Contrary to common sense, the tough times brought by the pandemic caused a dramatic demand for luxury items. Everything from jewelry to mansions experienced a huge surge in popularity. Recreational boats were no exception. In this respect, few companies benefitted more from the post-pandemic boom than OneWater Marine (NASDAQ:ONEW).
The company is a fast-growing premium boat retailer in the U.S. It went public just before the 2020 Covid-19 market selloff. The stock fell as low as $3.41 in March, 2020. Earlier this week, however, it reached a record high of $62.79 for a gain of 1741% in less than two years. Not bad indeed.
Alas, the recreational boat business is a cyclical one. People buy yachts when they feel they can afford them. The booming stock market brought the illusion of infinite prosperity to a lot of households. When the tide turns and the economy is tight, however, the boat industry is among the first to feel the brunt. And since the economy is hard to predict, we’d rather focus on OneWater ‘s Elliott Wave chart.
During its short history as a public company OneWater has already managed to draw a textbook five-wave impulse. The pattern begins from that March 2020 bottom and is labeled 1-2-3-4-5. Wave 3 is longer than both 1 and 5, while waves 2 and 4 are similar in shape and size.
OneWater Marine Stock Looks Cheap, but There is a Catch
This week’s bearish reversal likely means wave 5 is over at $62.79. According to the theory, a three-wave correction follows every impulse. Furthermore, it usually erases the entire fifth wave. For OneWater stock, this translates into a decline back to the support area of wave 4 near $35 a share. If this count is correct, investors should fasten their seatbelts and prepare for a ~40% drop.
Now, on a price-to-earning ratio basis, OneWater appears dirt cheap. The company is expected to make $7.70 in EPS this year. At a current price of $57, that 7.4 P/E ration makes it look extremely undervalued. However, highly cyclical businesses tend to show low P/E ratios just before the cycle reverses. That is when their profits are the highest, making the stock price seem cheap in comparison.
Whether that is the case in OneWater Marine is too early to tell, though. But we’d rather heed the warning the Elliott Wave principle is giving us and stay aside for now.