Super Micro Computer and Dollar General have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – October 5, 2023 – Zacks Equity Research shares Super Micro Computer Inc SMCI as the Bull of the Day and Dollar General Corp. DG as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Kinsale Capital Group, Inc. KNSL, NMI Holdings NMIH and Primerica, Inc. PRI.
Here is a synopsis of all five stocks.
Bull of the Day:
Zacks Rank #1 (Strong Buy) stock Super Micro Computer Inc, also known as Supermicro, is a San Jose-based technology company that designs and manufactures high-performance server and storage solutions. The company’s products are used various up-and-coming, high-growth industries, including enterprise IT, big data, cloud computing, internet of things (IoT), and artificial intelligence (AI).
Betting on Data Center Hardware
According to Next Move Strategy Consulting, the artificial intelligence market currently has a value of ~$100 billion and is expected to grow by a whopping 20x by 2030 to nearly $2 trillion! However, for investors, cashing in on the AI revolution is probably more complex than it may seem. “Chatbot” operators like Microsoft and Alphabetwill undoubtedly benefit if AI becomes even more widespread and adopted. Nevertheless, it is difficult to move the needle for these multi-trillion-dollar juggernauts. That’s where SMCI comes in – SMCI sells the “picks” to the proverbial AI gold rush through its data-center hardware necessary to run AI applications such as ChatGPT.
The AI Revolution is Driving Top and Bottom-Line Growth
Though a plethora of data center company’s benefit from the AI revolution, SMCI is best in class. Last quarter, earnings and revenue jumped by 34% year-over-year. After weathering the COVID-19 pandemic and global shortages, SMCI is beginning to separate itself from its peers in terms of its relative growth rate.
Are Supply Limitations a Concern?
Investment in AI is contributing to explosive demand for SMCI’s servers. However, shares pulled back in August mainly because the company could not meet that high demand. SMCI’s current server production is enough to generate a maximum of $15 billion in revenue annually, but with the addition of a new Malaysian production facility (which goes live in 2024), SMCI will be able to double its production.
SMCI also benefits from its server partnership with the undisputed AI leader, Nvidia. Though SMCI owns less than 10% of the server market currently, its coveted partnership with NVDA should help the company eat into competition such as Dell Technologies.
High Growth + High Efficiency: A Winning Combination
High earnings growth is only meaningful with strong operational efficiency. A high return on equity (ROE) indicates that management efficiently uses shareholder equity to generate profits. SMCI’s ROE of 35 dwarfs the S&P 500’s ROE of 25.
Relative Strength + Small Float
In the stock market, trends tend to persist, and strength tends to beget strength. With that in mind, SMCI is in a league of its own. Shares are up 234% versus the S&P 500’s 11.4%. Furthermore, if SMCI continues to execute, investors should benefit from its tiny share float of 45 million shares. Stocks with a small float can gain a lot of momentum because a limited supply of shares makes it easier for demand to supersede supply.
Bottom Line
Zacks Rank #1 stock Super Micro Computer is a leader in the AI industry – an industry expected to grow 20x by 2030. Despite challenges like supply limitations, SMCI’s recent earnings and revenues surged by 34% YoY, demonstrating its resilience. Look for SMCI to be much higher over the next 6-12 months.
Bear of the Day:
Zacks Rank #5 (Strong Sell) stock Dollar General Corp. is one of the largest discount retailers in the United States. Dollar General specializes in merchandise that typically sells for below $10 and includes consumable items, seasonal items, home products, and apparel. The company sells a mix of products, including merchandise created in-house, as well as inventory from leading national brands. Dollar General operates nearly 20,000 locations across the United States and Mexico.
Rising Expenses Due to Theft
Shoplifting is on the rise across major cities in the United States. For example, popular drug store Walgreensrecently revealed that shrink was up by more than 50% due to a spike in organized retail crime! Meanwhile, other retailers such as Targethave been forced to close dozens of stores in these crime “hot spots.” Though Dollar General is less impacted due to its low-cost items, rising SG&A expenses are straining its margins. Dollar General’s gross margins of 31% are well below the S&P 500’s margins of 49.35.
Softness in Discretionary Space Means Slowing Growth
While Dollar General’s margins are shrinking, growth is slowing – a dangerous combination. As stimulus-driven spending gradually wanes, the consumer products discretionary industry finds itself in a vulnerable position. Last quarter, sales declined by nearly 30%, while EPS grew at a feebly 4% year-over-year.
To make matters worse, Zacks Consensus Estimates paint an ominous picture. Next quarter, Wall Street expects EPS growth to drop 42%. Full-year 2024 EPS is expected to come in at -26.5%. In 2025, analysts expect mediocre growth of 7.35%.
Defensive Name not Acting Defensive
Discount retailers like Dollar General are considered defensive because their rock-bottom prices mean more resistance to economic downturns. However, DG’s growth is slowing even in the tough consumer economy. Furthermore, DG underperformed alongside high-tech, risk-on type stocks through the September stock market correction. In other words, if DG provides little safe-haven protection and is likely to underperform risk-on assets if the market bottoms, what’s the point of holding shares? The chart below illustrates how relatively weak the stock has performed.
Conclusion
Dollar General is not living up to its defensive, safe-haven reputation. Despite its low-cost offerings, margins are shrinking while growth is slowing – a poor combination.
Additional content:
3 Insurance Stocks with More than 25% YTD Gains to Buy
The insurance industry has performed well so far this year, riding on better pricing, prudent underwriting, increased exposure, streamlined operations, global presence and a solid capital position. The industry has gained 4.8% year to date.
Banking on strong fundamentals, Kinsale Capital Group, Inc., NMI Holdings and Primerica, Inc. have not only outperformed the industry but have also crushed the market and the Finance sector.
