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Bear of the Day: Simpson Manufacturing (SSD)

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Simpson Manufacturing (SSD - Free Report) is a $2.8 billion maker of building products that just had a -14% earnings miss and saw estimates get slashed double-digits.
 
The stock is climbing back from $58 after its post-earnings gap down but I don't think it will fill the gap up to $66. And that's why I shorted this provider of wood and concrete construction products like truss plates, connnectors, fasteners, anchors and adhesives on the rally back to $64. If it does fill the gap, I would add to the position there.
 
After estimates dropped enough to imply -5% EPS growth this year, the stock became a Zacks #5 Rank but still sports a Growth Score of A. That's probably based on next year's EPS looking great now with +19% growth. I think those will come down too.
 
Analyst coverage is low here, with only 2 contributing to the Zacks Rank, including Sidoti who downgraded to Neutral and lowered their PT from $72 to $60 on July 30. DA Davidson reiterated their $60 price target as they dropped 2019 EPS 17.7% from $3.17 to $2.61 and took next year down from $3.87 to $3.16.
 
The stock trades over 20X EPS and 2.5X sales that are only growing 5%. With housing slowing down, I think this stock will come down too and at least test the recent lows near $58 and probably $55.
 
Simpson Manufacturing Company Inc. is headquartered in Pleasanton, California and through its subsidiary, Simpson Strong-Tie Company Inc., the company designs, engineers and is a leading manufacturer of wood construction products and solutions, including connectors, truss plates, fastening systems, fasteners and shearwalls, and concrete construction products, including adhesives, specialty chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials.
 
A Method for Shorting
 
Whenever I pick a short, it is not my "best idea" per se, as when I pick longs I really believe in. 
 
Picking a short is more about this recipe: I see market & macro volatility on the rise, and I want some short exposure, so I go hunting for the first potential kill among the weakest prey.
 
I picked decent short targets in the past year in DDS and SIX, even if the timing wasn't perfect. But I quit looking for shorts in Q2 when the market was lifting most boats.
 
So let's talk about how I picked this short...
 
First, I looked at over 100 Zacks #5 Rank stocks across many Zacks sectors including Tech, Energy, Industrials, Construction, Finance and Medical.
 
That's not an exhaustive search certainly, and I'll admit I don't have the sector expertise to pick losers in Energy or Finance.
 
Second, I always seek a confluence of fundamental factors for a short, in addition to a poor Zacks Rank. SSD stood out for these reasons: rich valuation metrics, sector/industry weakness, low investment bank interest. 
 
In addition to weak housing starts data, we also got a slip in consumer confidence. According to Bloomberg on Aug 16...
 
U.S. consumer sentiment plummeted to a seven-month low in August on growing concerns about the economy even as the labor market shows few signs of weakening from robust levels.
 
The University of Michigan’s preliminary sentiment index slumped to 92.1 from July’s 98.4, missing all forecasts in Bloomberg’s survey of economists. The gauge of current conditions decreased to 107.4 while the expectations index dropped to 82.3, bringing both readings to the lowest levels since early this year. 
 
Third, I look at the charts and try to see where technical weakness looks like it could be preyed upon further. Here's the chart for SSD so you can see what I'm watching...
 
 
We have a rounding top of lower highs -- and lots of "support" targets below from $58 to $54.
 
My risk/reward is at least 2:1 as follows...
 
RISK $2-3 to $66 (it probably won't get much above $65) and look for REWARD of at least $5-7 into the mid-$50s.
 
Consumer Sentiment Plunge on... Tariff Tweets?
 
On top of more weak housing data, this hiccup for the consumer isn't welcome. I shorted SSD on the morning of this data and the one thing that has obviously gotten worse is the trade war action and reaction.
 
So it's safe to say that the rest of this analysis for early August won't look any better in early September...
 
Again from the Bloomberg article "Economic Concerns Send U.S. Consumer Mood to Seven-Month Low" by Ryan Haaron on Aug 16...
 
Consumers “strongly reacted” to the proposed increases in tariffs on Chinese goods, a subject that was spontaneously cited by 33% of those surveyed, near the recent peak of 37%, according to the report. Americans also concluded, following the Federal Reserve’s first interest-rate cut in a decade, that they may need to be more cautious about spending in anticipation of a potential recession, the report said.
 
The July 31-Aug. 14 survey period corresponded with an especially volatile period: The Fed rate cut, Trump raised tariffs on consumer goods from China then delayed some, and signs of global malaise multiplied.
 
Markets convulsed in those two weeks. U.S. stocks posted their two steepest drops of the year while yields on 30- year Treasury bonds fell to record low and 10-year yields dipped below the two-year in a harbinger of recession in the next 18 months.
 
“The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “Consumers concluded, following the Fed’s lead, that they may need to adopt a precautionary spending outlook in anticipation of a potential recession.”
 
(end of Bloomberg excerpt)
 
Now, to tie it all together, we bring in Diana Olick, housing expert from CNBC. She wrote about the housing market data, consumer confidence and the views of industry experts like KB Home (KBH - Free Report) CEO Jeff Mezger on Aug 16.
 
Olick observed that the terrific drop in long-term interest rates "has not produced a home-buying spree for either new or existing homes" thereby denting new home construction starts. And she titled her piece "Confidence matters more than mortgage rates in housing, and confidence just took a hit" after speaking with Mezger...
 
“I’ve always maintained over the years that consumer confidence means more than rates to the home buying decision,” said Jeff Mezger, CEO of Los Angeles, CA-based KB Home told Olick. “We’ve had some great years where interest rates were 8, 9,10%—because people find a way when they feel confident about the future.”
 
“Frankly, as an industry, that’s what is holding us back from getting to normalized levels,” said Mezger. “We’re only going to invest and build if we can get a return, and it’s difficult to find the combination of land, the cost to produce, the fee structure in that city and then what you can sell a home for based on the incomes in that submarket. So that is the challenge.”
 
Since it looks like low interest rates won't be used to buy expensive new homes, new construction could be under pressure for some time until prices come down.
 
Disclosure: I am short SSD shares in the Zacks TAZR Trader portfolio.
 
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