Chicago, IL – September 17, 2024 – Zacks Equity Research shares Sprouts Farmers Market SFM as the Bull of the Day and Tenaris TS as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Berkshire Hathaway Inc.’s (BRK.B), NVR, Inc. NVR and Lennar Corp. LEN.
Sprouts Farmers Market, a Zacks Rank #1 (Strong Buy), provides natural and organic food products primarily in the United States. Shares of the healthy grocer are widely outperforming the market this year with the backing of a leading industry group. The stock is hitting a series of 52-week highs and displaying relative strength as buying pressure accumulates in this top-ranked stock.
SFM stock is part of the Zacks Foods – Natural Foods Products industry group, which currently ranks in the top 29% out of more than 250 Zacks Ranked Industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months, just as it has consistently over the past year.
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
The company’s focus on product innovation and expansion of private label offerings bodes well for the future. The organic foods provider has witnessed a remarkable surge in e-commerce sales this year, expanding its digital footprint through key partnerships with Uber Eats, DoorDash, and Instacart.
An aggressive expansion plan to open 35 new stores in 2024 underscores its confidence in long-term growth. Sprouts has invested heavily to improve operational efficiencies, highlighted by its Fresh Item Management Technology which deploys computer-assisted ordering methods.
The top-ranked company has put together an impressive earnings history, surpassing earnings estimates in each of the past twenty consecutive quarters. Back in July, Sprouts reported second-quarter earnings of $0.94/share, a 22.1% surprise over the $0.77/share consensus estimate.
The grocer has delivered a trailing four-quarter average earnings surprise of nearly 12%. Consistently beating earnings estimates is a recipe for success and bolsters the bullish case.
SFM shares received a boost as analysts covering the company have been increasing their third-quarter earnings estimates lately. For the current quarter, earnings estimates have risen 8.7% in the past 60 days. The Q3 Zacks Consensus EPS Estimate now stands at $0.75/share, reflecting a potential growth rate of 15.4% relative to the year-ago period.
SFM stock has advanced more than 100% this year alone. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.
Only stocks that are in extremely powerful uptrends are able to witness this type of price move. SFM shares broke out to a series of all-time highs back in August, even as the general market pulled back. Stocks that hold up well through periods of volatility tend to lead the next leg higher.
Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping up. The stock has been widely outperforming the major indices, indicating a prolonged period of relative strength. With both strong fundamental and technical indicators, SFM stock is poised to continue its outperformance.
Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Sprouts Farmers Market has recently witnessed positive revisions. As long as this trend remains intact (and SFM continues to deliver earnings beats), the stock will likely continue its bullish run into the end of this year and beyond.
A promising combination of accelerating growth and momentum metrics bodes well for SFM shareholders, as the trend appears set to continue in the quarters ahead.
Backed by a top industry group and impressive history of earnings beats, it’s not difficult to see why this company is a compelling investment. Robust fundamentals combined with an appealing technical outlook certainly justify adding shares to the mix. The future looks bright for this highly-ranked, leading stock.
Tenaris is a global manufacturer and supplier of steel pipe products and associated services to the oil and gas, energy, and related industries. The company produces and sells seamless and welded steel tubular products such as steel casings, which sustain the walls of oil and gas wells during and after drilling.
Based in Luxembourg, Tenaris also manufactures and distributes steel line pipes to transport crude oil and natural gas from wells to refineries, storage tanks and distribution centers. In addition, the company provides premium joints and couplings for use in high pressure or high temperature environments, as well as coiled tubing for oil drilling and subsea pipelines.
Tenaris, a Zacks Rank #5 (Strong Sell) stock, is a component of the Zacks Steel – Pipe and Tube industry group, which currently ranks in the bottom 26% 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 throughout the year.
Candidates in the bottom tiers of industries can often be intriguing short candidates. While individual stocks have the ability to outperform even when included in a lackluster industry, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.
Along with many other steel-related stocks, TS shares have been struggling this year while the general market returned to new heights. The stock is hitting a series of lower lows and represents a compelling short opportunity as we head deeper into the latter half of the year.
Tenaris has fallen short of earnings estimates in four of the past eight quarters. Back in July, the company reported second-quarter earnings of $0.59/share, missing the $0.97/share Zacks Consensus estimate by -39.2%. Consistently falling short of earnings estimates is a recipe for underperformance, and TS is no exception.
CEO Paolo Rocca stated during the Q2 earnings call that despite high levels of oil and gas production in the United States, drilling activity has decreased, resulting in “reduced overall demand for pipes.” He also touched on the company’s outlook in other regions.
