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Baidu, Illumina, American Axle & Manufacturing, International Paper and KB Home highlighted as Zacks Bull and Bear of the Day

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Zacks Equity Research
·18 min read
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For Immediate Release

Chicago, IL – January 25, 2021 – Zacks Equity Research Shares of Baidu, Inc. BIDU as the Bull of the Day, Illumina, Inc. ILMN as the Bear of the Day. In addition, Zacks Equity Research provides analysis on American Axle & Manufacturing Holdings, Inc. AXL, International Paper Company IP and KB Home KBH.

Here is a synopsis of all five stocks:

Bull of the Day:

I wrote about Baidu as the Bull of the Day in November after the company's Q3 report inspired analysts to raise estimates and upgrade their outlooks as several business transitions were gaining traction.

As of Nov 27, the strong earnings beat and raised guidance caused the Zacks EPS Consensus for 2020 to jump 10% to $8.25. By late December, the profit projection moved up to $9.01 and this month it climbed to $9.75 after the company described their aggressive transitions in web content, advertising, and AI -- and announced their plans to build autonomous cars in China.

More importantly, this year's EPS consensus has risen from $10 to $10.86 as Wall Street analysts finally catch up to the story. More on them coming up, but here's a preview in the article and video I published a couple of weeks ago to explain what -- or rather, who -- helped launch BIDU shares over $200...

How Cathie Put the Wood to Wall Street: TSLA, SQ, ROKU, CRSP, BIDU

But following the Nov 16 report, the stock fell from new 52-week highs above $150 and languished for two weeks, revisiting the $132-133 support zone where I had begun an initial position in July.

Amidst that uncertainty and languishing share price, here's what I concluded in my Nov 27 report...

Bottom line on Baidu: The transformation into an AI powerhouse is real and streaming/social deals won't determine the fortunes of BIDU. I would remain a buyer of pullbacks to $130.

Then on December 9, the stock went on a 5-day tear, breaking above $150 and surging to $186 on big volume.

From the Google of China, to the Tesla of China?

The big catalyst on Dec 15 that moved shares 14% from $163 to $186 was a story in Reuters about Baidu in talks with several electric vehicle (EV) manufacturers in China to build their own next-gen EVs.

Since Baidu has deep experience with both artificial intelligence (AI) systems and ADAS (advanced driver assistance systems) that supply Volkswagen, Toyota and Ford, the speculation about the company making a deeper push into the auto industry really ignited some investor interest.

Baidu would offer EVs expanded capabilities based on their proprietary AI systems. The Reuter's story on the evening of Dec 14 was based on 3 sources and the company did not confirm any of the speculation, but I found this fact highly interesting...

"Baidu operates autonomous taxi service Go Robotaxi with safety drivers on board in Beijing, Changsha and Cangzhou, and plans to expand to 30 cities in three years. It gained approval last week to test five cars in Beijing without safety drivers."

On January 10, Baidu confirmed all the rumors with a press release titled "Baidu Announces Plan to Establish an Intelligent EV Company and Forms Strategic Partnership with Geely." Basically, Geely will be responsible for manufacturing the vehicles while Baidu will focus on the AI+ADAS software behind the car.

The idea of a standalone electric vehicle company where Baidu will be the majority shareholder finally woke up a few other investors besides me and Cathie Wood.

Here's what I wrote on Jan 12 to my TAZR Trader members, where we were buyers of BIDU last year between $120 and $140...

It's about time!

This is what I've been waiting for -- as long as 3 years!

Finally, this turns BIDU from the Google of China into both the Tesla and NVIDIA of China!

Keep in mind, we are not trying to take cars away from drivers. The first stage, as we learned from Mobileye five years ago, is just to get drivers used to ADAS, or Advanced Driver Assistance Systems, like Automatic Emergency Braking (AEB).

Congrats to you if you believed and bought and hung on when the bears seemed to dominate the stock below $140!

