Three Stocks to Watch for the Week of December 27th

Stocks finished higher last week after President Joe Biden announced new plans to contain the spread of the virus, and the Food and Drug Administration (FDA) approved Pfizer’s and Merck’s oral treatments.   

Despite the ongoing concerns around inflation and interest rates, some upbeat economic reports boosted investor sentiment. Jobless claims remain near pre-pandemic lows, durable goods orders came in well above forecasts, consumer sentiment was revised higher, and new home sales hit a seven-month high.

The coming week will be fairly quiet on the economic data front.  On Tuesday, the U.S. housing market will be back in focus as the S&P Case-Shiller Home Price Index for October is slated for release.  The index measures changes in home prices in America’s largest cities and is expected to show a 1.1% rise after a 0.8% increase in September.  We’ll also find out how supply pressures affect the world’s second-largest economy (by GDP) with the release of China’s Manufacturing Purchasing Managers’ Index (PMI) on Friday.  

Heading into the final trading week of 2021, bullish investors may anticipate a Santa Claus rally.  There’s no telling what could happen among this month’s unusual volatility.  Against the current backdrop, our team has a few recommendations of stocks to watch.  This week we have all of the details on a mighty mid-cap that’s showing traction.  Plus, a consumer staples darling seems likely to hold up against the worst of storms.  

Costco Wholesale (COST) has long defied the general downtrend for retailers for a host of reasons.  For starters, its bare-bones wholesaling operation doesn’t require the same attention to detail in its storefront.  Warehouses in the suburbs are, in fact, the ideal over chic urban real estate, and its dominant discounting model has won it tremendous loyalty among frugal shoppers.  

It also has tremendously reliable cash flow when compared with other retailers.  Consider that with some 67 million paid memberships at roughly $60 per pop in annual dues.  COST also enjoys a robust $4 billion in pure profit income rolling in annually simply from renewals.  With Costco’s loyalty rates as strong as they are (around 90%), it seems like the income is reliable and likely to grow in the coming year.  There have been whispers of plans to increase the cost of membership.  Historically Costco hikes the price every five years, and it will be five years in July.  

It should be no surprise that Costco has not just weathered the pandemic but thrived amid it. As a result, COST stock has surged 44% this year compared with 23% for the S&P 500 in the same period.  Considering fiscal 2022, the company expects revenues to grow by a little under 10% and earnings to expand by low double digits. 

 Next up is a mighty mid-cap that’s demonstrating traction amid significant changes in the company’s business model and management.  San Francisco-based software analytics company New Relic, Inc. (NEWR) offers solutions including application development, production monitoring, real-time analytics, mobile application management, and digital transformation.  Its offerings include new relic APM, new relic mobile, new relic insights, new relic services, a new relic browser, and a new relic platform.

Under the guidance of the founder and CEO of Lew Cirne, New Relic (an anagram of his name) helped introduce the concept of application monitoring to a generation of developers building web and mobile apps.  Investors seemed skeptical in July of this year, when Cirne stepped down, leaving the role to long-time Microsoft (MSFT) veteran Bill Staples, but the shift seems to be paying off as changes Staples made to New Relic’s business model take effect.  

The company switched to a consumption-based business model that charges customers based on the number of employees using New Relic software.  Previously, New Relic licensed its software through traditional subscription contracts.  “Our move to a consumption model puts our customers at the center of every function in the company. This transformation isn’t easy, and it won’t be completed quickly because we are asking our customers, our employ. Our shareholders to participate in a journey where the destination is clear, but the path to get there isn’t,” Cirne told investors in February when the changes were announced.  The shift aims to derive 80% of its revenue from consumers in the 2022 fiscal year in a bid to return revenue growth to rates seen in the overall market.

The track record since the new model speaks for itself.  Over the past two quarters, NEWR has exceeded expectations on the top and bottom lines.  Earlier this month, the company reported revenues of $196 million for the second quarter of its 2022 fiscal year, blowing past expectations for $182.2 million.  NEWR also reported an adjusted loss of 10 cents a share, while analysts had expected 13 cents.  The company ended the quarter with 14,300 active paying customers, with customers paying more than $100,000, exceeding 80% of total paying customers for the first time, said CFO Mark Sachleben.

J.P. Morgan analyst Sterling Auty double upgraded NEWR from Underweight to Overweight and raised his target for the stock price to $150 from $70.  Citing the “far better than expected” earnings.

“This was a big change for the positive this quarter as the business model switch, management changes, and operational moves have now shown two straight quarters of material improvement and have the company pointed on growth acceleration back toward industry levels,” Auty wrote in a note.

New Relic also adjusted its fiscal-year outlook, raising its forecast for revenues to between $778 million and $782 million, up from $730 million to $735 million previously.

Tractor Supply Company’s (TSCO) third-quarter top and bottom lines reflected strength against supply-chain challenges, marking the seventh straight quarter of an earnings surprise and the sixth consecutive sales beat.  The company delivered the sixth straight quarter of more than 10% increase in comparable-store sales (comps).  Comps were driven by higher comparable average tickets and comparable average transaction count.  It witnessed solid double-digit sales growth in the e-commerce business, delivering the 37th consecutive quarter of an increase.

TSCO is on track to build upon the “Life Out Here” lifestyle assortment and convenient shopping format to gain customers and market share. The strategy is essentially based on five key pillars — customers, digitization, execution, team members, and total shareholder return.  As part of the “Life Out Here” Strategy, the company provided long-term financial growth targets for three to five years after the normalizing of macro conditions from the impacts of the COVID-19 pandemic.

Driven by the solid performance in the first three quarters of 2021, management raised 2021 guidance. Management expects net sales of $12.6 billion, indicating an improvement from the previously mentioned $12.1-$12.3 billion. Comps are likely to grow 16%, up from 11-13% mentioned earlier.

Net income is now expected to be $972-$985 million for 2021, up from the earlier mentioned $895-$930 million. Earnings per share are expected to be $8.40-$8.50, implying a rise from $7.70-$8.00 mentioned earlier.

TSCO’s strength is evident in its past performance.  Shares of Tractor Supply have increased 11.1% over the past quarter and have gained 58.85% in the last year. On the other hand, the S&P 500 has only moved 5.71% and 40.08%, respectively.

Over the past two months, 13 analysts have made positive revisions to their earnings estimates for 2021, boosting the consensus EPS estimate from $7.88 to $8.46.  There have been no negative earnings estimate revisions over the past 60 days.  

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