FedEx Shares Face Considerable Downside Risk on DOJ Indictment

NEW YORK (TheStreet) -- Drug trafficking is a serious crime and shares of FedEx (FDX) shares are vulnerable following the package delivery company's disclosure that the Department of Justice filed criminal charges that the company was shipping misbranded controlled substances such as Ambient and Valium.

If the company is found guilty, shares of FedEx could take a serious hit. But such an event could take months.

FedEx is a member of the Dow Jones Transportation Average ,which set an all-time intraday high at 8406.17 on Thursday helped by strength in FedEx. This average has a positive but overbought weekly chart with its five-week modified moving average at 8136.65.

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FedEx ($151.90) reported quarterly results on June 18 for its quarter that ended in May and the company beat analysts estimates by 10 cents earning $2.46. The stock is up 46% over the last 12 months and has a 12 month trailing earnings per share ratio that's elevated at 21.8. The dividend yield is a paltry 0.5%.

Let's look at the daily chart:

Courtesy of MetaStock Xenith

FedEx traded to an all time intraday high at $155.31 on Thursday, then ended the day below Wednesday's low at $152.25. This is the first step in a daily key reversal. FedEx would have to close lower today, below Thursday's close at $191.90 to continue the reversal signal. A lower close today and Monday would confirm the key reversal. Shares are currently around $152.

So far today the stock has held its 21-day simple moving average at $151.19 and is well above its 50-day and 200-day SMAs at $145.41 and $137.09, respectively. FedEx has been above its 200-day since June 25, 2013 and that's the downside risk on a short-term "reversion to the mean."

Let's look at the weekly chart:

Courtesy of MetaStock Xenith

FedEx has a positive but overbought weekly chart but would have to close below last week's low at $149.42 to begin a weekly key reversal. This appeared possible in pre-market trading but investors do not appear worried about the DOJ criminal charges at this time.

The five-week modified moving average is $147.63 with the 200-week simple moving average at $101.41. The 200-week was last tested in December 2011. I consider the 200-week as the longer-term "reversion to the mean.

Investors interested in buying FedEx on weakness should consider doing so using a good 'til canceled limit orders to buy weakness to monthly and quarterly value levels at $146.82 and $142.30, respectively. I show a semiannual pivot at $148.81 which has yet to be tested on weakness. Beware that annual value levels are at $97.95 and $93.02.

Investors worried above the downside risk should consider selling today while the share price is close to the all-time high.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff

TheStreet Ratings team rates FEDEX CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate FEDEX CORP (FDX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 158.94% and other important driving factors, this stock has surged by 45.88% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, FDX should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • FEDEX CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, FEDEX CORP increased its bottom line by earning $6.79 versus $4.92 in the prior year. This year, the market expects an improvement in earnings ($8.80 versus $6.79).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Air Freight & Logistics industry. The net income increased by 140.9% when compared to the same quarter one year prior, rising from $303.00 million to $730.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 3.6%. Since the same quarter one year prior, revenues slightly increased by 3.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.31, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, FDX has a quick ratio of 1.58, which demonstrates the ability of the company to cover short-term liquidity needs.

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