What Helped Insurers Sail Through This Year?
The economy has been growing, albeit slowly. GDP increased at an annualized rate of 2.1% in the second quarter and 2% in the first quarter of 2023. Notably, at the latest FOMC meeting, the Fed estimated GDP growth of 2.1% in 2023 from 1% expected at its June meeting. The unemployment rate is expected to be 3.8%, an improvement from 4.1%.
Despite an above-average hurricane season, continued increases in pricing, reinsurance programs and favorable reserve development helped non-life insurers sail through. Swiss Re estimated a global economic loss of $120 billion in the first half of 2023 from natural disasters, while insured losses were estimated to be about $50 billion. Per a report in the Insurance Journal, the combined net ratio in 2023 is estimated to be 102.2. Underwriting losses are expected to be primarily due to soft performance in personal lines, which, in turn, is driven by higher catastrophe losses per Insurance Information Institute and Milliman.
Nonetheless, global commercial insurance prices rose for 23 straight quarters though the magnitude has slowed down over the last 10 quarters, per Marsh Global Insurance Market. Per reports published in Carrier Management, direct premiums written across the P&C business in 2023 are estimated to grow in double digits.
The insurance industry is rate sensitive. An improving rate environment is a boon for insurers, especially long-tail non-life insurers and life insurers. The Fed has already made three hikes in 2023, taking the tally to 11 since March 2022. Investment income, an important component of an insurer’s top line, is poised for continuous improvement.
Better economic conditions continue to support the life insurance industry. Policy count rose 4% in the second quarter of 2023, marking the second consecutive quarter of policy sales growth per preliminary results from LIMRA’s U.S. Retail Individual Life Insurance Sales surveys and estimates. The survey also found total that U.S. life insurance new annualized premium was $4.04 billion in the second quarter, up 2%. Premiums grew in the second quarter after three straight quarters of declines, per the findings.
Nevertheless, a solid capital level supports insurers in pursuing strategic mergers and acquisitions to gain market share, expand in niche areas, and diversify operations into new business lines and geography as well as increase dividends, pay special dividends and buyback shares.
The industry is undergoing accelerated digitalization. Players are investing heavily in technology to improve scale and efficiencies.
Picks for Better Returns
With the help of the Zacks Stock Screener, we have selected three insurance stocks that have rallied more than 25% year to date. These stocks have delivered earnings surprises in each of the last four reported quarters and witnessed northbound estimate revisions.
Richmond, VA-based Kinsale Capital offers various insurance and reinsurance products, typically providing coverage for risks that are unique and difficult to find in the standard insurance market. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
With an extensive focus on clients with small and medium-sized accounts, which have better pricing and are less prone to competition, it focuses only on the excess and surplus lines market in the United States. KNSL expects 2023 to be the sixth calendar year in a row with double-digit industry-wide E&S premium growth.
Kinsale Capital is well-poised to deliver improved margins, lower loss and expense ratios and estimates low double-digit rate increases across the book of business. The insurer enjoys the best combination of high growth and low combined ratio among its peers and targets a combined ratio in the mid-80s range over the long term.
The Zacks Consensus Estimate for Kinsale’s 2023 earnings suggests 48.5% growth from the year-ago reported figure on 48.4% higher revenues. The consensus estimate has moved up 1 cent in the past seven days. Year to date, shares have rallied 57.3%.
Headquartered in Emeryville, CA, NMI Holdings provides private mortgage insurance (MI). The mortgage insurer should continue to benefit from a strong mortgage origination market, robust growth in high-quality and short portfolios and increased private mortgage insurance penetration rates. It carries a Zacks Rank #2 (Buy).
NMIH continues to build on its position in the private MI market, expand its customer base and grow its insured portfolio of high-quality residential loans by focusing on long-term customer relationships, financial strength and profitability.
NMI Holdings has a comprehensive reinsurance program in place for nearly the entirety of its in-force portfolio. This in turn enhances its return profile, absorbs loss, provides efficient growth capital and mitigates the impact of credit volatility.
The Zacks Consensus Estimate for NMIH’s 2023 earnings suggests 8.6% year-over-year growth on 9.5% higher revenues. The consensus estimate has moved up 3 cents in the past 30 days. Year to date, shares have surged 25.1%.
Duluth, GA-based Primerica is the second-largest issuer of term-life insurance coverage in North America. It aims to be a successful senior health business while continuing to enhance its shareholders’ value. It carries a Zacks Rank #2.
Strong demand for protection products drives sales growth and policy persistency benefits for this insurer. A strong business model makes Primerica well-poised to cater to the middle market's increased demand for financial security.
PRI expects Term Life insurance issued policy growth in the range of 4-6% in 2023. The company noted that new rate classes through new products should accelerate growth. Inflationary pressure, however, is likely to weigh on the upside. The company expects adjusted direct premiums to grow 6% in 2023. It also expects net investment income of $34 million in each quarter for the remainder of 2023.
The Zacks Consensus Estimate for PRI’s 2023 earnings suggests 36.6% year-over-year growth on 3.1% higher revenues. The expected long-term earnings growth rate is pegged at 5%. The Zacks Consensus Estimate 2023 earnings has moved up 2% in the past 60 days. Year to date, its shares have gained 33.2%.
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Dollar General Corporation (DG) : Free Stock Analysis Report
Primerica, Inc. (PRI) : Free Stock Analysis Report
Super Micro Computer, Inc. (SMCI) : Free Stock Analysis Report
NMI Holdings Inc (NMIH) : Free Stock Analysis Report
Kinsale Capital Group, Inc. (KNSL) : Free Stock Analysis Report
