For Immediate Release
Chicago, IL – August 27, 2019 – Zacks Equity Research Shares of Tabula Rasa HealthCare TRHC as the Bull of the Day, Simpson Manufacturing SSD as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Verizon Communications VZ, Coca-Cola KO and Jack in the Box JACK.
Here is a synopsis of all five stocks:
Bull of the Day:
Tabula Rasa HealthCare is a $1.35 billion medical IT firm focused on patient-specific, data-driven technology and solutions which enable healthcare organizations to optimize medication regimens to improve patient outcomes, reduce hospitalizations, lower healthcare costs and manage risk.
The company's cloud-based software applications, including platforms EireneRx and MedWise Advisor, deliver control and certainty to payers, providers and other healthcare organizations. And their innovative use of artificial intelligence technologies and cross-provider integrations for doctors and pharmacies to cross-reference prescription complications is becoming more important in an aging population taking more medicines.
I last wrote about Tabula Rasa in early May after we were buyers of the stock in the low $50s. I saw incredible value in this innovative provider of key pharmacological technology to the healthcare system -- especially with sales growth of over 40% to $285 million this year.
Here's what I wrote in May...
Part of the pessimism is that while the company became profitable last year, it is expected to show no EPS growth this year and deliver a repeat of $0.77 giving it a P/E multiple of over 70X. And this after analysts held loftier expectations about 2019 growth as recently as last October when the consensus was for EPS of over $1.10.
(end of excerpt from my May Bull of the Day article, which also includes lots of good background on New Partnerships, Acquisitions, and Innovations that had occurred in the prior 8 months)
Gargantuan Surprise and Growth on the Rise
After TRHC's Q1 earnings report on May 8, there was more confusion among analysts about the outlook and when certain acquisitions would be accretive. Full year 2019 EPS consensus plunged to $0.47, even with a relatively big beat of 10-cents vs 6-cents.
Shares also kept falling during the May stock market slide, all the way to a new 52-week low near $41. And that's where I was a buyer again for another portfolio, this time my Zacks TAZR Trader where I encouraged my members to be buying under $45.
Then on August 8, Tabula Rasa Healthcare delivered Q2 earnings of $0.35 per share, beating the Zacks Consensus Estimate of $0.05 per share by 600%. This giant positive surprise, along with raised guidance and updates on key initiatives and innovations, sent shares flying all the way to $68 and giant volume of over 1 million shares (3X the average).
The Zacks EPS Consensus for 2019 was restored and now sits at $0.82, representing just 6.5% annual growth. But 2020 estimates rose from $0.97 to $1.13, for a 38.7% advance.
And management raised their 2019 revenue view to $283M-$293M from $280M-$290M. From this, consensus moved up from $287M to $289.25M for 41.6% topline growth.
Innovation and Partnership Updates
Last week, Tabula Rasa HealthCare announced a partnership between its precision dosing software subsidiary DoseMe and Bainbridge Health Partners, a Children's Hospital of Philadelphia spin-off. Bainbridge Health provides clinical solutions based on more than a decade of research and development, including the Med O.S® medication safety and stewardship platform that reduces the risk of medication errors and waste. The partnership will leverage Bainbridge Health's Med O.S® platform to further enhance medication safety and reduce costs across DoseMe's partner hospitals.
And two weeks ago, Tabula Rasa HealthCare announced a new offering of Comprehensive Medication Review (CMR) opportunities to community pharmacists through the collaboration of two of its subsidiary companies, SinfoniaRx and PrescribeWellness.
Community pharmacists now will have the opportunity to conduct face-to-face CMRs with their patients and receive compensation for additional clinical services. The collaboration between SRx, the largest provider of telephonic CMRs, and PW, one of the largest networks of community pharmacies, benefits patients, their pharmacists and their health plans.
For patients, there is an increased access to telephonic or in-person consultations. For pharmacists, the CMRs can be quickly and accurately documented as eCare Plans within the Patient Engagement Center using PrescribeCare, as they review all of a patient's medications to help determine the efficacy of each medication prescribed. For payors, more eligible members will complete a CMR to ensure they are receiving optimized care.
Bottom line: Buy the dips in TRHC and let's see if the stock can continue its rebound toward analyst targets as high as $90. And as I write this on Monday August 25, TRHC shares have done something notable: after continuing last week's market slide, they dipped to $59, closing the gap up from Aug 9, and ended +2.63% as they got back above $62.
Disclosure: I sold my TRHC positions in Healthcare Innovators and TAZR Trader, but may initiate a new long position at any time.
Bear of the Day:
Simpson Manufacturing is a $2.8 billion maker of building products that just had a -14% earnings miss and saw estimates get slashed double-digits.
