When we wrote about aesthetic medical products manufacturer InMode Ltd. on the first day of August, 2023, the stock was hovering just under $43 a share. From a fundamental viewpoint, the company’s stellar financials, decent growth rate and reasonable valuation made it seem like a good investment. There were two other aspects of its story, however, which gave us a pause.
The first one revolved around the fact that aesthetic procedures fall into the category of discretionary services. People simply won’t spend as much money on fixing their skin wrinkles as they do in a strong economy. Given our opinion that a 2024 recession is very likely, we thought InMode stock may be riskier than it appears at $43.
The second reason to avoid the stock had nothing to with the economy or the company. It was all about the 4-hour chart of the stock, which revealed a textbook Elliott Wave setup. Take a fresh look at it below.
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The chart above depicted an impulsive five-wave crash from $99.27 in November of 2021 to $20.60 in May, 2022. According to the theory, a correction in the opposite direction follows every impulse before the larger trend can resume. In the case of InMode stock, the corrective phase of the cycle took the shape of a simple (a)-(b)-(c) zigzag. Wave (b) was a textbook triangle pattern, labeled a-b-c-d-e.
With both waves A and B already in place, we thought it was “time for another notable drop in wave C, whose targets lie below the $20 mark.” In other words, a decline of more than 50% was supposed to occur. Given the quality of the company, we expected that it would take a recession for the stock to drop by this much. The bears weren’t in the mood to wait, though.
The share price started falling seemingly for no reason. The company had just beaten Q2 estimates on both earnings and revenue on July 27th. There was hardly anything on the horizon that would worry investors. Except for that bearish Elliott Wave setup, of course. Apparently the market sensed that something was wrong long before it was reflected in the company’s reports.
The stock was already in the $20s, when InMode posted disappointing Q3 numbers and lowered its full-year guidance on October 12th. Yesterday, it fell below the $20 a share mark to close the trading session at $19.86. Most investors, only relying on fundamental data, were inevitably too late to realize the danger. Elliott Wave analysis, on the other hand, warned us about it two and a half months in advance.
The thing is that a recession in the US, InMode ‘s biggest market, hasn’t even begun yet. Nevertheless, it seems to be a question of when, not if. So, it makes sense to expect INMD stock to visit the low-teens and perhaps linger there for a while, before the bulls can eventually return. It might be tempting to buy at a bargain P/E ratio below 8 now, but remember that the E probably stands for peak earnings…
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