"Winner Take Most"

I borrow this phrase from Cathie Wood of ARK Invest who has made her followers very happy with heavy investment in Tesla shares. If you saw my February video and article Tesla to $7,000: Buy the Launch Abort at $500, you know that she moved her price target from $5,000 to $7,000 (pre-split) in January.

Her thesis was always a long-term view that Tesla would own the "autonomous EV + ride-hailing" space, with their capability to generate 80% gross margins. Her vision for Tesla as an investment is unfolding much faster than even she anticipated, as she expects the real "disruptive innovation" fruits to take another decade to blossom.

I have always believed that AI and AD (autonomous driving) represented the primary growth drivers for Baidu, not internet search and advertising, as many faithful Alphabet investors must also believe about their beloved.

But for Baidu, I think these growth levers are stronger here because of the strong Chinese government support for advanced technologies. In early 2018, I described the development of the first urban "AI park" outside of Beijing where Baidu would be the primary R&D company to build and test AD technologies.

Since then, an "AI park" sprung up around Shanghai in 2019. And while NVIDIA gets all the attention as the premier builder of AI hardware and software stacks, Baidu's pedigree in AI is beginning to bear fruit.

Now even thought Baidu isn't going to take on Tesla in the luxury and mid-tier EV market, their total addressable market opportunity in China could be even greater with autonomous driving for the masses.

The fact that Volkswagen CEO Herber Diess was the first industry veteran to acknowledge that Tesla should be valued like a technology disruptor, not a car company, is the same logic sending BIDU shares up 100% since my November report.

Borun on EVs

My colleague Dave Borun has spent years studying the economics and technology of EVs, especially the battery and energy storage innovations. He has published several special reports for Zacks Ultimate members on the topic, with the most recent in October totaling 24 pages packed with info and insight -- and it didn't even include the 20+ slide research presentation he does for institutional investors to explain the battery technology.

So when Dave talks about EVs, I'm listening. Here's what he told me when I asked him about all the various players in China...

The opportunity is "hundreds of millions of people who have never owned a car and have no preconceived notion about what a car should look like - or even if they should let it drive for them, share ownership, lend it out when they're not using it, etc. It's like a totally blank slate and I'm positive there will be some big winners as the market matures."

That was all I needed to hear to remain invested in Baidu. Because despite issues of questionable financial reporting and fraud among many Chinese companies, the one thing we can't deny is that somebody is going to win in the world's largest middle class where the government is fully behind building infrastructure to keep the massive population thriving.

I don't invest in very many Chinese companies because of the unknowns and risks. But when I do, I focus on "winner take most" companies like Alibaba and Baidu.

Wall Street Plays Catch Up

On January 13, JPMorgan analyst Alex Yao raised the firm's price target on Baidu to $290 from $155 -- quite a leap! -- and told investors that he views the company's entrance into smart car manufacturing via a joint venture with Geely as "a catalyst to unlocking value in Baidu's broader intelligent driving investment."

Yao assigns a $14 billion valuation to Baidu's intelligent driving platform, Apollo, along with the Geely JV -- representing 17% of the current market cap -- adding that he now expects developments in smart car and autonomous driving to continue to drive Baidu's share price in coming quarters as core advertising enters the cyclical recovery stage.

And on Jan 19, Citi analyst Alicia Yap raised her price target on Baidu to $292 from $183, in light of the stock's "re-rating" to account for potential upside from Baidu's autonomous driving technology and upcoming EV. In her sum-of-the-parts assumptions, Yap believes Baidu shares still have upside, especially if the fundamental advertising recovery trend comes in stronger than expected and if the EV and autonomous driving-related initiatives get closer to monetization potential.

Bottom line on Baidu: We now have a clear potential winner in the Chinese autonomous driving market. I would remain a buyer between $220 and $240.

Disclosure: I own shares of BIDU and NVDA for the Zacks TAZR Trader portfolio.

Bear of the Day:

Illumina is the maker of the premier technology platform for genomic sequencing. While their million-dollar NGS (next-generation sequencing) machines are always in demand from biotech companies, universities, and other genetic researchers, the past year of the pandemic put a noticeable dent in sales and profits.

