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Moody’s, a Buffett Darling, Trading in Late Fifth Wave

Moody’s Corp. has been a long-time holding in the Berkshire Hathaway portfolio. It is also the seventh biggest position in it as of the end of March 2020. The company has a strong competitive advantage, it is highly profitable and growing. No wonder Warren Buffett likes it so much.

The stock did decline sharply in the recent COVID-19 selloff, but is back at new all-time highs as of this writing. Currently at $294 a share, it is actually up almost 80% from the March lows. Can that uptrend continue?

From a valuation point of view, Moody’s is extremely overvalued. The company trades at 40 times its 2019 earnings, but has been growing its EPS at just 10% for the past five years. The problem with valuation is that it has no predictive value. An overvalued company can stay that way for a long time.

By the way, Moody’s the company will be just fine. In order to get an idea of what lies ahead for Moody’s stock, we need a different approach. The weekly chart below puts the post-Covid-19 surge into Elliott Wave perspective.

Moody's is trading in late-stage super cycle fifth wave

It turns out the March plunge was wave (4) within the larger impulse pattern which has been in progress for over 20 years. Wave (1) ended in 2007 and was followed by a deep retracement during the 2008-2009 Financial Crisis. Wave (3) was a wonder to behold. It multiplied shareholders’ money by over 18, not counting the dividends.

If this count is correct, Moody’s stock is now in the fifth and final wave of the uptrend that began in 1998. Now, with the Fed’s re-adopted easy money policy, it remains to be seen how far can wave (5) go. However, we think holding an extremely overvalued stock that is due for a major Elliott Wave correction is not worth the risk. The anticipated three-wave decline can erase all of wave (5) and drag Moody’s back down to ~$160 a share. That is 45% less than the current price.

Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!



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