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KB Home, Whiting, SmileDirectClub, CrowdStrike and Chewy highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – October 10, 2019 – Zacks Equity Research KB Home KBH as the Bull of the Day, Whiting Petroleum Corp. WLL as the Bear of the Day. In addition, Zacks Equity Research provides analysis on SmileDirectClub SDC, CrowdStrike CRWD and Chewy CHWY.

Here is a synopsis of all four stocks:

Bull of the Day:

KB Homeis benefiting from a strong job market and the lowest mortgage rates of the cycle. This Zacks Rank #1 (Strong Buy) is expected to see double digit earnings growth this year and next.

KB Home is one of the largest homebuilders in the United States with developments in 38 markets in 8 states. It specializes in first time buyers, move-up buyers and active adults. It is headquartered in Los Angeles.

Another Beat in the Fiscal Third Quarter

On Sep 25, KB Home reported its fiscal third quarter results and beat the Zacks Consensus by 8 cents, or 12.3%. It reported earnings of $0.73 versus the consensus of $0.65.

KB Home has put together an impressive string of earnings beats that goes back 15 quarters, all the way to the beginning of 2016.

Revenue was $1.23 billion as home deliveries rose slightly to 3,022.

Average selling price fell 7% to $381,400, mainly due to a community mix shift within the West Coast region.

Net orders jumped 24% with double-digit increases in each of the company's four regions.

The cancellation rate, which is a key statistic for many home builders, improved to 20% from 26%. It's backlog also rose 14% to 6,230 homes with a backlog value of $2.3 billion. That's up 13% from $2.04 billion. The backlog saw increases in all regions.

Tripled the Dividend

The company is bullish as its seeing increased cash flow and expects the new home housing market to stay strong heading into fiscal 2020.

On July 15, it announced it was tripling the dividend to $0.09 from $0.025. It's now yielding 1.1%.

KB Home has consistently paid a dividend for the last 30 years.

Estimates Raised

The analysts are as bullish as the company as 7 analysts raised fiscal 2019 and fiscal 2020 earnings estimates since the report.

The fiscal 2019 Zacks Consensus Estimate rose to $2.82 from $2.68. That's earnings growth of 64.9% as it made just $1.71 last year.

7 estimates were also revised higher for fiscal 2020 during this same time which has pushed the Zacks Consensus up to $3.36 from $3.09. That's another 19.3% earnings growth.

Golden Time for the Home Builders

There have been several "golden" periods for the home builders since the Great Recession. Remember when the home builders were the best performing industry in the S&P 500 2012?

But with mortgage rates coming down under 4% again and the consumer still bullish, this appears to be another golden time for the companies.

Investors have been piling back into the stocks. KB Home is up 77% year-to-date and is hitting new 52-week highs.

It's close to breaking out to new 5-year highs.

But the shares are still relatively inexpensive as those estimates inch higher. It's trading with a forward P/E of 12.

It has a price-to-sales ratio of just 0.7 and a price-to-book ratio of 1.3.

Bear of the Day:

Whiting Petroleum Corp.continues to navigate the difficult energy market even as its stock price sinks. This Zacks Rank #5 (Strong Sell) is expected to see its earnings decline 111% in 2019.

Whiting is one of the largest independent exploration and production companies in the US with its focus on oil. It has one of the largest acreage positions in the Bakken/Three Forks in the Williston Basin of North Dakota and Montana, totaling 473,781 net acres.

The company also has 86,532 net acres in the new oil prone region of the eastern DJ Basin of Colorado.

A Big Miss in the Second Quarter

On July 31, Whiting reported its second quarter results and missed on the Zacks Consensus Estimate by 52 cents, reporting a loss of $0.28 compared to the Zacks Consensus of $0.24.

Production totaled 11.6 million barrels of oil equivalent (MMBOE), and average of 127,090 barrels of oil equivalent per day (BOE/d).

Crude oil was 65% of total production with natural gas liquids 17%.

Focusing on the Balance Sheet

On Sep 27, the company did a successful tender offer of $300 million of the outstanding 1.25% 2020 convertible notes. That leaves $262 million remaining.

It also has another $874 million coming due in 2021.

But it recently amended its credit facility to double the amount it could put on the revolver. It now has a credit facility with a $1.75 billion elected commitment and a $2.25 billion borrowing base.

The company intends to focus on paying down debt using free cash flow.

Stock Will Move with the Price of Crude

Whiting has one of the higher percentages of oil production among the E&Ps that means its stock will move with the price of oil, both up and down.

As of Oct 7, in an new presentation it posted on its IR site, the company had 62% of its second half 2019 production hedged and 18% of the 2020 production hedged.

It will continue to layer on additional hedges when it sees the opportunity to mitigate the price volatility.

But the traders will still trade on the crude price.

Analysts Cut Estimates Again

The analysts have gotten pessimistic about the upcoming quarter and 2019 in the last week.

Three analysts cut their earnings estimate for the third quarter pushing it down to just $0.02 from $0.47 just three months ago.

