Illinois Tool Works Inc. is an industrial products and equipment manufacturer, founded 110 years ago and headquartered in Glenview, IL. The company’s longevity and profitability suggest there is a durable competitive advantage, also known as a moat, protecting the business. The problem is that ITW is a no-grower. Sales in 2021 were roughly the same as in 2019, which were roughly the same as in 2018 and in 2017.
Yet, despite the absence of growth, at $203 a share investors are currently paying 22 times the company’s expected 2022 earnings for the stock. That is down from the all-time record of $250 in January, but still too expensive for our taste, valuation-wise. Valuation alone can only tell us so much, though. In order to get a clearer view of ITW stock ‘s likely direction, let’s examine the Elliott Wave chart below.
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What immediately grabbed our attention was that five-wave impulse from $250 to just above $195 a share. The pattern is labeled 1-2-3-4-5 in wave (1/A) and is followed by a simple a-b-c recovery to $213.84. Whether this was the end of wave (2/B) is hard to tell. The retracement is rather shallow compared to the impulse in corrects, so it might as well evolve into a bigger one.
Nevertheless, the theory states that once a correction is over, the preceding trend resumes. In this case, the trend prior to wave (2/B) is indicated by the decline in wave (1/A). In other words, more weakness in wave (3/C) can be expected sooner or later. If stagnant growth and high valuation weren’t enough, this bearish Elliott Wave setup surely puts ITW stock on our “No, thank you” list.
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