Trade idea of the day: What is going wrong at WPP?

We have known for a while that the advertising industry is facing headwinds, this is nothing new. In the past WPP CEO Martin Sorrell has reassured the market that these were cyclical headwinds and that the tide would turn. However, today he has changed his tune cutting the long term outlook, which suggests that this is a changing industry landscape and potentially a structural problem at WPP.

What: 

We have known for a while that the advertising industry is facing headwinds, this is nothing new. In the past WPP CEO Martin Sorrell has reassured the market that these were cyclical headwinds and that the tide would turn. 

However, today he has changed his tune cutting the long term outlook, which suggests that this is a changing industry landscape and potentially a structural problem at WPP. 

Today WPP is suffering its worst stock slump since 1999 as CEO Sorell cut WPP’S predicted a year of no growth, capping off a tough year which has seen it cut the sales outlook three times. 

Today’s slashing of forecasts has served to make investors, already jittery over the health of the advertising industry, even more anxious as the industry goes through massive changes. WPP was previously considered a bellweather for the global economy, when things were going well companies spend more on advertising, boosting the advertising agencies such as WPP. 

In times of economic difficulties marketing budgets get cut and advertising reduced. However, the surge in digital marketing is disrupting this pattern, with the likes of Facebook and Google cutting out the need for the middle man. 

 Despite the headwinds in the industry, WPP has been excessively slow to make structural changes and is only going about the sort of simplification that sector peer Publicist started a full 3 years ago. 

This slow response to environmental changes could continue to be a disadvantage for the sector leader, WPP as competition becomes increasingly fierce. 

How: 

Is there still a short trade in play? Since the beginning of 2017 the share price of WPP has been on a downward trajectory, losing 36% across the past 12 months. 

On the daily chart, WPP is trading below 20sma, 50sma and 100sma. Whilst technical indicators are also pointing to a strong sell. WPP is down over 12% in trading today, finding support at 1230p. 

Should the price break through 1230p, WPP could extend losses to resistance at 1185. A break below here could then see the stock sink back towards 1050p. On the upside a push above 1270 could see gains extended to the region of 1545.

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