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Weyerhaeuser, Royal Caribbean, Macy's, L Brands and The Children's Place highlighted as Zacks Bull and Bear of the Day

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Zacks Equity Research
·12 min read
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For Immediate Release

Chicago, IL – January 7, 2021 – Zacks Equity Research Shares of Weyerhaeuser Company WY as the Bull of the Day, Royal Caribbean Group RCL as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Macy's, Inc. M, L Brands, Inc. LB and The Children’s Place, Inc. PLCE.

Here is a synopsis of all five stocks:

Bull of the Day:

The stay-at-home initiative, combined with historically low-interest-rates, has caused a fierce rally in lumber. Lumber futures have surged over 155% since their lows on April 1st, and this rally still has legs with demand continuing to swell.

All this momentum is catalyzing my purchase of US lumber giant Weyerhaeuser, as analysts rush to increase their estimates and savvy investors swarm to get in on the action. WY has been propelled into a Zacks Rank #1 (Strong Buy) as EPS estimates are driven higher on both long and short-term horizons.

Buying Into The Lumber Rush

Do-it-yourself (DIY) home projects have been the hottest hobby amid the global quarantine, with the world finally running out of excuses for why they don't have time to fix the cabinets, redo the deck, build that fence, etc. I'm sure many of you can attest to this as I can.

This DIY initiative has created an enormous amount of (albeit short-term) demand for wood, which kickstarted this lumber rally. The rally will be sustained by home builders who are rushing to get houses up and on the market as prime mortgage rates slide below 3% for the first time in history (despite a marginal bounce back from their lows).

Those who've been considering purchasing a new home are now pulling the trigger as the economy begins to turn around. According to the US Census Bureau and the Department of Housing and Urban Development, new home sales in November were 841,000, a figure that continues to drive past both analysts' estimates as well as 2019 figures. In November, single-family homes were "20.8 percent (±19.5 percent) above the November 2019 estimate of 696,000."

I anticipate this uptick in new home sales to progress as the rapid economic rebound continues. With more people looking to move out of city centers and into quaint suburbs and rural areas, home builders still have a lot of work on their hands as hybrid and completely remote working models become the norm in the post-pandemic world. This means the high demand for lumber isn't going anywhere but up.

Why Weyerhaeuser (WY)?

Weyerhaeuser isn't exactly a sexy company and doesn't have the same level of analyst exposure as many exciting tech firms, which makes it prone to valuations that are below intrinsic value. Today WY is breaking out from its underappreciated valuation, and we are taking advantage of the continued momentum-driven opportunity.

WY underperformed its cohorts amid the COVID downturn because of its conservative dividend suspension to maintain liquidity amid the pandemic's uncertainty. This dividend has been reinstated in full force, with a robust $0.68 annual base dividend, representing an over 2% yield combined with a supplementary dividend that will be based on the company's yearly cash-flows, moving forward.

Weyerhaeuser's strategic timberland in the Pacific Northwest is driving an enormous amount of growth for the company. This region is expected to continue accelerating growth as its Canadian competitors are plagued by pine beetles, causing a supply shortfall amid this lumber demand surge.

WY’s wood products are also anticipated to be a significant profit driver moving forward. Analysts estimate residential construction activity to soar in the coming years, which will significantly benefit Weyerhaeuser's sales and profit margins.

WY has tracked lumber futures prices almost perfectly up until the COVID-crisis. This has presented us with a rare opportunity to cash in on the lumber rush after it happened.

Over the past 3 months, lumber futures have soared 155% to their highest level in history. I believe that we still have more room.

From my TradingView chart below, you can see that Lumber futures just bounced off a critical Fibonacci Retracement level around $675 and looks to be headed back towards its end of August highs. WY is poised to ride this lumber surge to the moon.

The Takeaway

WY is positioned to continue surging with lumber prices and the recovery of the economy. This is a lucrative cyclical stock that investors have begun to pivot into as they put more of their sideline cash to work and rotate profits from their COVID winners.

We are looking at a strong WY resistance at roughly $30.80, a level that I will be looking to add to my position. But you may not want to wait to take advantage of this unique COVID-driven opportunity that has wheels as a recovery stock.

Bear of the Day:

There has been a big rotation from tech into the cyclical underperformers over the past couple of months. With the presidential election in the rearview mirror, and vaccine announcements providing investors with a much clearer end to this pandemic tunnel, optimism surges into 'recovery' stocks. Some of 2020's dogs have been lifted to inequitable levels in which I would not want to be left holding the bag.

Royal Caribbean Cruises, the world's second-largest cruise line behind Carnival, is one such stock that has surged past its intrinsic value in recent months. At the same time, analysts continue to lower its long-term EPS estimates. RCL has been pushed down to a Zacks Rank #5 (Strong Sell), yet investors keep buying in the hopes of a robust economic recovery taking this business back to normality.

RCL has driven up 36% since the end of October, 10% above its average price target. It is time to consider pulling profits on this frothy cruise line stock.