Similarly, 2019 is looking bleaker as well.

The Zacks Consensus Estimate has fallen to a loss of $0.25 from $1.14 in the last 90 days.

That's an earnings decline of 111% as the company made $2.18 in 2018.

Two analysts also cut for 2020 in the last week pushing the Zacks Consensus down to $1.01 from $1.20.

Shares Have Gotten Hammered

The energy stocks have been among the worst performers all year. Whiting is down 69.4% year-to-date.

Whiting is now trading at 5 year lows.

With Wall Street completely ignoring the energy stocks, is now finally the time to buy?

The E&Ps, as a group, rank in the bottom 25% of the Zacks Industry Rank.

Bombed IPOs with Ripening Valuations

Some of 2019s most disastrous IPOs are starting to look like buys as nervous investors and trend riding traders oversell some of these stocks. Not all of the bombing IPOs are looking better at lower valuations, but below I will discuss a few that I believe have the potential to drive substantial returns for your portfolio.

These IPOs are considered high-risk stocks, higher-reward option. Keep this in mind when evaluating my picks.

SmileDirectClub

Shareholders were not smiling when SDC lost 27.5% of its IPO valuation on the first day of trading in mid-September. This was the worst first-day IPO price drop in roughly 2 decades (for firms raising $500 million or more), according to Dealogic. SDC is down another 27.7% since its closing price on day one of trading (September 12th). I believe that this substantial drop in value may have created a buying opportunity.

SmileDirectClub is the leading direct-to-consumer teeth aligner (95% market share), which allows users to treat mild to moderate crowded or crooked teeth without ever seeing an orthodontist. The process takes less than half of the time a traditional orthodontist would and only costs $1,895, a fraction of what the conventional orthodontic model charges (typically between $5,000 and $8,000).

With only 40% of counties having access to orthodontists, this model is attractive because of its convenience, ease, price point, and proven results. So far, SDC has helped over 700,000 people across the Americas as well as Australia and the UK. This year analysts are projecting that the firm will acquire around 450,000 new customers.

The total addressable market (TAM) for SmileDirectClub is astronomical, with 85% of the world having malocclusion (misalignment of teeth) and less than 1% of them are being treated. The convenience and affordability of SDC’s product offering positions the firm to penetrate the untapped market potential.

Smile Direct has seen an unprecedented amount of growth in the past two and a half years. The company demonstrated almost 200% year-over-year revenue growth in 2018, and the first 6 months of 2019 illustrated 113% year-over-year topline appreciation.

SDC has been experiencing expanding gross margins proving economies of scale, which is an excellent sign for a growing business. Marketing and sales are making up a majority of the company’s costs, but that’s par for the course of a fast-growing company.

Right now, SDC is only trading at a forward P/S of around 6x, which is quite reasonable due to its exceptional growth outlook. The analyst coverage of this stock is still quite light, and I believe the recent selloff is due to this product’s controversial product offering.

Investors are concerned about potential legal action associated with an orthodontic product being dispensed without the individual actually seeing an orthodontist. This type of practice is becoming increasingly common, with virtual/online doctors’ appointments becoming a norm for convenience chasing Millennials.  

SDC’s lock-up period comes to an end on 3/10/2020, meaning that pre-IPO shareholders will be able to sell out of their positions at this point. This could cause a short-term price slide in March of next year.

SDC is trending down as we speak with a 15% price drop just today. Short-sellers are going to get whiplash when the reversal begins. With this compelling business and analysts’ buy rating, I expect to see a SDC rally very soon. Top banks are rating this stock as a buy with price targets representing more than double its current price.

This stock is a highly risky investment and wouldn’t give it a significant allocation in your portfolio. SDC appears to be oversold, and I see a short and long-term upside.

Other Recent IPOs to Watch

CrowdStrike is an exceptionally promising security cloud stock. It’s a proliferating company with a ton of growth priced in, but still some excellent opportunity for stockholder returns if you are willing to bear the risks involved. Its reoccurring revenue streams make it an attractive investment even at excessively high multiples. Analysts are rating this as a buy, and its recent dip could have created a good buying opportunity. The lock-up period expiration is 12/09/2019.

Online pet retailer Chewy has sold off over 25% since its first day of trading, though the stock is still up about 20% over its IPO price. The pet industry has been expanding as millennials need for a best friend deepens. Chewy’s online presence and positioning caters exceptionally well to millennials who seem to order everything online. CHWY is trading at 1.9x, which is unusually low for a firm that is expecting north of 20% topline growth moving forward. The lock-up period expiration is 12/11/2019.

Take Away

The IPO frenzy hasn’t yielded investors the strongest returns this year, but that doesn’t mean that these stocks’ potential went down the drain. For some of these stocks, it means that valuations have ripened, and so has the upside potential. Keep an eye on the stocks I discussed above, and their quarterly releases moving forward.

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KB Home (KBH) : Free Stock Analysis Report
 
Whiting Petroleum Corporation (WLL) : Free Stock Analysis Report
 
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