Just recently, our Kronos Worldwide (KRO) position turned into a positive territory. Despite the adverse effects of the coronavirus induced lockdowns, we were early with our entry as the share price topped out on the 4th of November last year. Shares though have come back strongly since bottoming out on the 9th of March at $7.70 per share and, currently, trade above $11 a share.
We stated in a recent article that the dividend remained the strong calling card here and nothing has changed to this effect. With the firm’s current valuation and 6%+ current dividend yield, value investors are going to be attracted to this stock. The one trend to watch, however, is that payout ratio. At present, the dividend payment is taking up practically all the free cash flow the firm is generating. This is why we would like to see some strength in the share price before adding more capital here.
In this article, we will take a technical view of Kronos. Other articles have gone through the risks such as the expected decline in demand for titanium dioxide associated with this sector which could lead to a dividend cut in Kronos. In many sectors right across the board and not just the speciality chemicals industry, demand for products and services looks like it is going to be less for quite some time to come. Kronos, at present, pays out a forward dividend of $0.72 which equates to a yield of 6.26%. The question is, therefore, how the market bakes this “no normal” into the share price?
From a technical standpoint, we study Kronos’ market action to try and gain insights on where shares are headed. For example, we believe that all known fundamentals whether they be bullish or bearish have already been embedded into the share price action. Fundamentalists may have a problem with this but here is our premise.
Companies at any given time are cheap for a reason or, consequently, expensive for a reason. Many times, fundamental analysis investors aim to portray that a company will explode for whatever reason but we believe this reason(s) is usually already known by the market. If the fundamentals are bullish, then the price will increase accordingly. If they are bearish, the price will decrease. Technically, it is all about market action which is essentially the resulting fundamentals of the firm. Reasons why, for example, Kronos may go up or down from present levels is secondary, in our view.
Therefore, from this perspective, let’s head to the long-term chart. As we can see, Kronos is most certainly not a recession-proof stock. The declines in the 2009 and 2015 lows were very steep to say the least. However, the advantage with cyclical stocks is that upside can be significant at those multi-year lows. The question now is whether the March 12th lows this year will end up becoming multi-year cycle lows or do we have further lows ahead of us. The technicals can certainly help us in this regard.
We are already long a small position as mentioned in Kronos. Here is what would need to happen on the long-term chart in order for us to consider adding to our position.
Firstly, we would need to see a price break above that down-cycle multi-year trend-line. The encouraging aspect here is that price already has clear momentum as we can see from the RSI bullish divergence and recent bullish move. Furthermore, price is now trading above its 10-month moving average. Once we get the trend-line breach, it would be a clear indication that the pattern of lower lows has ended.
Secondly, the MACD indicator is very close to crossing over, which would be another long-term buying signal. The beauty of this indicator is that it combines momentum with the trend. As we can see above, this indicator’s action at present is very similar to the 2016 crossover (which subsequently resulted in a blistering rally). Investors should note here that since this indicator is a lagging indicator, the crossover always takes place months after the actual bottom. In 2016, for example, the buying signal did not present itself until 6+ months had passed after the bear-market bottom.
We like the share price action on the daily chart. The volume trend looks attractive as shares remain trading in a narrow trading range. A breakout above the upper trend-line will most likely correspond with the triggering of the long-term signals described above.
Therefore, to sum up, Kronos, definitely, holds potential but still has work to do before we can confirm that a new long-term bullish trend has been started. Second quarter earnings ($0.04 EPS expected) are due to be announced shortly. Let’s see if earnings beat here can rally shares out of its existing channel.
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Disclosure: I am/we are long KRO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.