The Pandemic & Tabooed Cruises 

The pandemic has tabooed cruises. Being in close quarters with thousands of strangers with no way to escape sounds like a literal nightmare amid this pandemic, and I think cruise lines will be hard-pressed to shift this narrative even in the post-COVID world.  

The story about Carnival's Diamond Princess that was supposed to be a 14-day luxury cruise around the islands of Japan and southern China, ended up being a month-long trip from hell. A passenger tested positive for the novel coronavirus 3 days before the ship was scheduled to dock. The 2,666 passengers were quarantined in their small cabins for the remainder of the extended voyage, while the number of confirmed cases racked up. There were over 700 confirmed cases by the time the cruise finally got all the passengers off one month after it took-off.

This was not the only cruise that experienced the virus's rapid spread in close quarters. This news has tabooed the cruise line industry and left it with a deep scar that will not quickly fade. These cruises will miss out on their peak season this year, and many consumers will be apprehensive about getting on a cruise ship for years to come. Being in close quarters with many people you don't know is the epitome of what we are being conditioned to avoid.

Financials 

This leisure driven business has already lost more in the last two quarters than it had made in its entire 2019 fiscal year, and the pain is far from over. Analysts are expecting similar misery in 2021, and maybe if Royal Caribbean can flip its tabooed narrative, the business may once again turn a profit in 2022. That assumes the cruise line will have enough liquidity to get through the rough waters in the coming quarters.

Royal Caribbean was forced to lay off over 25% of its workforce out of the gates in April and raised $3.3 billion in debt with an interest rate that reflected a very distressed company. Unfortunately, I don't think this will be enough to support the $1 billion+ losses it is incurring quarterly.

The company is now in the process of raising $1 billion in capital through what is known as an ‘at-the-market’ (ATM) offering. This will allow RCL to sell newly issued shares over any period of time they deem necessary. This ATM will dilute any shares currently held, and if they unload these new issues quickly, it could be devastating for the share price.

The company is holding a total debt-to-capital ratio at around 69%, which I suspect will continue to increase in the coming quarters.

Final Thoughts

RCL has had a good run from its COVID bottom on March 18th, driving returns of 223%, but I think now is the time to pull some profits. 

Additional content:

Macy's to Shut 45 Stores on Optimization Initiatives

Consumers’ inclination toward digital transactions has put traditional brick-and-mortar stores in dire straits as they struggle to attract footfall. The past year was even more challenging for physical stores as the coronavirus pandemic-led social distancing norms eclipsed traffic turn-up, especially at malls. Moreover, consumers’ tighter pockets led to lower spending on luxury items.

The situation has compelled retailers to walk a tightrope, with many resorting to store closures. Macy's is also one such retailer. This well-known departmental chain has been restructuring its store base to better align with consumers’ altering shopping preferences.

Per media reports, the company is likely to close as many as 45 of its department stores by the middle of this year. The closures are likely to help the company focus on other productive store locations as well as boost digital capabilities. Let’s dive deeper.

Store Restructuring on the Cards

The store closure plans are apparently part of Macy’s previously-announced strategy to shutter nearly 125 stores by the end of 2023. According to market sources, a majority of these stores are located in lower tier malls and have been less productive. Sources have also highlighted that the company is striving to rightsize its store fleet by concentrating on well-trafficked higher tier malls.

The need for closing underperforming stores looks justified for the company when considering the sluggish comparable sales performance during third-quarter fiscal 2020. During the period, comparable sales were down 21% year over year, on an owned basis and down 20.2% on an owned-plus-licensed basis. Moreover, store sales plunged nearly 36%.

Well Macy’s isn’t alone in adhering to rationalizing its store fleet. Notably, L Brands has closed more than 200 Victoria’s Secret stores in the United States and Canada last year. The Children’s Place plans to close nearly 300 stores by the end of fiscal 2021.

Digital the Way to Go

With brick-and-mortar format on the bitter side of things, retailers are striving to stay afloat on the back of growth in the digital realm. Macy's is also adapting to changes in the retail ecosystem by bolstering its online capabilities. During the third quarter, the company’s digital sales surged 27% year on year, contributing 38% to total-owned comparable sales.

The company is witnessing growth across all metrics including traffic, search and conversion. Also, customers have been responding well toward the company’s expanded omni-channel offerings such as curbside, store pickup and same-day delivery.

Wrapping Up

Macy’s well-chalked strategic initiatives to boost digital and omni-channel offerings are worth applauding. Apart from these, efforts to boost assortments and reduce costs are likely to continue supporting this Zacks Rank #3 (Hold) company in the forthcoming periods. Markedly, shares of the company have surged 88.3% in the past three months compared with the industry’s rise of 80.5%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Weyerhaeuser Company (WY) : Free Stock Analysis Report
 
Macys, Inc. (M) : Free Stock Analysis Report
 
Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
 
The Childrens Place, Inc. (PLCE) : Free Stock Analysis Report
 
L Brands, Inc. (LB) : Free Stock Analysis Report
 
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