L3Harris Technologies (NYSE:LHX), formed by the 2019 merger between L3 Technologies and Harris Corporation, is the sixth largest US defense contractor. The company is decently profitable and financially sound, which helps explain why the stock is hovering close to its all-time high.
And indeed, L3Harris has been very generous to investors throughout the years. The stock price is up 743% from its 2009 bottom for a compounded annual return of 19.44%. The result gets even better when counting the dividends.
But should investors simply extrapolate the past into the future and is it safe to buy L3Harris now at $220 a share? From a fundamental standpoint the answer is a resounding Yes. After looking at the Elliott Wave chart below, however, we’re not convinced.
The monthly chart reveals the stock’s progress since the late-1990s. The uptrend can easily be seen as a five-wave impulse, labeled (1)-(2)-(3)-(4)-(5). Note that two lower degrees of the trend are visible within wave (3). The market has also taken the guideline of alternation into account.
The Charts Points To The South For L3Harris Stock
Wave (2), which occurred during the 2008 Financial Crisis, was a sharp 60% decline. On the other hand, wave (4), which began with the March 2020 coronavirus panic, looks like a sideways triangle correction. If this count is correct, the following surge to $246.08 last month must be the final wave (5).
Unfortunately for the bulls, the Elliott Wave theory states that a three-wave retracement follows every impulse. In this case, we expect the bears to erase the entire fifth wave and then some. A 50% decline from top to bottom, 40% from current levels, can be anticipated to drag L3Harris to the low $120s.
In addition, there is a strong bearish RSI divergence between waves (3) and (5), highlighting the bulls’ exhaustion. Without a doubt, L3Harris has a bright future ahead of it, business-wise. The stock, however, is likely to disappoint over the next couple of years. Despite its seemingly low valuation, we remain on the sidelines.