Business services companies rely on the growth of the broader economy to prosper. Therefore, it's not surprising that stocks in this subsector have thrived under the Trump administration's increased government spending and corporate-friendly tax reforms.
As investors look ahead to what new catalysts may resuscitate the bull market that has stampeded Wall Street over the past 10 years, business services stocks may come under some short-term duress as concerns over a slowing economy and unresolved trade tensions between the United States and China linger. Companies in this cyclical industry may also face rising hiring costs due to a tight labor market and stringent immigration policies that make it difficult to attract talented staff.
From a technical perspective, the new year's bounce in business services stocks looks set to run into significant resistance. Let's explore three trades to profit from falling prices.
Cintas Corporation (CTAS)
Headquartered in Cincinnati, Ohio, Cintas Corporation (CTAS) manufacturers and markets uniform and facility services primarily in North America, Latin America, Europe and Asia. Cintas stock, with a market capitalization of $18.47 billion and offering a 1.15% dividend yield, is up over 5% for the year as of Jan. 15, 2019. The company's forward price-to-earnings ratio (P/E ratio) of 24.4 makes it more expensive than the average S&P 500 stock that has a forward P/E ratio of 14.4.
Cintas shares trended steadily higher from January through August last year. Since that time, the bears have taken control, apart from a countertrend move midway through the fourth quarter and the current 14% bounce from the December swing low. The stock's rise on declining volume in 2019 indicates a lack of buyer participation. Traders should consider opening a short position at the $180 level, where the price finds resistance from the upper trendline of a descending channel pattern and the 61.8% Fibonacci retracement level. Set a stop-loss order above the 200-day moving average and look to book profits on a fall back down to the Christmas Eve low.
Moody's Corporation (MCO)
Moody's Corporation (MCO) provides credit ratings, economic-related research and analytical tools. The New York-based company acquired Bureau van Dijk in 2017, a provider of private company data, for $3.5 billion to expand its analytics business. Morgan Stanley (MS) recently downgraded Moody's from "equal-weight" to "underweight" due to a more challenging debt issuance environment. The investment bank also slashed its 12-month price target on Moody's stock to $135 from $145. Moody's share price has started the year well, with a year-to-date return of 6.56% as of Jan. 15, 2019. Investors receive a 1.18% dividend yield.
A head and shoulders pattern formed on Moody's chart between June and September that heralded a change in trend direction. The stock has since oscillated within a descending channel that has established clear support and resistance areas. Although the price has staged an impressive rally to start 2019, it finds significant resistance at the $152 level from the channel pattern's upper trendline. Those who want to short the stock can time their entry by waiting for the relative strength index (RSI) to move into overbought territory above 70.0 before executing a trade. Consider using a five-point stop and covering the short sale near the December swing low at $129.26.
Verisk Analytics, Inc. (VRSK)
Verisk Analytics, Inc. (VRSK) offers data analytics solutions for customers in the insurance, energy and financial industries. The company, whose clients predominantly reside in the United States, drives revenue from long-term contracts and subscriptions. Zack's Investment Research downgraded Verisk shares from "hold" to "sell" in early 2019, stating that the company remains susceptible to security breaches, customer consolidation, fluctuations in the U.S. insurance industry and pricing pressures. As of Jan. 15, 2019, Verisk stock has returned just 1.96%, underperforming the industry average return by 1%. The company has a market cap of $18.30 billion.
Verisk's share price formed a classic double top chart pattern over a three-month period in the second half of 2018. Price accelerated below the pattern's neckline during December in sympathy with the broad market sell-off. The stock has attempted a half-hearted rally over the past three weeks but now approaches a confluence of resistance at $112.50 from the double top's neckline and the 200-day simple moving average (SMA). Traders who short at this level could place a stop just above the 50-day SMA and aim to take profits on a test of last month's low.
