For Immediate Release
Chicago, IL – September 22, 2020 – Zacks Equity Research highlights North American Construction NOA as the Bull of the Day and PC Connection CNXN as the Bear of the Day. In addition, Zacks Equity Research provides analysis on DaVita Inc. DVA and ExlService Holdings, Inc. EXLS.
Here is a synopsis of all four stocks:
Bull of the Day:
North American Construction is a Zacks Rank #1 (Strong Buy) stock that posted solid numbers at the end of July which helped push the stock higher through the middle of August. Since that time shares have been sliding back down, but now looks to be a good time for a deep dive into why this stock obtained the highest Zacks Rank.
North American Construction Group Ltd. provides heavy construction and mining services primarily in Canada. It offers services to large oil, natural gas and resource companies. American Construction Group Ltd, formerly known as North American Energy Partners Inc., is based in Alberta, United States.
The most recent quarter caused the stock to spike. I see the company reporting EPS of $0.29 when $0.13 was expected. That $0.16 difference translates into a positive earnings surprise of 123%. That has a way of sending expectations and the stock price much higher!
Prior to the most recent beat, the company posted 2 beats and 1 miss of the Zacks Consensus Estimate. That average positive earnings surprise over the last four quarters is 40.7%, so the beats are pretty big in size.
Earnings Estimate Revisions
The key to the Zacks Rank is the movement in earnings estimates. When you see positive estimate revisions you will see the Zacks Rank move higher and the stock will generally do the same thing.
I see estimates moving higher across the board for NOA.
There is a five cent increase over the last 60 days for the current quarter.
There is an eight cent increase over the same time period for next quarter.
The full year 2020 saw a huge move from $0.86 to $1.22 and 2021 jumped from $1.07 to $1.26.
Those sorts of moves will push a stock to a Zacks Rank #1 (Strong Buy)
The huge beat came amid a significant topline contraction. I see a -61% topline number, but as bad as that is, I love seeing the 5.7x forward PE. The 1.3x price to book multiple is also nice and low and at the same time I see margins moving higher over each of the last three quarters.
Bear of the Day:
PC Connection is a Zacks Rank #5 (Strong Sell) stock that posted a big miss in early August and the stock sank as a result. Since that time estimates have been trimmed and the stock has fallen as well. Let’s take a deeper look in this Bear Of The Day article.
PC Connection, Inc. is a direct marketer of brand-name personal computers and related peripherals, software, and networking products to business, education, government, and consumer end users located primarily in the United States.
The most recent quarter caused the stock to tumble. I see the company reporting EPS of $0.32 when $0.68 was expected. That $0.36 difference translates into a negative earnings surprise of 53%. That has a way of sending expectations and the stock price lower.
Prior to the most recent beat, the company posted 3 beats of the Zacks Consensus Estimate. The average positive earnings surprise over the last four quarters is 3.4%, so there is one other big beat and two smaller ones.
Earnings Estimate Revisions
The key to the Zacks Rank is the movement in earnings estimates. When you see negative estimate revisions you will see the Zacks Rank move lower and the stock will generally do the same thing.
I see estimates moving lower across the board for CNXN.
There is a 12 cent decrease over the last 90 days for the current quarter.
There is another 12 decrease over the same time period for next quarter.
The full year 2020 saw a move from $2.97 to $2.23 and 2021 slumped from $3.10 to $2.66.
Those sorts of moves will push a stock to a Zacks Rank #5 (Strong Sell)
The topline is contracting by 25% and growth investors hate to see that. At the same time the valuation is somewhat reasonable, with a 19x forward earnings multiple and a 1.8x price to book multiple. That said, operating margins are falling and need to turn around before investors are willing to make a connection with this stock.
What's Driving Estimates on New Strong Buy Stocks?
It’s easy to list everything that’s wrong with the market right now: the typical September sell-off, the still-high valuations, looming election-driven volatility, U.S.-China trade concerns, signs of a second wave of infections in some regions and worst of all, likely delays in the availability of a vaccine.
So easy in fact that we may even overlook the positives, which make an equally long list. These would be the V-shaped recovery, the promise of zero interest rates and maximum employment, other supportive measures for the economy, the steadily declining unemployment rate, the positive ISM data (PMI above 50% since May, indicating steady economic expansion) and finally, rising estimates for a large number of companies.
