For Immediate Release
Chicago, IL – June 11, 2020 – Zacks Equity Research Shares of Williams-Sonoma WSM as the Bull of the Day, Caterpillar CAT asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on JPMorgan JPM, Goldman Sachs GS and PNC Financial PNC.
Here is a synopsis of all five stocks:
Bull of the Day:
Williams-Sonoma is a Zacks Rank #1 (Strong Buy) that is a specialty retailer of premium quality home products. The San Francisco based company runs fives segments, which include popular names like West Elm and Pottery Barn.
The stock has been on a big run since the March panic lows and the company has recently delivered a nice beat on earnings expectations. Investors should stick with the stock as the earnings and price momentum continue.
Stock Drop and Pop
The March panic was the perfect time to buy WSM as it fell below the $30 level when investors were selling everything. From there, the stock popped rather quickly, rallying all the way back to pre-COVID levels by May. Traders realized that the stay-at-home environment was perfect for the WSM segments. Consumers wanted to spice up their kitchen, living space or home office and Pottery Barn and West Elm were great places to go.
Of course, people wouldn’t literally go, as the store locations were mostly closed. However, the digital platform allowed WSM to thrive in an environment where they should have struggled.
The stock rallied into the earnings report at the end of May. A beat was expected, but the 722% upside surprise was not. The blowout quarter impressed investors and the stock went higher by 15% over the next two days.
The company reported $0.74 v the $0.07 expected and saw revenues at $1.24B v the $1.07 expected. While the company suspended guidance, they commented on the e-commerce momentum. Here is CEO Laura Alber on the quarter:
“In this highly disrupted environment, we are proud to deliver 2.6% comp growth in the first quarter, despite having all of our 616 stores closed for more than half of the quarter. Our large e-commerce business had breakout comp growth in the second half of the quarter and continues to accelerate. Our teams maximized demand online, leaning into new and innovative ways to engage and serve our customers virtually. We gained market share with strong new customer growth in our DTC business, giving us even more confidence in the growth trajectory of our e-commerce business longer term.”
Analysts loved the quarter and took estimates and price targets higher. Over the last 30 days, estimates for next quarter have gone from $0.76 to $0.97, a move of 27%. For next year, estimates have been taken up 53% higher over the same time frame.
Analyst commentary cited comparable sales growth and earnings above expectations with stores closed as a catalyst for the stock going higher.
The Technical Take
The dip and rip in the stock gives us a clear picture of what to expect. The 61.8% Fibonacci retracement break, from February highs to lows, was a buy signal with long term targets at $105. With the stock above all moving averages which are trending higher, these targets are well within reach.
Those looking for a pullback could look at the 21-day moving average and hallway back from pre-EPS levels to highs. This would be right around the $75-76 level.
The market has rewarded investors that found the stocks that benefited or adjusted well during the pandemic. Now that stores are reopening, the question is how consumers respond going forward. With the digital sales doing very well for William-Sonoma and its segments, the stock will continue to perform in any environment.
Bear of the Day:
Caterpillar is a Zacks Rank #5 (Strong Sell) that is the largest global manufacturer of construction and mining equipment. The company, which is known for its iconic yellow machines, has struggled during the lockdowns. However, the stock has rallied 50% off the March panic lows.
While economies are reopening and the stock deserved a bounce, investors might want to think twice about further upside.
The Panic and Rally
The stock was crushed in early March, falling from $140 all the way to $87.50. After a very volatile April, the stock bottomed on a second test of $100 and has since pushed all the way back to $140.
Investors seem to think that CAT will not be phased by the economic damage that the shutdowns created. However, looking at earnings and estimates, the bulls might be getting ahead of themselves.
Earnings and Estimates
Caterpillar reported earnings in late April, seeing a 9% surprise on EPS to the downside. The company also missed on revenue and commented that Q2 will be worse than Q1 in relation to the virus.
The stock's recent up move has no fundamental basis as estimates continue to look horrendous. Over the last 60 days, next quarters estimates have fallen 24%, from $1.72 to $1.31. For next year, estimates have fallen 20% over the same time frame.
With numbers falling and remaining lower, investors should question if the stock deserves to be back at February levels. If the economy doesn’t bounce back like the market expects, CAT could see another volatile fall back into support levels.
Caterpillar has seen a volatile year, but is still at pre-pandemic levels for now. The stock is above all moving averages and as long as it can remain over the 200 day at $130, it could hold momentum. If that area breaks, we could see significant downside as sellers come in for fundamental reasons.
We have seen big moves higher in stocks like CAT on the back of the Fed. The question going forward is can the fundamentals fix themselves in the short-run or is there more severe damage that will harm the stock.
Fed Keeping Accommodations in Place Through 2022
The Federal Open Market Committee (FOMC) released a statement two hours before Wednesday’s closing bell, and after an initial trading blip to the downside, market indexes overall have rallied on the news, and through most of Chairman Powell’s presser a half-hour later. After the conclusion of its two-day meeting, the FOMC considered the coronavirus pandemic continuing to be a “considerable risk to the economic market,” and has declared its intent to keep interest rates unchanged at 0.00-0.25% — from now “at least” through year 2022.
That’s 2 1/2 years of near-zero interest rates from this point forward, even as the Fed expects above-trend economic growth in 2021 and ’22. In addition, the FOMC will keep bond purchasing policy in place, in order to keep volatility low — an unexpected additional perk to an economy looking to climb out of a deep, deep hole. After trillions of dollars in stimulus from both the Fed and Congress to address the economic crisis — with potentially more to come — it boggles the mind what our balance sheet might look like in a couple years.
Fed Chair Powell said the FOMC would be retaining “broad and forceful actions” in assisting the revival of the economy, saying the Fed is ”committed to using the full range of tools to support the economy.” Acknowledging that economic improvement has occurred since the Fed took emergency steps to backstop the U.S. economy with cheap capital and absorbing bond paper back in March, the ruling body still expects -6.5% GDP for full-year 2020 — the lowest-ever such projection, which Powell called the “most severe on record.”
Unemployment is now projected to be sub-10% for Q4 of this year, but not before. This amounts to a continued overall economic hardship for millions of Americans going forward, despite an historically robust labor market over the previous several years. Powell also mentioned that, in the May non-farm payroll report last week from the Bureau of Labor Statistics, 4.7 million Americans listed themselves “employed but absent” from their jobs, when in truth they too should have been counted as unemployed. This would have taken the headline jobs number last month to -2.2 million, not +2.5 million.
The dollar index dropped in the wake of this report, as far as 60 basis points. It has since halved that loss, but is one area where zero interest rates will not have a pronounced benefit. Banks also look to be selling off a bit here, with JPMorgan -3%, Goldman Sachs -1.8% and PNC Financial -5%. And Treasury yields had initially sold off to varying degrees after the Fed report. Stock indexes overall were mixed, with the Dow pulling back a full 1% by the closing bell and the S&P 500 down 0.53%.
The Nasdaq, on the other hand, has posted its third all-time high close in as many days, crossing past 10,000 points at the end of the regular session for the first time ever. The tech-heavy index finished up 0.67% on the day.
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