Clorox: Stock’s Breakdown Makes Tepid Guidance Even Less Attractive

Clorox (CLX) is a stalwart of the pandemic economy. The company’s line-up of cleaning and disinfectant products are favorites for COVID-19 safety routines. While the company sells products like vitamins, bags and wraps, cat litter, food, water filtration, and natural personal care, Clorox is the cleaning company. As the cleaning company, the stock has enjoyed a breakout and then uptrend since the March stock market crash.

The Stock Chart for Clorox

Clorox (CLX) is looking toppy in a reflection of a lukewarm 2021 earnings outlook.
Clorox (CLX) is looking toppy in a reflection of a lukewarm 2021 earnings outlook. Source:

This week, CLX closed below its 50-day moving average (DMA) for the first time since March 25th. The stock survived three tests of 50DMA support until the last one led to the current breakdown. The near 2-month low marks follow-through and confirmation of a post-earnings (August 3rd) top.

I turned out wrong about a March topping pattern. At that time, I focused my attention on buying from the large number of stocks that had crashed and become incredibly cheap. CLX was even trading at the former all-time high left behind by the breakout. Compared to that crowd, CLX looked unattractive. That relative comparison turned out quite correct. Today, CLX trades just 2.8% higher than its extreme intraday high from March.

The current topping pattern looks a lot more convincing than the March topping pattern given the bearish 50DMA breakdown, and extremely high valuation, and unexciting guidance for 2021.

The Guidance from Clorox

According to Yahoo Finance, Clorox sports a 29.8 trailing P/E, a 31.4 forward P/E, price/sales at 4.1, and a price/book at an astounding 30.5. This sky-high valuation buys a company with little to no growth in the coming year. Here is the 2021 outlook from Clorox’s 4th quarter earnings report:

“Flat to low single-digit increase in sales (flat to low single-digit increase in organic sales growth).

Mid-single-digit decrease to mid-single-digit increase in diluted EPS.”

I am biased to the low-end because the company will face difficult comparables for the second half of 2021 given the strong sales from the pandemic in the first half of 2020. The outlook from Clorox includes some notable risks as well as opportunities. From the latest earnings report:

“Continued elevated global demand for cleaning and disinfecting products.

Aggressive investments in the long-term momentum in Clorox’s global portfolio, including increasing production capacity.

Job security and discretionary spending pressures on consumers as a result of an ongoing recession.

Minimal disruptions to its extended supply chain and other operations, allowing Clorox to continue producing products to meet demand.”

This reads like too much risk given the minimal tepid 2021 guidance. An investment in CLX at these levels is a thematic bet on the market following the pandemic narrative no matter the price. Perhaps the coronavirus worsens in the winter and prompts a fresh run-up in demand for Clorox’s cleaning products. Given the flurry of work on vaccines and treatments, I am not one to trade on guesses about a renewed surge in demand for Clorox products.

The Trade on Clorox’s Stock

Clorox’s slow ascent could be its buffer on the way back down. Thus, aggressive shorts do not make much sense. I started with a layered put calendar spread at the $215 strike. I sold a put short expiring this week and sold another put expiring next week. The premiums from these puts partially paid for two monthly September $215 puts. The chart above shows that the selling in CLX may have already reached a pause, so I like the odds of both short puts expiring worthless ahead of a presumption of selling in early to mid-September.

Given my newfound bearishness on the stock market, I am more interested in trading breakdowns like CLX. Over the course of a deeper sell-off, if one happens, I expect the 200DMA to offer firm support for the stock. Some form of the COVID-19 narrative is likely to linger even after the virus and/or its health impacts are vanquished.

Be careful out there!

Full disclosure: CLX calendar put spread

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