be Brewing

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About: Argan, Inc. (AGX)
by: Individual Trader
Summary

Stock looks like it could test last December's lows.

Earnings though are expected to thrive in 2021.

Argan's low debt, dividend and earnings growth will attract bottom feeders if we drop to the $40 level once more.

From a long-term perspective, shares of Argan, Inc. (AGX) seemed to have either put in an inverse head and shoulder pattern or else a standard double bottom pattern. Argan is a power generation and renewable player in the industrial space. Both are reversal patterns which hold a lot of weight in our eyes considering the time it took for these reversal patterns to play out. We have been watching this stock closely for a number of reasons. It has a strong balance sheet and pays a 2% dividend yield which is easily covered by earnings at present.

For example, if we look at the chart below, we can see that the basing pattern (which led to the reversal) took well over a year to play out. This is noteworthy as the more time a respective stock takes to complete a bottom, the stronger the subsequent rally usually is.

Shares of Argan, Inc. finally broke out of their bottoming pattern early this year. However (considering the length of that bottoming pattern as mentioned), we would have expected more of a sustained rally over the past 3 months. In fact, shares turned over sharply in April and have come right back down to test the breakout area (last year's highs). The question now is whether the support area (drawn in red above) will hold.

First, if we go to a more recent daily chart, we can see a gap printed around 6 weeks after the stock bottomed in late December last year. This in all likelihood means that the gap is a breakaway gap. These gaps usually take place after the completion of a significant bottoming pattern. They usually take place once price has broken out of its range.

Breakaway gaps are a sign of strength in an up-move and usually offer strong support for shares. As we can see from the daily chart of AGX, this gap has not been filled yet but is at risk of doing so which is worrying. If indeed the gap on the chart is a runaway gap (these gaps pop up around the middle of the up-move) and not a breakaway gap, shares could have already topped here is AGX. Let's dig deeper.

Many times after a stock has undergone a strong rally, shares can form something like a coil, pennant or flag pattern which usually are continuation patterns in their own right. However, as the chart shows below, we have none of these patterns being played out at present. Furthermore, the MACD has not turned over and is still only hovering around the zero line. This basically means that although shares have been selling off in AGX over the past while, the stock may not be as oversold as some would suggest. Therefore, caution is warranted at this stage.

We state this because the average valuations in this industry for both sales and assets for example are 1.8 and 0.6 respectively. Argan currently trades with a sales multiple of 1.6 and a book multiple of 1.9. Yes, the stock may look cheap compared to its average historic numbers but we cannot state the same with respect to the industry in general.

However, Argan though under $40 a share would present an excellent long opportunity if the decline was to play out. Earnings are expected to top $4.40 next year. This would mean Argan would be very cheap from a forward earnings standpoint.

With the S&P 500 now 18 weeks into its current intermediate cycle (the stock's last ICL was on the 24th of December last year), the odds are high that we will get some type of an intermediate decline in the not too distant future. Given the correlation between the S&P and Argan, if that gap were to get filled, then a retest of the stock's December lows could come into the frame rather quickly once more. Let's see how this plays out over the next month or so.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.