“The change in the government in Mexico and the uncertainties surrounding the policy for the energy sector are limiting drilling investment in the country. In Argentina, the necessary stabilization of the macroeconomic environment is delaying investment in drilling and the development of infrastructure in Vaca Muerta. This factor will affect our sales and results in the second half, when we expect that our sales volume will be 10% to 15% below those of the first half.”
Tenaris has been on the receiving end of negative earnings estimate revisions as of late. Looking at the current quarter, analysts have slashed estimates by -19.44% in the past 60 days. The Q3 Zacks Consensus Estimate is now $0.58/share, reflecting negative growth of -36.3% relative to the prior year.
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.
As illustrated below, TS 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 average (red line) moving averages – another good sign for the bears.
TS 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. The stock would have to make an outsized move to the upside and show increasing earnings estimate revisions to warrant taking any long positions. Shares have fallen nearly 17% this year alone.
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 TS is included in one of the worst-performing industry groups provides 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 TS until the situation shows major signs of improvement.
Warren Buffett-led Berkshire Hathaway Inc.’s portfolio hasn’t fared badly against the S&P 500’s return amid a higher interest rate environment. However, Buffett hopes for interest rate cuts like several market pundits as it would jack up the share price of two of his beloved housing stocks NVR, Inc. and Lennar Corp. Here’s why –
According to Freddie Mac, for the week ending Sept. 12, the 30-year fixed-rate mortgage slipped to its lowest level since February 2023. The rate on the 30-year loan averaged 6.2%, down from the four-week and 52-week averages of 6.34% and 6.93%, respectively. The 30-year mortgage rate hovered around the 7% mark for most of the year, but since late July, it has begun to cool off and has fallen since then.
The 15-year fixed mortgage average rate was 5.27%, down from the four-week and 52-week averages of 5.47% and 6.21%, respectively, a positive development for aspiring homeowners, added Freddie Mac. Mortgage rates in the United States have continued to soften over the past year.
An increase in expectations of a much-awaited interest rate cut in the Federal Reserve’s September policy meeting is pushing the yields on long-term bonds lower leading to a drop in mortgage rates.
The Fed is expected to trim interest rates as price pressures ebb toward the central bank’s 2% target. The interest rate cut would be the first one since March 2020, when the Fed slashed rates to boost economic growth derailed due to the pandemic. The interest rates have remained elevated for the past 14 months, waiting for economic conditions to improve.
According to the CME FedWatch Tool, around 59% of market participants expect the Fed to trim interest rates by 50 basis points in the upcoming policy meeting. Nearly 41% of traders are pricing in a quarter-point interest rate cut.
The steady decline in mortgage rates on interest rate cut expectations should increase new home purchases, and boost homebuilders’ bottom line. Thus, two of Warren Buffett’s homebuilders, NVR and Lennar,are expected to see an increase in their stock prices.
After giving away his stake in D.R. Horton, Inc. DHI, the Oracle of Omaha hung onto these housing stocks as they would benefit from urbanization and a strong brand value. Berkshire Hathawayhas roughly $100 million of NVR shares and around $26 million of Lennar shares as of the company’s latest 13F filing, citing a CNBC article.
NVR’s profit margin is expected to improve as the company has witnessed an increase in new orders. In the second quarter, NVR’s new orders increased by 3% to 6,067 units from 5,905 units a year ago.
NVR has proficiently generated profits as the company’s return on equity (ROE) is 38.5%, more than the Building Products - Home Builders industry’s 18.3%. An ROE of more than 20% is usually considered very strong.
NVR’s expected earnings growth rate for the next five years is 7.6%. Its shares have gained 33.9% so far this year.
Lennar is well-positioned to gain from its dynamic pricing model, which helps the company set prices based on demand trends and ever-changing market scenarios. This, in turn, aids Lennar in improving cash flow and return on inventory.
Lennar has a debt-to-equity of 8.3%, less than the industry’s 15.4%, a tell-tale sign that the company has less debt on its balance sheet than its peers, and can operate more efficiently in the long run.
LEN’s expected earnings growth rate for the next five years is 7.8%. Its shares have gained 24.7% year to date.
In the worst-cum-worst situation, if the Fed doesn’t cut interest rates, shares of NVR and Lennar would still scale upward, thanks to the presidential election in November. Kamala Harris, a Democratic nominee wants to boost construction activity and provide financial assistance to first-time home buyers.
Moreover, millennials are about to settle into a family life leading to increased demand for houses, a blessing for NVR and Lennar. Both stocks have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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