With more than 70% of companies in the business services industry exceeding Wall Street's earnings estimates in the June quarter, it's not surprising that the segment has returned nearly 30% year to date, ranking alongside the best performing areas of the market.
The industry has continued to benefit from robust manufacturing and non-manufacturing activity. Purchasing Managers' Index (PMI) readings for both came in above 50 for July, indicating economic expansion despite the escalating U.S.-China trade tussle. Ample demand from commercial construction, finance and insurance, health care, and support services helped companies in the business services space drive quarterly top- and bottom-line growth. However, much of the upside may be mostly factored into existing stock prices, with the segment trading at a 24% premium to the S&P 500 from a forward earnings perspective.
From a technical standpoint, several of the industry's best-performing stocks this year have recently formed topping patterns and show signs of dwindling momentum that may induce investors to take some profits off the table amid heightened market volatility. Below, we drill down on three business services leaders and explore possible shorting opportunities.
FleetCor Technologies, Inc. (FLT)
FleetCor Technologies, Inc. (FLT) provides commercial payment solutions – such as fleet cards, food cards, and corporate lodging discount cards – across the Americas, Europe, and Australasia. Morgan Stanley downgraded the Peachtree Corners, Georgia-based company in July, saying that the firm's valuation versus its payments peers now sufficiently accounts for its earnings trajectory and levers for long-term growth. The company trades at about 25 times forward earnings, compared to the industry average multiple of 22. FleetCor stock has a market capitalization of $25.01 billion and is trading up 55.58% year to date, outperforming the business services industry average by roughly 20% as of Aug. 13, 2019.
The payment provider's share price trended sharply higher between December and June, with only three minor pullbacks to the 50-day simple moving average (SMA). More recently, the stock printed a fresh 52-week high/all-time high but has subsequently failed to hold above the July swing high. Moreover, a bearish divergence between the stock's price and the relative strength index (RSI) indicates fading buyer momentum and increases the probability of a double top. Those who decide to take a short position should look for an initial fall to the $270 level, followed by a move down to $235, where the price finds support from a horizontal trendline and the 200-day SMA. Cut losses if the stock closes above its all-time high at $297.13.
Cintas Corporation (CTAS)
Cintas Corporation (CTAS) provides corporate identity uniforms and related business services primarily in North America, Latin America, Europe, and Asia. The $26.79 billion company operates through two business divisions: Uniform Rental and Facility Services, and First Aid and Safety Services. Cintas has surpassed the Street's bottom-line expectations over the past four connective quarters; however, the company does trade at a lofty 31 times earnings. As of Aug. 13, 2019, Cintas stock issues a 0.78% dividend yield and has returned 55.60% year to date.
Since gapping roughly 9% after topping analysts' earnings and revenue expectations, the stock has consolidated within a tight $15 trading range. Cintas also recently forged a new 52-week high/all-time high but has pulled back below key resistance at $265. As the stock reached its peak, the RSI made a shallower peak, suggesting weakening enthusiasm from the bulls. Traders who execute a short sale here should set an initial profit target at $245, where the price may test a gap fill and the 50-day SMA. Those looking for a more significant downside move could place a take-profit order near the $210 level – an area where the price encounters support from a horizontal line and the 200-day SMA. Limit downside with a stop-loss order above this month's high at $266.56.
Global Payments Inc. (GPN)
With a market value of $24.46 billion, Global Payments Inc. (GPN) offers payment technology and software solutions for card, electronic, check, and digital-based payments. The company primarily targets small and midsize merchants in North America, Europe, and the Asia-Pacific. In May, Global Payments and Total System Services agreed on a stock merger of equals that gives Total System Services shareholders 48% of the combined company's shares. The consolidation aims to help compete with new technology players, like Square, Inc. (SQ) and PayPal Holdings, Inc. (PYPL), which offer similar payment technology-driven services. Global Payments stock pays a tiny 0.02% dividend yield, has a forward price-to-earnings (forward P/E) ratio of 25.64, and is up a healthy 55.23% on the year as of Aug. 13, 2019.
The Global Payments share price broke below a topping pattern earlier this month, indicating further downside risk in the days and weeks ahead. A retest of the formation's neckline and 50-day SMA was rejected in recent trading sessions, further suggesting imminent weakness. Short sellers should think about buying to cover between $135 and $129, where the stock finds crucial support from previous price action and the 200-day SMA. Manage risk by positioning a stop order slightly above the Aug. 9 high at $161.41 and moving it to the breakeven point if the price drops below the critical psychological $150 level.