Bear of the Day: Westlake Corp. (WLK)

Westlake Corporation manufactures and markets performance and essential materials as well as housing and infrastructure products globally. The company produces and supplies a variety of products such as ethylene, polyethylene, PVC, vinyl intermediates, and fence and decking components.

Founded in 1986 and headquartered in Houston, Texas, Westlake also provides consumer and commercial products including landscape edging, home and office matting, and marine dock edging. It offers its products to chemical processors, plastics fabricators, construction contractors, and supply warehouses for use in various consumer and industrial markets.

The company faces challenges from elevated interest rates and inflation. High rates and affordability concerns have dampened housing starts, leading to reduced demand and lower business confidence. Sluggish construction activity in North America remains a concern over the short-term. As a result, both the pipe-and-fitting and siding-and-trim businesses have been negatively impacted.

The Zacks Rundown

A Zacks Rank #5 (Strong Sell) stock, Westlake WLK is a component of the Zacks Chemical – Plastic industry group, which currently ranks in the bottom 1% out of approximately 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months, just as it has so far this year:

Also note that stocks in this group remain relatively overvalued and are projected to experience below-average earnings growth:

Stocks in the bottom tiers of industries can often be intriguing short candidates. While individual stocks have the ability to outperform even when they’re part of a lagging industry, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.

WLK shares have been underperforming over the past year. The stock is hitting a series of lower lows and represents a compelling short opportunity as we head further into 2025.

Recent Earnings Misses & Deteriorating Outlook

Westlake Corp. has fallen short of earnings estimates in three of the past four quarters. Earlier in May, the company reported a first-quarter loss of -$0.31 per share, missing the Zacks Consensus Estimate by a whopping -144.3%.

Westlake has posted a trailing four-quarter average earnings miss of -61.4%. Consistently falling short of earnings estimates is a recipe for underperformance, and WLK is no exception.

The company has been on the receiving end of negative earnings estimate revisions as of late. Looking at the current quarter, analysts have slashed estimates by -48.65% in the past 60 days. The Q2 Zacks Consensus EPS Estimate is now $0.95 per share, reflecting negative growth of -60.4% relative to the year-ago period.

Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.

Technical Outlook

As illustrated below, WLK stock is in a sustained downtrend. Notice how the stock has made a series of lower lows, widely underperforming the major indices. Also note that shares are trading below downward-sloping 50-day (blue line) and 200-day (red line) moving averages – another good sign for the bears.

WLK stock has experienced what is known as a “death cross,” whereby the stock’s 50-day moving average crosses below its 200-day moving average. Shares would have to make an outsized move to the upside and show increasing earnings estimate revisions to warrant taking any long positions. The stock has fallen more than 35% this year alone.

Final Thoughts

A deteriorating fundamental and technical backdrop show that this stock is not set to make its way to new highs anytime soon. The fact that WLK is included in one of the worst-performing industry groups adds yet another headwind to a long list of concerns.

A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of WLK until the situation shows major signs of improvement.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research