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DGX, NKLA, NKE and TSLA as Zacks Bull and Bear of the Day

Zacks Equity Research
·10 mins read

For Immediate Release             

Chicago, IL – September 24, 2020 – Zacks Equity Research highlights Quest Diagnostics DGX as the Bull of the Day and Nikola NKLA as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Nike NKE and Tesla TSLA.

Here is a synopsis of all four stocks:

Bull of the Day:                                                 

Quest Diagnostics has been one of the coronavirus heroes, having performed 14.4 million COVID-19 diagnostics tests and 3.6 million antibody tests (as of September 14th). At the same time, Quest was provided with a strong tailwind from the global pandemic as the clinical-testing duopoly - with LabCorp - got flooded with demand for the much needed COVID-19 screens.

Despite the precipitous surge in this unforeseen testing demand, Quest had seen a significant disruption in its non-COVID related diagnostics. This disruption is beginning to fade as its broad portfolio of testing capabilities begins to pick back up considerably faster than anticipated.

On September 10th, Quest’s management team sizably increased its full-year revenue and EPS outlook for 2020 (again), and analysts have followed suit. Quest has raised its 2020 sales guidance by 10% from pre-COVID projections. With the business looking more potent than ever, DGX is propelled to a Zacks Rank #1 (Strong Buy).

Diagnostic Outlook

Quest upwardly revised its 2020 revenue guidance to $8.4 - $8.8 million (from $8 - $8.6 million), which would represent record annual sales with year-over-year growth of 8.7 – 13.9%. Management similarly adjusted EPS from $6.60 - $8.60 to $7.50 - $9.00, which would blow past earnings of any prior year. Analysts have set their EPS and sales estimates towards the highest end of what tends to be conservative guidance.

2020 is undoubtedly going to be a banner year for Quest. The firm is currently conducting 20,000 COVID diagnostic tests and 20,000 antibody tests daily, with a capacity of 200,000 daily (for each) if we were to see a pandemic resurgence this fall/winter. The consistent COVID testing and the substantial uptick in normal operations will be the impetus that pushes this stock to record levels.

DGX’s short-term price action will be dictated by its ability to navigate the COVID-crisis and its testing needs, while its long-term trajectory remains strong.

You may be thinking that the coronavirus testing tailwind is only temporary, but many analysts are predicting that the COVID-9 diagnostic market will continue to grow for years to come. The continued COVID testing uptick combined with the consistent organic growth the company had illustrated for years prior to the pandemic, positions this stock well for the next decade of returns.

Valuation, Levels, & Price Targets

DGX is currently trading at a forward P/E of 13.1x, representing a sizable discount to its 5 years rolling average of 15.6x. This relative discount, combined with its consistent 2% dividend yield, gives me confidence in the relative safety of a long-term position in this stock.

These shares have seen some short-term volatility after failing to break through the $118 level on Monday. DGX is now headed down towards its 200-day moving average around $109, which I believe will represent a strong support level for these shares to bounce off.

Despite DGX’s beta being north of 1, these shares have not been correlated with the broader market amid the pandemic trade. I like this stock as volatility begins to pick up again because it provides a marginal hedge to your portfolio.

9 out of 14 analysts are calling DGX a buy today. Many analysts have raised their price targets in the wake of management’s considerable upside revisions to 2020 guidance. The average price target sits at $133 per share, representing a roughly 20% upside from where it is trading today.

Final Thoughts

DGX is a good play for the rest of this crazy and unpredictable year. One thing we know for sure is that people will continue to be tested for COVID-19 and its antibodies, through the remainder of the year at least. If a reliable vaccine is discovered and the eventual need for this test recedes, Quest still has its massive portfolio of organically expanding clinical tests to leverage.

Bear of the Day:

Nikola bulls have gotten their face ripped clean off this week with the start-up's survival being put into question. Following Hindenburg Research's (appropriately named) strongly-worded report about Nikola misleading investors, "Tesla Wannabe's" CEO, Trevor Milton, stepped down.

This 'tactical' move by Nikola almost feels like an admission of guilt. Get the one responsible for this ostensible felonious securities fraud out so that the company can keep itself together.

