We're Downgrading This Holding As it Approaches Overbought Territory
Plus, a key support level in healthcare and where we would consider upgrading Costco shares.
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*Keeping our Elevance price target at $550, but watching this support level
*Downgrading United Rentals to a two rating from one
*Costco’s pullback and our two rating
In Wednesday's video, we said we wanted to review Elevance Health’s ELV earnings conference call carefully before rendering any decisions about our price target. While the company delivered top- and bottom-line beats, the market’s attention was on its incrementally negative Medicaid comments and rising medical costs. That combination sees Elevance’s benefit expense ratio trending higher in 2H 2024 compared to 85.6% in 1Q 2023 and 86.3% in 2Q 2024.
That expense rate ticking higher will crimp EPS growth in 2H 2024, which explains the revised language to “at least $37.20” from “greater than $37.20” used by Elevance to discuss its 2024 EPS. That guidance suggests 12% EPS growth year over year in 2H 2024, compared to the latest FactSet figures that have the S&P 500 growing its EPS at 10.7% over the same time frame. As we move through the current earnings season, we’ll remain focused on forward EPS growth prospects for the basket of S&P 500 companies, and use that as our benchmark.
The concern we have is if the outlook for Elevance’s benefit expense ratio is revised even higher in 2H 2024, leading the company to once again soften the language around its 2024 EPS forecast and potentially that $37.20 figure. We’ll have to keep a close watch on this, but with ELV shares down close to 10% in the last two days, the shares are sufficiently beaten up that we can be patient. That said, moving through the current earning season, we will carefully watch the support level near $496 better known as the 200-day moving average. Should we find ELV shares crossing below that, they could become a source of funds for the portfolio.
Downgrading United Rentals to a Two Rating From One
Turning to United Rentals URI, the recent strength in the shares has them bobbing and weaving around our $750 price target depending on what’s happening in the market. With less than 3% upside to that target price, we are downgrading URI shares to a two rating from one. We still see the company well positioned because of infrastructure and other stimulus spending, as well as the eventual uptick in the housing market as the Fed starts to cut rates. However, if URI shares move closer to our price target, potentially putting them in overbought territory, a prudent move would be to lock in some of that strong move in the shares over the last two weeks.
Costco’s Pullback and Our Two Rating
The market’s recent pressure has pulled Costco COST shares down almost 5% from its recent high near $887. The current share price offers 14% to our $950 target, which is almost enough upside to consider revisiting our two rating on the shares. But almost enough doesn’t get the job done. Ideally, we like to see close to 20% upside for us to apply our one rating, which for COST shares means either seeing reasons to boost our price target further or the shares pulling back to the $780 level, which is the 100-day moving average.
At the time of publication, TheStreet Pro Portfolio was long ELV, URI and COST.