The stock is climbing back from $58 after its post-earnings gap down but I don't think it will fill the gap up to $66. And that's why I shorted this provider of wood and concrete construction products like truss plates, connnectors, fasteners, anchors and adhesives on the rally back to $64. If it does fill the gap, I would add to the position there.
After estimates dropped enough to imply -5% EPS growth this year, the stock became a Zacks #5 Rank but still sports a Growth Score of A. That's probably based on next year's EPS looking great now with +19% growth. I think those will come down too.
Analyst coverage is low here, with only 2 contributing to the Zacks Rank, including Sidoti who downgraded to Neutral and lowered their PT from $72 to $60 on July 30. DA Davidson reiterated their $60 price target as they dropped 2019 EPS 17.7% from $3.17 to $2.61 and took next year down from $3.87 to $3.16.
The stock trades over 20X EPS and 2.5X sales that are only growing 5%. With housing slowing down, I think this stock will come down too and at least test the recent lows near $58 and probably $55.
Simpson Manufacturing Company Inc. is headquartered in Pleasanton, California and through its subsidiary, Simpson Strong-Tie Company Inc., the company designs, engineers and is a leading manufacturer of wood construction products and solutions, including connectors, truss plates, fastening systems, fasteners and shearwalls, and concrete construction products, including adhesives, specialty chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials.
A Method for Shorting
Whenever I pick a short, it is not my "best idea" per se, as when I pick longs I really believe in. Picking a short is more about this recipe: I see market & macro volatility on the rise, and I want some short exposure, so I go hunting for the first potential kill among the weakest prey.
I picked decent short targets in the past year in DDS and SIX, even if the timing wasn't perfect. But I quit looking for shorts in Q2 when the market was lifting most boats.
So let's talk about how I picked this short...
First, I looked at over 100 Zacks #5 Rank stocks across many Zacks sectors including Tech, Energy, Industrials, Construction, Finance and Medical.
That's not an exhaustive search certainly, and I'll admit I don't have the sector expertise to pick losers in Energy or Finance.
Second, I always seek a confluence of fundamental factors for a short, in addition to a poor Zacks Rank. SSD stood out for these reasons: rich valuation metrics, sector/industry weakness, low investment bank interest.
In addition to weak housing starts data, we also got a slip in consumer confidence. According to Bloomberg on Aug 16...
U.S. consumer sentiment plummeted to a seven-month low in August on growing concerns about the economy even as the labor market shows few signs of weakening from robust levels.
The University of Michigan’s preliminary sentiment index slumped to 92.1 from July’s 98.4, missing all forecasts in Bloomberg’s survey of economists. The gauge of current conditions decreased to 107.4 while the expectations index dropped to 82.3, bringing both readings to the lowest levels since early this year.
We have a rounding top of lower highs -- and lots of "support" targets below from $58 to $54.
My risk/reward is at least 2:1 as follows...
RISK $2-3 to $66 (it probably won't get much above $65) and look for REWARD of at least $5-7 into the mid-$50s.
Consumer Sentiment Plunge on... Tariff Tweets?
On top of more weak housing data, this hiccup for the consumer isn't welcome. I shorted SSD on the morning of this data and the one thing that has obviously gotten worse is the trade war action and reaction.
So it's safe to say that the rest of this analysis for early August won't look any better in early September...
Again from the Bloomberg article "Economic Concerns Send U.S. Consumer Mood to Seven-Month Low" by Ryan Haaron on Aug 16...
Consumers “strongly reacted” to the proposed increases in tariffs on Chinese goods, a subject that was spontaneously cited by 33% of those surveyed, near the recent peak of 37%, according to the report. Americans also concluded, following the Federal Reserve’s first interest-rate cut in a decade, that they may need to be more cautious about spending in anticipation of a potential recession, the report said.
The July 31-Aug. 14 survey period corresponded with an especially volatile period: The Fed rate cut, Trump raised tariffs on consumer goods from China then delayed some, and signs of global malaise multiplied.
Markets convulsed in those two weeks. U.S. stocks posted their two steepest drops of the year while yields on 30- year Treasury bonds fell to record low and 10-year yields dipped below the two-year in a harbinger of recession in the next 18 months.
“The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “Consumers concluded, following the Fed’s lead, that they may need to adopt a precautionary spending outlook in anticipation of a potential recession.”
(end of Bloomberg excerpt)
Now, to tie it all together, we bring in Diana Olick, housing expert from CNBC. She wrote about the housing market data, consumer confidence and the views of industry experts like KB Home CEO Jeff Mezger on Aug 16.
Olick observed that the terrific drop in long-term interest rates "has not produced a home-buying spree for either new or existing homes" thereby denting new home construction starts. And she titled her piece "Confidence matters more than mortgage rates in housing, and confidence just took a hit" after speaking with Mezger...
