Transdigm Group is a leading aircraft components manufacturer, headquartered in Cleveland, Ohio. The company went public almost 20 years ago and what a journey it has been. The stock is up from $23.95 at the IPO to almost $1400 today for a 5700% gain, not counting the dividends. On the other hand, it is down from over $1600 per share, losing 13% this month, following the company’s latest earnings report.
Understandably, many would hurry to buy the dip, given the company’s high quality. Our problem is that even after a 13% drop, Transdigm stock still trades at a P/E of 38. Not to mention that according to the Elliott Wave chart below, the bears are probably not done with it yet.
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The weekly chart reveals that the recent decline from $1624 to $1370 is most likely part of a fourth wave correction within the larger impulsive uptrend. Wave I lasted for 14 years until Covid-19 struck in 2020 and erased 70% of Transdigm’s market cap in just two months. That crash stands for wave II. As usual, wave III was a wonder to behold, bringing an eight-fold increase in just over five years.
Its five sub-waves are marked 1-2-3-4-5 and the structure of wave 3 of III is visible, as well. This leads us to believe that this month’s drop marks the start of wave IV. It is far too early to tell what kind of corrective shape it would take. All we know is that it is too shallow in relation to the impulse it retraces. Further weakness to sub-$1200 makes sense, before the bulls can lift the price to a new record in wave V. Then, the entire impulse pattern starting in 2006 would be complete and a big three-wave correction should erase roughly half of it, before Transdigm’s uptrend can continue.
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