Tapestry sent a spark through the luxury retail industry yesterday after it announced the $8.5B takeover of rival Capri Holdings. The deal follows a string of mergers and acquisitions in the field in recent years by the likes of LVMH, Tapestry and Capri itself. Kering, the French high-end fashion giant, is an unlikely takeover candidate due to its €64B market cap. Just as Capri, however, its stock has been badly underperforming recently.
Kering reached an all-time high of €798 two years ago, before plunging below €428 in October, 2022. In other words, the company’s valuation fell 46% despite record sales and profits in both 2021 and 2022. The recent recovery to just over €520 is of little consolation to most pandemic-era investors. Is there still hope for the stock to return to the 2021 highs anytime soon? The chart below looks rather uninspiring.
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Kering ‘s daily chart reveals that the selloff from €798 to €428 is a textbook five-wave impulse. The pattern is labeled 1-2-3-4-5 in wave A, where wave 1 is a leading diagonal. The five sub-waves of wave 5 are visible, as well. According to the Elliott Wave theory, this pattern points in the direction in which the larger sequence is developing.
In other words, we can expect more weakness as soon as the three-wave recovery in wave B is complete. Wave B looks like a simple a)-b)-c) zigzag, whose wave b) is a running flat correction. If this count is correct, wave c) can lift the stock to the resistance near €630-€650, before the bears return in wave C. Once they do return, downside targets below €428 would make sense.
How far below and why have we labeled this structure as waves A and B and not as I-II? To answer that question we need to see where does it fit into the bigger picture. The weekly chart below puts it all into context.
Kering went public in 1994 and looked like a great investment up until early-2000. Unfortunately, by late-2008 it had lost most of its post-IPO gains. We’ve marked this boom-bust cycle as waves (I) and (II). Wave (III) was a wonder to behold as it pushed the stock up 25-fold to almost €800 a share by late-2021. Its impulsive structure is easy to recognize. Note that wave IV of (III) is an expanding flat correction, whose wave ‘c’ coincided with the Covid-19 panic of 2020.
If this is the correct count, the recent weakness must be part of wave (IV). Corrections usually erase most or all of the preceding impulse’s fifth wave. Given that wave C of (IV) has yet to unfold, we see that Kering can plausibly fall to the support near €350. Once there, the risk/reward ratio would be quite attractive as the uptrend should resume in wave (V) towards €900 a share. So, while Kering looks fairly valued at €520, we’d wait for another dip below €400 to initiate a position.
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