“I’ve always maintained over the years that consumer confidence means more than rates to the home buying decision,” said Jeff Mezger, CEO of Los Angeles, CA-based KB Home told Olick. “We’ve had some great years where interest rates were 8, 9,10%—because people find a way when they feel confident about the future.”
“Frankly, as an industry, that’s what is holding us back from getting to normalized levels,” said Mezger. “We’re only going to invest and build if we can get a return, and it’s difficult to find the combination of land, the cost to produce, the fee structure in that city and then what you can sell a home for based on the incomes in that submarket. So that is the challenge.”
Since it looks like low interest rates won't be used to buy expensive new homes, new construction could be under pressure for some time until prices come down.
Disclosure: I am short SSD shares in the Zacks TAZR Trader portfolio.
3 Stocks to Play in the Face of Continued Economic Uncertainty
The global economic outlook continues to be a blurry picture with President Trump ordering US companies to search for alternatives to China, and Fed chairman Jerome Powell pledging to act appropriately to sustain the economic expansion. Powell acknowledged that the trade war tariffs are a factor in the deteriorating economic outlook but remained positive about the current state of the US economy.
The US weekly jobless claims fell more than expected last week, suggesting that the labor market has held firm despite public fears of an impending recession. Claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 209,000 for the week ending August 17. The decline was sharper than expected as economists were anticipating 216,000 for the week.
While Wall Street has been uneasy about the economic outlook, the US economy seems to still be in an expansion period. Although the economy has slowed and there are economic indicators pointing towards a recession, current economic data suggests that the economy is still growing.
The purchasing managers index measured by the Institute of Supply Management hit 51.5% in July, marking the 35th consecutive month of manufacturing growth. The ISM’s non-manufacturing index touched 53.7% and marked the 114th consecutive month of growth in non-manufacturing activities. However, recession fears have sent many investors into sell-off frenzies, providing an opportunity for more bullish investors to enter stocks at discounted prices. Let’s take a look at what stocks can be solid investments in a time when the global economic outlook remains uncertain.
Verizon Communications is a good defensive move to make when faced with a dimmed global economic picture. Most of the company’s business is based in the US, making them less susceptible to global macroeconomic issues than other companies. The company’s beta ratio of 0.53 further cements the stock as a sound investment that can weather market volatility. Verizon also boasts a 4.24% dividend yield, more than double the average yield of the S&P 500. The stocks high dividend yield provides investors with an appealing perk during times of economic unclarity.
Estimate revisions have ticked upwards for Verizon, earning it a Zacks Rank #2 (Buy). Fiscal 2019 earnings are expected to rally 1.91% to $4.80 per share on the back of a slight sales spike to $131.37 billion. VZ has a solid history of beating bottom line estimates as it has an average EPS surprise of 2.58% over the past four quarters.
Coca-Cola is a classic defensive move to make during times of economic worries and unprecedented banter between the president and Fed chairman. Coca-Cola has a beta ratio of 0.48 and a dividend yield of 2.94%. The consumer staple stock is seen as a relatively safe investment to make as the demand for the company’s products doesn’t fluctuate with the broader market. KO is a solid move for investors feeling uneasy about the economy and it has the potential to trade higher as more panicked investors pour into the stock.
KO has been able to deliver positive organic sales growth over the past several quarters; organic sales increased 6% in Q2 for the company. Coca-Cola is a Zacks Rank #2 (Buy) and estimates are looking solid for the company. Earnings are expected to rise 0.96% to $2.10 per share and revenue is forecasted to surge 15.68% to $36.85 billion in fiscal 2019. The company has consistently surpassed estimates with an average EPS surprise of 2.85% over the past four quarters.
Jack in the Box is a company that is a leader in the fast-casual dining industry. It operates one of the nation’s largest hamburger chains and Qdoba Mexican Eats. Fast casual dining demand doesn’t typically decline during recessions making the stock a viable investment during times like these. Its beta ratio of 0.30 paired with its dividend yield of 1.85% further cement it as a safety stock that can bring returns if markets go haywire.
The stock has made a solid run in the past four weeks, up 15.8%. The company’s robust third quarter drove the stock’s run, beating top and bottom-line estimates. JACK’s reported EPS of $1.07 beat our estimate by 8.08% and revenue of $222.4 million beat estimates by 1.41%; earnings and revenue grew Y/Y by 7% and 18.3%, respectively.
The company’s recent initiative to expand its delivery channels bodes well for the company as it would bolster its transactions and sales. Estimates are looking solid for the current quarter with an anticipated 22.08% surge in earnings to $0.94 per share, and revenue is expected to climb 24.36% to $220.7 million. Estimates were revised upwards for JACK, earning it a Zacks Rank #2 (Buy).
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