Autohome Has Solid Fundamentals, But The Trend Is To The Downside

Summary

• Chinese automotive site Autohome has seen earnings and revenues grow in recent years, but they are both expected to be lower in the first quarter.
• Sentiment toward the stock is rather skeptical with analysts, short sellers, and option traders all displaying bearish leanings.
• The stock has moved lower for the last year with a trend channel forming over the last nine months.
• Looking for a helping hand in the market? Members of The Hedged Alpha Strategy get exclusive ideas and guidance to navigate any climate. Get started today »

I have been using a three-pronged approach to analyze investments for almost 20 years now. I believe the best investments with the greatest odds of success come when you have the three analysis styles match. For a bullish investment, the fundamentals are strong, the chart shows a stock that is in an upward trend, and the sentiment shows that there is some form of pessimism being displayed toward the stock. For the sentiment, I use a contrarian view as I want bearish investors or analysts to flip to the bullish side and push the stock even higher.

When you use this approach, every once in a while, you will get a stock that confounds you as it has the fundamental strength you are looking for and it has the bearish sentiment that you want, but the stock is trending lower rather than higher. One such company for me is Autohome (NYSE:ATHM), the Chinese automotive website operator. The site offers new and used car listings as well as content and reviews of cars.

The company is expected to announce earnings next week, but I wasn’t able to confirm the earnings date on Autohome’s investor relations page. The Wall Street Journal, StockEarnings.com, and Seeking Alpha all have the estimated date as Wednesday, May 13. Hopefully, this estimate is accurate.

Analysts expect the company to report earnings of $0.76 per share for the first quarter and that is down slightly from the $0.85 the company reported in Q1 2019. Revenue is expected to come in at $220.07 million after coming in at $234.21 million one year ago. If we break down those estimates, analysts expect a 10.5% decline in earnings and a 6% decline in revenue for the quarter when compared to last year.

Autohome has been able to grow its earnings and revenue pretty rapidly over the last few years. The company’s EPS has grown by an average of 36% per year over the last three years while revenue has grown by an average of 12% during that same span. In the fourth quarter, earnings and revenue both grew by 5% from the previous year. Analysts expect earnings to decline by 1% in 2020 as a whole, but they do expect revenue to grow by 5.3%.

The management efficiency measurements for Autohome are rather impressive. The return on equity is well above average at 26.5% and the profit margin is even better at 46.4%.

The stock is trading with a trailing P/E ratio of 21.8 and a forward P/E of 19.4. Neither of those figures puts it in the overvalued category.

Obviously, the COVID-19 virus and the ensuing economic shutdown in China have hurt Autohome just like most businesses in the world, but China is starting to open its economy back up now. The global pandemic isn’t the only thing that slowed China’s economy though. China was slowing before the outbreak, the virus just accelerated the slowing.

Analysts And Short Sellers Are Skeptical Of Autohome

Turning our attention to the sentiment analysis, analysts appear to be skeptical of the stock and short sellers are displaying a bearish sentiment as well. There are 16 analysts covering the stock with eight “buy” ratings, six “hold” ratings, and two “sell” ratings. This gives us an overall buy percentage of 50% and that is below average when compared with other stocks. It is surprising to see such skepticism given the fundamental strength of the company.

The short interest ratio is at 5.3 currently and that is above average and another sign of bearish sentiment toward the stock. There are 3.66 million shares sold short currently and the average daily trading volume is around 695K.

Autohome doesn’t see a great deal of options activity. There are only 2,201 puts open at this time and 1,296 calls open. This gives us a put/call ratio of 1.70 and that is much higher than the average ratio. Unfortunately, the importance of the reading is dampened a little by the low number of shares the options represent. The total number of shares the options represent, both puts and calls, is only 349,700 – barely half of the daily trading volume.

All three sentiment indicators point to a bearish sentiment toward Autohome.

The Downward Trend Started Long Before The Virus Hit

As I pointed out in the beginning, there are always stocks that seem to defy the odds and move lower despite strong fundamentals and bearish sentiment. For Autohome, the stock hit the $115 level in April 2019 and it started trending lower from there. The recent low took the stock below the $60 level and a loss of almost 50% from the high last spring. The stock hit its all-time high of $118.20 in May ’18.

I found the pattern over the last nine months to be especially interesting as the stock has formed a downward-sloped trend channel. The highs connect very precisely to form the upper rail and the lows are pretty consistent as well. It worries me that the upper rail is now in the same area as the 104-week moving average as that could form a dual layer of resistance.

The stock is below its 52-week moving average as well and it just made a bearish cross below the 104-week moving average. The last time the 52-week moved below the 104-week was back when there was barely enough data to form a 104-week moving average. That was at the end of 2015 after the company went public toward the end of 2013. The 52-week crossed bullishly above the 104-week in July 2017 when the stock was trading under $50 a share.

From the all-time high in 2018, the stock dropped down to the $60 area before bouncing. The fact that the stock found support just below the same area in March is somewhat encouraging.

There is another potential support level at the $55 level. The stock had trouble moving above that price in 2014 and 2015. It would eventually break through that level in 2017 and when it suffered a small pullback in the fourth quarter of 2017, the $55 area acted as support.

My Current Take On Autohome

The fundamentals for Autohome are too good to suggest that investors short the stock or buy puts on it. The bearish sentiment is another argument against taking a bearish position. The only argument for making a bearish trade is the downward trend on the chart.

While the fundamentals and sentiment suggest the stock is a buy, the chart says now is not the time. The downward trend is still in place and we could very easily see the stock drop back down to the $60 level in the next few months. That would mean a loss of over 24% from the current price.

My suggestion for investors is to wait for one of two scenarios. First, if the stock drops back down near the $60 area, I would look to buy it and then set a stop just below the $55 mark.

The second scenario would be to buy the stock on a breakout from the downtrend. If the stock closes above its 104-week moving average, that would be the signal for me. If it breaks out of the downward-sloped trend, I can see the stock rallying back up to the $115 area within the next year. If it falls down to the $60 area again, I would watch for a bounce back up to the upper rail. The range from the lower rail to the upper rail is big enough that if you can catch an upward cycle in the overall trend, you could still make a nice profit.

Analyst’s 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.