Is Kansas City Southern (KSU) Setting up for a Breakdown?

Kansas City Southern (KSU) is a transportation holding company. It focuses on the growing north or south freight corridor connecting key commercial and industrial markets in the central United States with major industrial cities in Mexico. The company is likely to be purchased by Canadian National (CNI) in the second half of 2022…

Kansas City Southern (KSU) is benefiting from increased efficiency and reduced costs due to its precision-scheduled railroading model. As economic activities have increased, KSU has seen a gradual recovery in volumes, but its operations have been negatively impacted by network congestion.

KSU had $812 million in cash as of the end of the most recent quarter, compared with only $9 million in short-term debt. The company has a history of negative earnings growth as earnings have fallen an average of 22.1% per year over the past five years. However, In its most recent quarter, though, earnings rose 79% year over year.

The stock looks overvalued with a trailing P/E of 202.88 and a forward P/E of 29.76. The stock had been trending up from last August until May, but has shown downward momentum since, as shown in the chart below.

Take a look at the 1-year chart of KSU below with my added notations:

Chart of KSU provided by TradingView 

KSU has formed key support at $260 (green) over the past several weeks. In addition, the stock is also declining against a down trending resistance line (red). These two lines have KSU stuck within a common pattern known as a descending triangle. Eventually, the stock will break out of it.

A short trade could be made on a break of support. A long trade could be made on a break through the triangle resistance.

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