Headquartered in Minneapolis, Minnesota, Graco (NYSE:GGG) Inc. develops and manufactures fluid-handling systems and products for industrial uses. The company was founded in 1926 and has been public for more than half a century. It exceeded the $2B revenue mark for the first time in 2022. As its stock now flirts with a new all-time high, Graco has a market cap of roughly $13B.
Is GGG a buy, though? From a fundamental perspective, the company is profitable, growing and has more cash than debt on its balance sheet. The thing that puts us off is its valuation. Graco trades at 25 times forward earnings, meaning investors are probably too optimistic about its future prospects. And while GGG has been overvalued without crashing for quite a while now, we think it is approaching dangerous territory.
It looks like this time might be different in a bad way. The weekly chart above reveals that Graco is on the verge of completing a multi-decade five-wave impulse. The pattern is labeled I-II-III-IV-V. Wave II coincided with the 2008 Financial Crisis and planted the seeds for the extended third wave that followed. Three lower degrees of the trend can be recognized within the structure of wave III.
The general stock market weakness throughout 2022 produced what should be Graco ‘s wave IV. If this count is correct, the recent surge is part of the fifth and final wave of the sequence. Wave V is supposed to exceed the top of wave III, so upside targets near $90 a share seem reachable. On the other hand, the Elliott Wave theory states that every impulse is followed by a correction.
Corrections usually erase the entire fifth wave, but in this case, a drop to just ~$55 would be too shallow compared to the preceding impulse. Therefore, we believe the bears can potentially drag Graco to the next support near the mid-$40s. That would be a much better time for investors to add Graco to their stock portfolios. For now, we remain on the sidelines in anticipation of a major bearish reversal near $90.