On January 1st, 2021, while most of the world was still recovering from New Year’s hangover, we wrote that Campari stock bulls might get a serious one themselves soon. The Italian spirits company’s stock was trading near €9.30 a share in Milan, but at 44 times earnings it looked too expensive relative to fundamentals.
Overvalued stocks can remain that way for a long time, however. So it wasn’t overvaluation that convinced us that Campari bulls were running on fumes. Instead, it was the Elliott Wave chart below and the pattern it revealed.
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The pattern in question was a five-wave impulse, marked (1)-(2)-(3)-(4)-(5). Three lower degrees of the trend were also visible within the structure of wave (3). There was also a notable bearish RSI divergence between waves (3) and (5), underlining the uptrend’s exhaustion. The theory states that every impulse is followed by a three-wave correction, which usually erases the entire fifth wave.
With all that in mind, we concluded that “a drop to roughly €5 a share is likely going forward.” This proved to be a correct, albeit not perfectly-timed call, as the updated chart below shows.
The bulls went from extreme optimism to euphoria, pushing the stock price up to nearly €13.50 in late-2021. They couldn’t prevent the negative phase of the Elliott Wave cycle, however. What we thought would be a major 50% decline turned out to be a 62% crash to €5.10 so far. It took the shape of a simple (a)-(b)-(c) zigzag with an expanding flat correction in wave (b).
Now that the stock has fallen to the support of wave (4), is it a good pick? Despite its clear Elliott Wave setup pointing north, we remain unconvinced for a few reasons. Alcohol is an easy target for tariffs and Trump has already threatened 200% levies on EU spirits imports. In addition, at over 30 times free cash flow, the stock is still far from cheap even after the recent crash. And last but not least, as shares fell 42% in 2024, management decided it was a good idea to spend €97 million on a new headquarters building. Not exactly the shareholder alignment most investors are looking for.
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