Our latest earnings trends report shows that third and fourth quarter estimates continue to move up, with third-quarter earnings expectations moving from -26.5% on Jul 2 to -23.4% on Sep 18. Full-year earnings expectations have also moved up from a low of -24.4% on Jul 2 to -20.9% on Sep 18.
The sectors likely to report positive revenue growth in Q3 are Medical, Retail/Wholesale, Technology and Construction. While other sectors will be down, the decline isn’t uniform, nor will the recovery be.
So, for example, there could easily be opportunities in sectors like Utilities (to decline less than 1% in Q3), Finance (less than 2%), Consumer Staples (less than 3%) and Auto (around 3%). That really gives us quite a few choices, if we can refine our decision-making.
I’m a great advocate of sticking to safety, although I know that a certain amount of risk-taking can probably generate more substantial gains. But I do enjoy my night’s sleep.
So if I know of any safe investing method, I’m going to stick with it. Like the Zacks Rank system that pulls out stocks with the best chances of upside and separates out stocks that are best avoided right now. When you consider that market makers are always going to be out there, buying and selling stocks, the ranking system makes all the more sense. So the first rule of investing in stocks is to go for a stock with a Zacks Rank #1 (Strong Buy) or #2 (Buy).
As explained above, not all sectors, or the industries housed within them, will do equally well. The Zacks Industry Rank can be leveraged to determine the industries that will do better than others. The general rule is that we want to invest in the top 50% of the 250+ Zacks-classified industries because historical data shows that these industries outperform the bottom 50% by a factor of more than 2 to 1.
Moreover, around half the stock’s price movement is attributable to the industry it’s in because there are common factors driving stocks in the same industry. And because that’s just the way sentiments move too.
Most importantly, we want to invest in stocks seeing positive estimate revisions. That’s what I’m focusing on with these Zacks Rank #1 stocks that also operate in attractive industries.
DaVita offers outpatient dialysis services, hospital inpatient dialysis services and ancillary services such as end stage renal disease (ESRD) laboratory services and disease management services to patients suffering from chronic kidney failure.
DaVita’s 2020 earnings grew 11 cents and 2021 earnings grew 21 cents in the last 7 days. The increase was related to its Dutch auction tender offer, under which 8,000,679 shares, or 6.6% of total outstanding shares, will be bought back.
This is in addition to the 62-cent increase in the 2020 estimate and 68-cent increase in the 2021 estimate 30 days ago, the result of a solid earnings report. The company offers the kind of services that typically don’t wax and wane with changing economic conditions. However, the fact that it already offered telehealth services and has already launched its artificial intelligence system to predict future business and improve operational efficiencies shows that it is also up to speed with the recipe for growth in the new normal.
ExlService Holdings, Inc.
The company’s operations management and analytics business is all about developing customer-centric operating models and enabling digital transformation to improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. It has clients across the insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics industries.
ExlService’s 2020 and 2021 earnings estimates have moved up 44 cents and 31 cents, respectively over the last 7 days. The estimate revision was driven by the raising of its fiscal 2020 guidance. Accordingly, revenue is now expected to be $945 million and $955 million compared to prior guidance of $922 million to $938 million (up 2.2% at the midpoint). Earnings guidance is up from $2.60-$2.80 to $3.35-$3.45 (up 25.9% at the midpoint). The guidance was raised because the company is seeing a stronger-than-expected rebound.
Prior to this, the 2020 earnings estimate went up by 34 cents while the 2021 estimate was retained, when the company reported stellar results, topping the Zacks Consensus by 65.6%. In this case, EXLS offers services that are of great importance to companies as they try to cope with the challenges thrown up by COVID.
As a result of the revised expectations, earnings are now expected to grow in both 2020 and 2021. Revenue estimates for 2020 are still slightly behind, but the company could ultimately beat the numbers if the strength in the business continues.
It can get difficult to come to any investment decision, when there’s so much conversation, both positive and negative, doing the rounds. It’s at times like this that it pays to stick to the basics. Keep your eyes on the Zacks Rank, Zacks Industry Rank and the earnings estimate revisions. That’s the safest way to pick the best!
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