A trendline of support has formed in the chart of Sonos Inc. (SONO), as shares have been slowly climbing over the past couple months.
SONO is engaged in providing home sound systems. The company's product line includes speaker sets and other accessories like boost, mounts, stands, and cables and networking.
The company saw its revenue drop in the second quarter due to the pandemic closing retail stores, but SONO is seeing record direct-to-consumer revenue and there’s no reason that should stop. Its products are in high demand, especially its new flagship soundbar Arc and the Sonos Move, which are both higher-margin products.
SONO has only produced positive earnings twice in the last nine quarters, but analysts expect a slightly positive EPS last quarter, which will be reported on November 18th. Sales are expected to grow 7.8% next year.
As of the end of the second quarter, the company had only $73 million in long-term debt compared to a cash balance of $329 million. SONO also has a strong 1.9 current ratio.
While its P/E can’t be calculated due to negative earnings, its Price to Sales ratio is 1.4, well below the industry average. The stock has shown strong near-term momentum, which has led to a “Buy” rating in our POWR Ratings system and a grade of “A” in the short-term focused Trade Grade component.
Take a look at the 1-year chart of SONO below with my added notations:
Since its March bottom, SONO has been trending higher, while also forming a nice trendline of support (blue) along the way. Any (2) points can start a trend line, but it’s the 3rd test and beyond that confirm its relevance.
A short position could be entered if SONO were to break below its trendline.
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SONO shares were trading at $16.13 per share on Friday morning, down $0.10 (-0.62%). Year-to-date, SONO has gained 3.27%, versus a 9.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Christian Tharp, CMT
Christian is an expert stock market coach at the Adam Mesh Trading Group who has mentored more than 4,000 traders and investors. He is a professional technical analyst that is a certified Chartered Market Technician (CMT), which is a designation awarded by the CMT Association. Christian is also the author of the daily online newsletter Todays Big Stock.
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