I mentioned during this week's Stock Watch video that I was buying Greencross last week for our clients. Below I will share with you an extract of last week's recommendation:
FUNDAMENTAL ANALYSIS
While the downwardly-revised guidance for FY15 has clearly disappointed the market, the forward profit growth estimates remain very strong and are driven by the benefits of the Mammoth merger, the acquisition of City Farmers, continued LFL sales growth in the underlying operations, continuation of the new store rollout program, veterinary acquisitions and the co-location strategy.
We consider that the current 1-year forward PE multiple of 14.8x is highly attractive for a quality growth stock such as GXL, with the market appearing to have not factored in the potential uplift in earnings in FY16 and FY17 from the initiatives referred to above.
Accordingly, we retain a positive view on GXL, particularly in light of the significance de-rating from ~19x at the time of our earlier report in April occurring whilst the fundamentals remain strong.
TECHNICAL ANALYSIS
When we looked at GXL on 7 April for our clients, it was trading at $7.70 and we suggested that it could head lower, with support at $7 and then further down at $6. It has clearly gone even lower than that, but the bounce from around $5 is quite robust, in our opinion. We have seen a strong week of buying here and the stock has triggered a buy signal on the weekly RSI (pictured). The stock has not broken the downtrend that commenced a year ago, but it is showing enough reversal signs here that some investors may wish to test the waters. There was some slight resistance near $6, but beyond that we could see it head to over $7 before finding the next level of resistance.
