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Kimberly-Clark Magically Levitating Stock Price; EMC Only Getting Started


Many companies with Kimberly-Clark's fundamentals get half its multiple, while the precise opposite is true for EMC.

Kimberly-Clark (KMB) showed up on my DeMark scans a couple of weeks ago with completed TD Sequential Countdowns, completed TD Waves 5, and completed Megaphone 7 patterns on both weekly and monthly timeframes. With deference to companies paying out fat dividends, 4% in this case, I decided to put it on the back burner until I could find an answer as to why on Earth would a stock like this sport a P/E of 15. After yesterday's earnings report, the answer became rather obvious: for no good reason.

The earnings conference call consisted of a litany of ways the company would show hardly any sales growth and minimal operating profits growth, but would prop up its shareholder base by buying back $1 billion worth of stock and pay out $1 billion dollars worth of dividends. About the only hope the company offered to improve on its depressing guidance was the fact that one of its key input costs, northern softwood pulp, is trading about 10% below what they modeled for the year. Yippee!

At the outset the stock traded down a little bit more than $2, which seemed very light punishment given the "crime." Clearly my impression was wrong since near the close the stock was down about half that much. Now, I am not suggesting that Kimberly-Clark should have tanked $30, nor that it is on its way out of business, however I will repeat that there are no good reasons to own this stock at current prices. Which brings me back to the DeMark charts: a weekly close below $73.56 would put in a "price flip", validating the Megaphone and Sequential Countdown indicators. On a monthly basis the "price flip" will need a close below $71.01. The breach of either level would confirm a change in trend.

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The implied volatility in Kimberly-Clark's options is generally very low, but with an enterprise value of more than $34 billion and a Price/EBITDA of about 9, the risk of a buyout or LBO looks rather limited, and does not seem to justify paying any option premium for overnight risk. I am short a little bit of the stock at $72.40. I will be adding to my short on strength and my "cry uncle" level is around $79. A reasonable downside objective is $61, the current TDST support level on a monthly basis.

On the long side of the ledger is a name that will make a lot of people yawn: EMC Corp. (EMC). I can say that with confidence because for quite a while I, too, was one of the yawners. What woke me up was a tidbit buried in a conference call of Iron Mountain (IRM) back in October of 2010, where the CEO quoted IDC Corp. for the proposition that over the following two years the world would create as much new data as all the data assembled in recorded history. Eighteen months have since passed, but it isn't like I have ignored EMC until now; just a couple weeks ago I described it as a "gift" when it was trading around $21. The key is that with a longer-term horizon (1 to 2 years) the fun may be just beginning.

In a way EMC is very much the anti-Kimberly-Clark: a company that grows its core storage earnings at double-digit rates; throws off cash flow of more than 2x its earnings; sports a free cash flow yield of 16 1/2%; a P/E equal to its growth rate; and owns 80% of VMware (VMW), arguably one of the purest and most essential providers of tools for the development of cloud computing. I know 99% of you already know all of this, so the question is once again, why aren't these attributes being recognized in the stock price. And the answer is once again: there are no good reasons. If there are any, please do share.

Based on several technical indicators EMC's stock slumber may be coming to an end. On a conventional chart the stock is a few confirmatory days away from showing a breakout. And weekly DeMark counts show that the move up is only on bar number two of a TD Sequential Sell Setup. On a daily basis there may be a near-term pullback, and on a monthly basis the stock is going to have to show tenacity once it reaches the $30 zone. But between here and there are several dollars worth of gains to be had, justified by strong fundamentals and a low valuation. To make things even more enticing, EMC options across all available expirations trade at implied volatilities several points below the equivalent realized vols. That said I am straight long the stock and long some January 2013 way-out-of-the-money-puts, and would much prefer getting longer at lower prices and then selling option premium than to pay up for the calls.

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Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
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