Which is a bit ironic since rapidly sequencing the genome of the coronavirus has been the key to developing vaccines in such a short time.

After a projected 33% drop in EPS for 2020 from $6.57 to $4.39, profits for ILMN are expected to bounce back to $5.82 in 2021.

But recently, an analyst from Piper Sandler slashed EPS estimates for the first half of the year, cutting Q1 to $1.10 from $1.53 and dropping Q2 even more from $1.75 to $1.20.

These downward estimate revisions were inspired by the company's revelations at the JPMorgan Healthcare Conference on January 11 where Illumina guided FY21 adjusted EPS to $5.10-$5.35, vs. the prevailing consensus of over $6.50.

Illumina also guided revenues lower for the year, offering a view of $3.79 to $3.88 billion, vs. consensus of over $3.95B.

So what should investors make of the stock recovering to all-time highs above $405?

One persistent driver for shares is urgent demand for its proprietary technology. Here's how the company describes its current focus and mission...

In these unprecedented times, there are no borders, countries, mine, or yours. There's only one focus: how do we stop COVID-19. As the world's leader in next-generation sequencing, our technology helps power the heroes working around the clock to track transmission, conduct surveillance, develop therapies and vaccines, and protect our neighbors around the globe for years to come.

At the JPM shindig, Illumina also announced its latest innovation, Illumina Connected Analytics for "transforming genomic data bottlenecks into catalysts."

"This new and integrated bioinformatics solution provides a comprehensive, private, cloud-based data platform that empowers customers to manage, analyze, and explore large volumes of multi-genomic data in a secure, scalable, and flexible environment," was how the company described this new offering.

Connected Analytics will be available on January 28, and that may explain some of the recent push to new highs.

Another newer driver is the discovery of the world's greatest ETF innovator, Cathie Wood of ARK Invest.

Aside from the glaring fact that she sold all ILMN shares in Q4 of 2020, the surging interest in her ARK Genomics ETF and ARK Innovation ETF have helped send biotechnology stocks to all-time highs, from the CRISPR wing members like Editas Medicine to the smaller NGS players like Invitae.

I also sold ILMN shares in Q4, even before I knew that ARK Invest did. We took 20% gains near $350 even as Wall Street analysts were lowering their estimates and price targets down below $300.

Now we all have egg on our portfolios as Illumina soars to new highs.

If you still hold ILMN shares, you may consider holding or trimming as lots of optimism about the recovery is already baked in. And I would wait for the estimates to stop going down, and start going back up, before adding new shares. The Zacks Rank will let you know.

Disclosure: I own shares of EDIT for the Zacks Healthcare Innovators portfolio.

Additional content:

3 Undervalued Strong Buys

This doesn't seem like a time for value, does it? The major indices are at or approaching all-time highs as we are hopefully heading for a big recovery once this pandemic ends. Who wants to invest in value when there are stocks just waiting to take off after a solid year of "social distancing"?

Smart investors, that's who.

Undervalued stocks may not stay undervalued for long, especially if they've got a high Zacks Rank. These are the stable names that could be among the biggest beneficiaries of a return to normal. And we've got a screen that will help you find them.

The Undervalued Zacks #1 Rank Stocks screen will help you find names that aren't on most investors' radars... but may be in the near future. Take a look at three names that recently passed this screen. However, these positions can change quickly, especially in such hectic times, so make sure to also look at the full list for a broader view of the landscape.

American Axle & Manufacturing

American Axle & Manufacturing knows where the future is. This global automotive parts supplier has been successfully diversifying its business, including making great strides in its electric drive technology. Therefore, AXL also knows where the money is!

The company designs, engineers and manufactures driveline and metal forming technologies. It boasts that these products are making the next generation of vehicles smarter, lighter, safer and more efficient. AXL is not afraid to make strategic buyouts, divestments and partnerships to achieve its goals... especially the electric ones.

For example, earlier this month, AXL announced a technology development agreement with China's Suzhou Inovance Automotive that will accelerate the development and delivery of scalable, next-generation 3-in-1 electric drive systems. These systems integrate an inverter, electric motor and gearbox.