Since Milton announced his resignation on Sunday, the share price has capitulated over 38%, likely blowing out many retail investing bulls' trading accounts.

Losing Critical Relationships

Hindenburg's accusation, combined with Milton's "early retirement," has many of Nikola's potential partners questioning the business's legitimacy. Relationships with energy enterprises like BP to build hydrogen-refueling stations are crucial to this alt-energy automotive start-up's future success. Now conversations with these potential partners have halted, plummeting NKLA shares 26% yesterday alone.

If Nikola were to lose its key hydrogen-refueling relationships, it could spell the end for this alternative energy-driven automotive start-up.

Sell-side analysts across the board have been lowering their EPS guidance for weeks, pushing the stock into a Zacks Rank #4 (Sell). After yesterday's shambles, I suspect that we will see another set of sizable downward EPS revisions, that will likely push NKLA down to a Zacks #5 (Strong Sell).

Apprehension From The Beginning

I had been very apprehensive about NLKA shares since they surged past Ford's valuation. A company that hasn't sold a single car being more valuable than a 117-year-old automotive giant?

The valuations looked stretched out of the gates with FOMO ridden retail investors driving the bid to seemingly no end when it went public in early June. The shares even IPO'd in a very precarious way, through a special purpose acquisition company (aka SPAC).

A SPAC is a company that goes public on nothing but the promise to purchase a business at some point in the future. This year, more than $33 billion has been raised through SPACs, which, in my mind, signals overoptimism in the equity markets.

These SPACs seem to be a cesspool for overzealous retail investor excess, which can be exemplified with the surge in Virgin Galactic and its eventual drop-off. DraftKings is also a 2020 SPAC IPO that is still sitting at a crazy high valuation, but this betting stock is nothing short of a gamble at its enormously frothy levels. It is only a matter of time before DKNG experiences a similar decline.   

Final Thoughts 

NKLA appears to have been a double whammy of disaster with an enormously stretched valuation from overexcited investors & traders combined with what seems to be a mounting securities fraud situation that has halted its ability to conduct business.

I suspect that a massive number of short-sellers have caused some of yesterday's stock capitulation. This means that we could see a short squeeze sometime soon when the sellers buy back shares to flatten their positions. I would be very apprehensive about touching NKLA in any capacity.

Additional content:

Market Indexes Skid into the Red

Market indexes skidded into the close on Wednesday, after a game attempt to continue on the buying mood that had descended on investors at session lows on Monday. Wednesday’s close took the indexes back down to those lows: the Dow was down nearly 2%, or 525 points, the S&P 500 fell 78 points, -2.4% and the Nasdaq, whose tech stocks suffered the brunt of today’s sell-off, fell 330 points, or 3%.

Both the Nasdaq and S&P have finished lower in five of the last six regular trading days; for the Dow, make it four days out of five. As we discuss with regularity here, there’s not much blowing the sails to keep bearish sentiment alive.

Mostly what we’re seeing is a reckoning — of the continued pandemic (now experiencing a “second wave” in Europe but continuing its first wave in the U.S.), a stalling labor market and a hazy outlook of the General Election November 3rd. Basically, we’re giving back much of what we took in August, when most of these challenges were still on the table.

All 11 sectors in the S&P finished lower on the day, led by Tech, Materials and Energy. Healthcare performed best, only down 1%. In fact, the S&P 500 has given back so many of its recent gains that it’s back down to almost break-even on the year. While Nike rose 8% on its recent quarterly sales and earnings strength, Nikola and Tesla are currently paying the price for earlier massive run-ups last month, now down 27% and 10% on the day, respectively.

Thursday morning brings us new Initial and Continuing Jobless Claims, as well as August New Home Sales, which reports after the opening bell. On the claims side, 850K new Americans are expected to have filed for unemployment, which continues the slow downward slope of the past several weeks.

New Home Sales are also expected to come in lower than the previous read, to 900K from 901K in July. Earlier this week, Existing Home Sales for last month rose to 6.00 million from 5.86 million the previous month.

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