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7 Earnings Reports to Watch Next Week

Vince Martin

Editor’s note: InvestorPlace’s Earnings Reports to Watch is updated weekly. Please check back next week for our latest earnings picks.

U.S. stocks kicked off 2020 on a high note on Thursday. All three broad market indices gained nicely, closing once again at all-time highs. With the external environment quiet, and economic indicators mostly positive, there’s seemingly little reason why the current rally has to end.

But a potential stumbling block looms, as earnings season begins in earnest in a little over a week. Corporate earnings reports don’t necessarily need to be spectacular to keep the momentum going. But they need to be strong enough to avoid the declines seen in late July of last year and in October 2018.

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The earnings calendar next week isn’t  heavy enough to move the market as a whole. But releases from a group diversified in terms of industry, size and trend provide a potential preview of what’s to come. Strong results from these names could suggest another impressive earnings season lies ahead. Anything less, however, and investors should be on guard.

Walgreens (WBA)

Earnings Show Walgreens Stock Is Still Going in the Wrong Direction

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Earnings Report Date: Wednesday, Jan. 8, before market open

Walgreens (NASDAQ:WBA) seems to have found a bottom. WBA stock has gained 20% since touching a six-year low in late August. And there’s a case that the gains should continue.

After all, WBA stock still looks attractive from a fundamental standpoint, at less than 10x forward earnings. Pharmacy rivals CVS Health (NYSE:CVS) and Rite Aid (NYSE:RAD) have rallied as well. In their most recent earnings reports, both companies showed improvement in front-end sales and margins, two of the key areas that have pressured the sector in recent years.

If Walgreens can deliver a solid earnings report on both fronts, the combination of a cheap valuation and an improving outlook suggest upside. Indeed, I called out WBA stock as a 2019 loser that looked set to become a 2020 winner. But for that call to be proven correct, Walgreens needs at least a solid report on Wednesday morning. The takeover speculation that swirled in November seems to have faded. Rivals are making progress.

In that context, better results from Walgreens will suggest that the industry finally is responding to broader pressures — and likely would boost all three stocks. Anything less, however, and investors will worry that Walgreens is losing market share — and the rally in WBA stock over the past four months could quickly fade.

Constellation Brands (STZ, STZ.B)

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Earnings Report Date: Wednesday, Jan. 8, before market open

Constellation Brands (NYSE:STZ, NYSE:STZ.B) is another company in need of an impressive report. STZ stock still trades about 20% below May 2018 highs. Its acquisition strategy over the past few years looks misguided at the moment. Cannabis company Canopy Growth (NYSE:CGC), in which Constellation invested over $4 billion last year, has seen its shares plummet. Constellation paid $1 billion for brewer Ballast Point in 2015, and sold the business for an undisclosed, but likely tiny, amount in December.

Growth is another concern. Beer sales more broadly are being pressured by consumer shifts to other products, including hard seltzer. Constellation is launching new products, including a Corona hard seltzer, but it’s playing catch-up in that category to the likes of Boston Beer (NYSE:SAM) and Anheuser-Busch InBev (NYSE:BUD).

Simply put, there are real worries here, and legitimate reasons why STZ stock has headed in the wrong direction for some 20 months. With shares bouncing off November lows, Constellation needs to give investors a reason to project more upside ahead. If it doesn’t, Constellation stock could see ugly trading on Wednesday, and a quick move back to those November lows — or beyond.

Lennar (LEN, LEN.B)

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Earnings Report Date: Wednesday, Jan. 8, before market open

Somewhat quietly, construction stocks had a soft close to 2019. Lennar (NYSE:LEN, NYSE:LEN.B), the nation’s largest homebuilder, has had one of the biggest fades, pulling back about 11% from October highs.

Weakness in LEN stock and in the sector adds import to Lennar’s fiscal fourth-quarter release on Wednesday morning. Construction stocks were among 2019’s biggest winners. The iShares U.S. Home Construction ETF (BATS:ITB) gained 48%. Lennar stock rose 42%. The sector benefited from a strong economy and lower interest rates, and at the moment the news still looks mostly positive.