AXL's third quarter report was its fifth straight that beat the Zacks Consensus Estimate. "Beat" actually isn't a good enough word. "Bludgeon" is more appropriate. Earnings per share of $1.15 bludgeoned our expectations by 447%. However, revenue missed forecasts due to you-know-what.

But the pandemic is (hopefully) on its last legs, and AXL has done a great job generating free cash flow and cutting costs to keep its head above water. And now it can offer a 2020 sales outlook of $4.6 billion.

Shares of AXL have jumped approximately 35% since that late October report. The company will go to the plate again on February 12.

Analysts are still expecting a loss by 2020, but the deficit has narrower significantly to 10 cents from 41 cents. However, analysts are most excited for 2021. Not only is AXL expected to post a profit, but that profit is currently anticipated at a full $1.01.

International Paper

On the one hand, people are using less paper than ever before as technology promises to save trees by making us less wasteful and more responsible to our environment. On the other hand, those same people are getting practically everything delivered to their houses during this pandemic inside corrugated packaging. Or in other words... paper. Take that, trees!

International Paper is a leading global producer of renewable fiber-based packaging, pulp and paper products. Therefore, you can still get your packages AND save trees at the same time!

The company has put together an impressive 16 straight quarters of positive earnings surprises, which means this company was benefiting from the growing importance of e-commerce long before the pandemic.

And now with all of today's challenges, it has been focusing on cash generation and a solid balance sheet to deal with the issues. The company has also been investing to improve its North American containerboard mill system, while also doing some M&A when appropriate to grow its business.

For its third quarter, IP reported earnings per share of 71 cents, which beat the Zacks Consensus Estimate by nearly 48%. It's four-quarter average beat is also right around 48%. Net sales of $5.1 billion were down 8% year over year, but still managed to stay above our expectations at $5.03 billion.

The company said it continues to see momentum in demand for corrugated packaging. Shares of IP are up more than 17% since the report in late October. The next report comes early next month.

The Zacks Consensus Estimate for 2020 is up 2.9% to $2.88 over the past 60 days, while expectations for next year climbed 8.5% in that time to $3.84. In other words, analysts expect growth of more than 33% for this year over last.

They expect IP to continue benefiting from growing e-commerce demand. This is not something that will go "back to normal" when the pandemic ends. This is an example of "the new normal." If anything, more consumers than ever now realize how easy it is to shop from home for cardboard boxes full of stuff.

KB Home

If you ever thought about owning your own home or upgrading... then this is the time to make that happen! Otherwise, you run the risk of still being in that two-bedroom apartment years from now with the noisy neighbors and brick wall views. What were you waiting for?

A record number of potential homeowners are taking advantage of these historic times, which explains why the building products-homebuilders space is in the top 14% of the Zacks Industry Rank.

It's also a pretty good explanation for KB Home's solid fourth quarter performance and rising earnings estimates. The homebuilder's net orders grew 42% year over year in the quarter, as housing market conditions continue to be "robust".

KBH has already reported its fiscal fourth quarter. Earnings per share of $1.12 topped the Zacks Consensus Estimate by nearly 29%. It has now beaten expectations in three of the last four quarters, but that miss in the fiscal second quarter was a real anomaly brought on by covid. As you can see in the chart below, KBH has quite an impressive record of positive surprises that stretches back years.

Total revenue of $1.19 billion was down from last year, but still beat our expectations by 8%. Backlog at quarter-end was up 54% to 7810 homes, and potential housing revenues from that backlog grew 63% to $2.96 billion.

Looking forward, the company expects "meaningfully higher revenue and earnings in 2021 to drive significant expansion of our return on equity." And the analysts seem to agree.

The Zacks Consensus Estimate for this year (ending November 2021) is now at $5.11, which is up nearly 20% in 30 days. Expectations for next fiscal year (ending November 2022) are nearly as good with earnings of $5.55, marking a gain of 16.4% and a year-over-year improvement of 8.6%.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market. Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.

Click here for the 6 trades >>

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