Formed by the merger of Avery International and Dennison Manufacturing in 1990, Avery Dennison manufactures and distributes pressure-sensitive adhesive materials, apparel branding labels and tags, RFID inlays, and specialty medical products. The company’s market cap is close to $18B and the stock is not far from the all-time high of $233 and change it reached last month.
The share price is up nearly 1200% or 13-fold from its 2009 bottom, making Avery Dennison a market-beating investment over the past 15 years. The higher its valuation, however, the harder it is for the strong returns to continue. Given the stock’s forward P/E of 23 and the company’s low-single-digit revenue growth rate, we think that caution is advised. And the Elliott Wave chart below more than supports that conclusion.
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The weekly chart of Avery Dennison reveals that the bull market from the bottom in 2009 can be seen as a complete five-wave impulse. We’ve labeled the pattern (1)-(2)-(3)-(4)-(5), where the five sub-waves of (1) are also visible and wave (4) is an a-b-c-d-e triangle correction. It looks like wave 5 of (5) could lift the stock to a new high near $240 – $250 a share.
That might be the bulls last chance to evacuate, though, because according to the theory, a three-wave correction follows every impulse. Furthermore, the corrective phase of the Elliott Wave cycle usually erases the entire fifth wave and then some. This puts downside targets near $140 within the bears’ reach. So we think that extrapolating the recent past into the distant future would be a mistake for Avery Dennison shareholders. The company’s long-term prospects remain bright, but the next couple of years are likely to disappoint.
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