And yet investors have sold off housing and construction stocks of late, with Home Depot (NYSE:HD) one of the more notable decliners. That makes the reaction to Lennar’s earnings perhaps more interesting than the report itself. How does the market respond to fiscal 2020 guidance? Does Lennar even give guidance? After all, the company delayed its outlook a year ago, citing “continued softness and uncertainty” in the housing market. Similar sentiment likely would not be taken well after 2019’s sector-wide rally.

With smaller builder KB Home (NYSE:KBH) reporting on Thursday afternoon, this is a big week for the industry. There are some signs that housing might not be quite as strong as external conditions suggest it should be. If Lennar expresses any kind of caution toward 2020, the reversal both in LEN stock and housing names more broadly could continue.

RPM International (RPM)

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Earnings Report Date: Wednesday, Jan. 8, before market open

Fiscal second-quarter earnings from specialty chemicals manufacturer RPM International (NYSE:RPM) are not going to move the market. Despite a $10 billion market capitalization, RPM stock is not a widely owned name. Its earnings results are likely to garner little in the way of headlines. Still, RPM’s numbers and outlook are important for the sector.

After all, major names in the industry have struggled. LyondellBasell (NYSE:LYB) has underperformed the market. DuPont (NYSE:DD) trades at the lows. The sector on the whole has been a laggard despite a positive macroeconomic environment.

To be sure, RPM’s specialty-heavy business doesn’t make it a perfect proxy for those larger, diversified companies. But good news here could signal some optimism toward reports from larger peers later this month. And those peers — DuPont in particular — could use whatever optimism they can find.

Bed Bath & Beyond (BBBY)

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Earnings Report Date: Wednesday, Jan. 8, after market close

For Bed Bath & Beyond (NASDAQ:BBBY), the fiscal third-quarter earnings report will be less about the numbers than the commentary. New CEO Mark Tritton, hired away from Target (NYSE:TGT), will have his first chance to lay out his plans for a turnaround at the struggling retailer. Tritton already has cleaned house in the executive ranks. News on the dividend, capital allocation and the store footprint may follow during Wednesday afternoon’s conference call.

Tritton will have a high bar to clear. BBBY stock already has more than doubled from August lows, including a nice jump after the hiring was announced. Even with shares valued at 8 times forward earnings, the market is pricing in an improvement from the recent trend of steadily declining profits. I’m far from convinced any plan can rescue Bed Bath & Beyond at this point. But Tritton will have a chance to convince at least some of the skeptics on Wednesday.

Acuity Brands (AYI)

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Earnings Report Date: Thursday, January 9, before market open

It would seem like LED lighting plays like Acuity Brands (NYSE:AYI) would be big winners. Spurred by government regulation in the U.S. and Europe, LED adoption has been swift. Yet the technology simply hasn’t proven to be the catalyst to the sector for which bulls hoped.

AYI stock is down by roughly half from 2016 highs. Cree (NASDAQ:CREE) is off about one-third from mid-2013 levels, and has declined over 30% from its 52-week high. Pricing and margin pressure have stunted growth and reduced the earnings multiples investors are willing to pay.

But Acuity still has a chance to create value. At this point, AYI looks downright cheap, at just 13x forward earnings. Yet the company still is grinding out earnings growth, and the long-term opportunity appears reasonably intact. A big quarter from Acuity could change the narrative for both the company and its sector. And if growth expectations increase, so will Acuity Brands stock.

WD-40 (WDFC)

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Earnings Report Date: Thursday, Jan. 9, after market close

There have been a few small- to mid-cap stocks in this market that seemingly have defied gravity. WD-40 (NASDAQ:WDFC) is one of those stocks. WD-40 is a fine company. Its namesake product has enormous brand recognition, dominant market share and myriad applications.

But WDFC stock looks hopelessly overvalued. The consensus Wall Street estimate for fiscal 2020 suggest a two-year earnings growth rate under 2%. Yet shares are valued at a whopping 40 times that estimate. Like Rollins (NYSE:ROL), J&J Snack Foods (NASDAQ:JJSF) and others, the stock price seems almost disconnected from reality.

That reality has caught up with ROL stock, which has stalled out over the last 15 months. The question with WDFC stock might not be what exactly earnings look like on Thursday afternoon — but whether it’s next. Will investors keep bidding up a stock that hardly seems to merit such a premium? If they do, that’s yet another sign that, in this market, betting against valuation is foolish — and riding momentum might be the best play.

As of this writing, Vince Martin has no positions in any securities mentioned.

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