The Industrials sector endured a dreadful stretch versus the broad market from early 2018 through the Covid lows of March 2020. These economically sensitive stocks tend to do better when there is optimism about future growth prospects across the macro landscape. That does not seem to describe the current situation, but I’m spotting some green shoots with Industrial compared to the S&P 500.
The Industrial Select Sector SPDR ETF (XLI) is near its highest relative level in more than a year. Investors should watch the XLI:SPY relative chart for clues on the market, which usually turns ahead of the economy. One small engineering company has a troubled past and reports results early this week.
According to CFRA Research, Matrix Service Company (NASDAQ:MTRX) provides engineering, fabrication, infrastructure, construction, and maintenance services primarily to the oil, gas, power, petrochemical, industrial, agricultural, mining, and minerals markets in the United States, Canada, South Korea, Australia, and internationally.
The Oklahoma-based $150 million market cap Construction & Engineering industry company within the Industrials sector has negative earnings over the trailing 12 months, according to The Wall Street Journal, and has a poor EPS beat rate history. Remarkably, the company has missed the consensus earnings forecast in each of the previous 11 quarters. So it’s hard to expect good things to be reported later this week.
On valuation, Seeking Alpha rates the stock with an A+, but there’s relatively little in the way of consistent metrics to confirm that. I do notice, though, that MTRX’s forward price-to-sales ratio is at the very low end of its history. That suggests there is a high degree of pessimism baked into the stock price. At under 0.2 times next year’s sales, it's about half the average valuation.
According to Wall Street Horizon’s corporate event data, Matrix has a confirmed Q4 2022 earnings date Monday, September 12 AMC with an earnings conference call to follow on Tuesday morning. You can listen live here. Its Q1 2023 release is slated for Monday, November 7 AMC.
With an awful earnings beat rate history and a low price-to-sales valuation, what does the options market say about what could happen Monday evening and Tuesday, post-earnings? Traders see a large 14.8% share price swing using the nearest-expiring at-the-money straddle. The consensus EPS forecast, according to data from Option Research & Technology Services (ORATS), is for a per-share loss of $0.30. Last quarter, the stock moved more than 16% after the company reported results.
MTRX is in a clear bearish downtrend. There is also a hefty number of shares traded in the $6 to $7 range – that's bearish overhead supply. Thus, there’s a confluence of resistance that lies just above the current stock price. MTRX is, however, trending higher off its low under $5 back in early July. Notice that the recent spike above $6 was quickly sold into – that was the stocks’ late 2021 and early 2022 range lows.
Overall, the trend is bearish and there is resistance evident above the stock price. I would wait for a bullish breakout above $7.50 before getting long.
Investors should avoid Matrix ahead of earnings Monday. A bearish price trend supersedes a low valuation in this case. Moreover, the firm’s incredibly poor EPS beat rate history portends bad news Monday evening. The options market prices in a big swing, and I think that will be to the downside.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.