Paper Stock Sell Signal Hasn’t Failed in Years

The shares of paper provider Westrock (WRK) have added more than 10% so far in June, after touching a three-year low of $32.01 on May 31. However, it could be a “dead cat bounce” for the equity, which just flashed a historically bearish signal.

WRK stock has spent 2019 in a channel of lower highs, and has surrendered roughly half its value since touching an all-time peak of $71.55 in January 2018. After the recent bounce, the shares are now back within one standard deviation of their 80-day moving average, after a lengthy stretch below this trendline.

Over the past three years, there have been five similar run-ups to the 80-day. One month later, the shares were lower 100% of the time, averaging a loss of 11.25%, per data from Schaeffer’s Senior Quantitative Analyst Rocky White. From the equity’s current perch at $35.92, a similar drop would place the stock just south of $32 — and back into new-low territory.

Despite Westrock’s struggles, one-third of analysts following the equity maintain “buy” or better opinions, with not a single “sell” in sight. Meanwhile, the consensus 12-month price target of $49.46 represents a steep 38% premium to current levels. This analyst configuration leaves the door wide open for potential downgrades and price-target cuts, which could exacerbate selling pressure on WRK.

Traders expecting more downside for the shares should consider options. The security’s July 35 put was last asked at 85 cents, so buyers would profit the further WRK retreated beneath $34.15 (strike minus premium paid) before the options expire at the close on Friday, July 19. Should the stock stay north of the strike, meanwhile, the buyer’s risk is limited to the initial premium paid for the puts.