When we wrote about OneWater Marine (NASDAQ:ONEW) on Jan. 7, 2022, the stock was hovering slightly below $57 a share. The company had an incredibly strong 2021 after the pandemic somehow boosted demand for recreational boats.
Furthermore, 2022 was expected to build on that momentum with another ~30% revenue growth and almost $7.70 in EPS.
In other words, less than three months ago, OneWater was trading at an incredibly low P/E of 7.4. At first glance, the stock looked like a bargain and a high-potential investment.
We were not convinced, though, and argued that investors should "stay aside for now." But our skepticism had nothing to do with the company’s fundamentals. Instead, it was based entirely on ONEW ‘s Elliott Wave chart below.
A quick look at OneWater's daily chart revealed a very clear impulse pattern, which we then labeled 1-2-3-4-5. And that is all it took to turn bearish on the stock, because the theory states that a three-wave correction follows every impulse. Corrections usually erase the entire fifth wave, which told us to "prepare for a 40% drop" to roughly $35 a share. The updated chart below shows how the situation unfolded.
The bears took over almost immediately. The bulls gave them a good fight throughout February, but without achieving much. On Mar. 23, 2022, the stock dropped to $35.53, down 37% since we wrote about it in January and 43% from its $62.79 record high.
In the meantime, as OneWater stock kept falling, the company reported better-than-expected quarterly results and raised its guidance for the full year. Analysts’ estimates now call for almost $9 in earnings per share for FY2022. Strangely, as the business improved, its market value crashed. Most investors are probably wondering what is going on. Elliott Wave analysis put us ahead of it.
What Can History Tell Us About OneWater ‘s Industry?
OneWater is a relatively young company, which formed in 2014 and only became public two years ago. The past couple of years have been very generous to the business, but we must see what happens when the going gets rough, as well. Unfortunately, we cannot check how the business behaved during the 2008 Financial Crisis, since it simply didn’t exist back then.
We can, however, use one of its main competitors, MarineMax (NYSE:HZO), as a proxy, since it operates in the same industry and is subject to the same market forces. For instance, MarineMax has also been posting record results in the past two years.
Alas, it didn’t do so well during the 2008 recession. Its sales fell from $1.26B in 2007 to as low as $450 million by 2010. EPS plunged from $2.08 in 2006 to a loss of ($7.30) in 2008. It then took roughly a decade for the company to match its 2007 revenue again.
Conclusion
Recreational items, especially large ones such as a boat, are the first thing people stop buying in a crisis and the last thing to start spending on again. This is the very definition of a cyclical industry. It is also the reason we’re skeptical that OneWater’s recent results are indicative of future business performance. Extrapolating the recent past into the future is a dangerous game in investing, especially if the recent past was so rosy.
Back to Elliott Wave analysis. We think once the current plunge in wave A is over, waves B up and C down would have to complete the correction. Eventually, OneWater stock can be expected to fall below $30 and towards the mid-$20s before the 5-3 wave cycle is complete. We remain on the sidelines until then.