For Immediate Release
Chicago, IL – July 15, 2022 – Zacks Equity Research shares Lamb Weston
LW
as the Bull of the Day and MercadoLibre
MELI
as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Bank of America
BAC
, JPMorgan
JPM
and Morgan Stanley
MS
.
Here is a synopsis of all five stocks:
Bull of the Day
:
Lamb Weston
, a Zacks Rank #1 (Strong Buy), has been a substantial beneficiary of the recovery in the foodservice business. LW has been bucking the market’s downtrend this year on the heels of higher prices for its product offerings. The company is a component of the Zacks Consumer Staples sector, which currently ranks in the top 38% out of all Zacks Ranked Sectors. LW sports a second-best ‘B’ rating in our Zacks Momentum Style Score category, indicating a strong likelihood that the stock’s outperformance will continue.
Lamb Weston is part of the Zacks Food – Miscellaneous industry group, which ranks in the top 27% out of approximately 250 industries. This group is essentially flat on the year, all while the general market has experienced a painful correction. Because it is ranked in the top half of all industry groups, we expect this group to outperform the market over the next 3 to 6 months.
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Company Description
Lamb Weston is a global producer, marketer, and distributor of frozen potato products. The company offers frozen potatoes, commercial ingredients, and appetizers under the Lamb Weston brand, in addition to other licensed brands and various customer labels. LW is also engaged in the vegetable and dairy business. It serves retail and foodservice customers, specialty retailers, convenience stores, and both independent and chain restaurants. Lamb Weston was founded in 1950 and is headquartered in Eagle, ID.
Product volumes continue to benefit from a rebound in demand at full-service restaurants and non-commercial channels, like lodging and hospitality. The company has increased prices on its products to counteract higher input, manufacturing, and transportation costs. LW’s efforts to boost offerings and expand capacity have enabled it to effectively meet rising demand conditions for products such as fries and snacks.
Earnings Trends and Future Estimates
LW has exceeded earnings estimates in three of the past four quarters. Back in April, the company reported fiscal Q3 EPS of $0.73 per share, marking a 65.91% surprise over the $0.44 consensus estimate. LW has delivered a trailing four-quarter average earnings surprise of 18.1%.
Earnings estimates for the upcoming announcement have seen positive changes as of late. The fiscal Q4 consensus estimate has been revised upward by 2% to $0.51 per share in just the past 7 days. If the company is able to achieve this, it would translate to growth of 15.91% relative to the same quarter last year. Sales are expected to climb 6.03% to $1.07 billion.
What the Zacks Model Reveals
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to identify companies that have recently witnessed positive earnings estimate revision activity. The technique has proven to be quite useful for finding positive surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
LW boasts a +0.99% Earnings ESP for the fiscal fourth quarter. Another earnings beat may be in the cards when the company reports these results on July 27
th
.
The future looks just as bright, with analysts increasing their full-year EPS estimates for fiscal 2023 by 0.35% in the last week. The Zacks Consensus EPS Estimate now stands at $2.85, reflecting potential growth of 47.04% relative to the current fiscal year. Sales are seen rising 10.13% to $4.42 billion.
Let’s Get Technical
LW shares have advanced over 17% this year. Only stocks that are in extremely powerful uptrends are able to make this type of price move while the market makes a series of lower lows. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.
Notice how both the 50-day moving average (blue line) and the 200-day moving average (red line) are sloping up. The stock has been making a series of higher highs through July, and appears to have bottomed back in March – much earlier than the major indices. With both strong fundamentals and technicals, LW is poised to continue its outperformance.
Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Lamb Weston has recently witnessed positive revisions. As long as this trend remains intact (and LW continues to deliver earnings beats), the stock will likely continue its bullish run this year. The fact is this elite company is still outperforming.
Bottom Line
Higher prices of the company’s principal products have contributed to LW’s bullish run. Buoyed by a leading industry group and sector combination, it’s not difficult to see why LW is a compelling investment. Robust sales and earnings growth along with a strong technical trend certainly warrant a closer look.
Solid institutional buying should continue to provide a tailwind for the stock price. Recent positive earnings estimate revisions should also serve to create a ‘floor’ in terms of any sudden or unexpected downside moves. If you haven’t already done so, be sure to put LW on your shortlist.
Bear of the Day
:
MercadoLibre
, a Zacks Rank #5 (Strong Sell) stock, operates online commerce platforms in Latin America. Its various products enable businesses, merchants, and individuals to list merchandise and conduct sales and purchases online. MELI also offers a financial technology solution platform which facilitates transactions by allowing its users to send and receive payments electronically. In addition, the company provides a digital storefront where users can setup, manage, and promote their own digital stores. MercadoLibre was incorporated in 1999 and is based in Uruguay.
The Zacks Rundown
MELI has been severely underperforming the market over the past year. The stock topped out all the way back in January of last year and has been in a price downtrend ever since. Shares are hitting a series of 52-week lows and represent a compelling short opportunity as the market continues its volatile start to the year.
As a general rule of thumb, we want to target stocks in the top-performing industries. Historical research has shown that roughly half of a stock’s future price appreciation is due to its industry grouping. We therefore want to avoid stocks in the bottom 50% of all Zacks Ranked Industries. Candidates in the bottom half of industry groups can often represent solid potential short candidates. While individual stocks have the ability to outperform even when included in poor-performing industries, their industry association serves as a headwind for any potential rallies.
MercadoLibre is part of the Zacks Internet – Commerce industry group, which currently ranks in the bottom 39% out of approximately 250 industries. Because this industry is ranked in the bottom half of all Zacks Ranked Industries, we expect it to underperform the market over the next 3 to 6 months.
Recent Earnings and Future Estimates
Earnings misses have been a sore spot for MELI during the past year. The e-commerce provider has fallen short of estimates in each of the past two quarters. MELI most recently reported Q1 EPS back in May of $1.30, missing the $1.66 consensus estimate by -21.69%. During the fourth quarter, the company missed the $0.89/share estimate by -203.37%, posting a loss of -$0.92/share in the process. When you’re missing earnings estimates by that wide of a margin, you’re going to be fighting an uphill battle when it comes to the stock price.
Analysts have been revising earnings estimates downward as of late. For the second quarter, estimates have been slashed by -4.95% over the past 60 days. The Q2 Zacks Consensus EPS Estimate now stands at $1.73. Consistently falling short of earnings estimates is a recipe for underperformance, and MELI is no exception.
Technical Outlook and Valuation
MELI stock has been steadily falling since last year and has now established a well-defined downtrend. Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping down. Shares have declined more than 56% in the past year. The stock continues to trade below both averages, while the 50-day moving average has acted as steady resistance throughout the down move:
MercadoLibre has continued its descent into the new year, with shares falling over 51% year-to-date and showing no signs of a reversal. The death cross, a technical pattern in which a stock’s 50-day moving average crosses below the longer-term 200-day moving average, occurred late last year.
Despite the underperformance, MELI is still relatively overvalued, irrespective of the metric used.
Final Thoughts
Our Zacks Style Scores illustrate a deteriorating investment picture for MELI, as the company is rated a worst possible ‘F’ in Value and has an overall ‘C’ VGM score. Recent earnings misses signal more trouble on the horizon. The fact that MELI is included in a bottom-performing industry group simply adds to the growing list of concerns.
Falling future earnings estimates are a big red flag and need to be respected. These will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend. Potential investors should only think about including this stock in their portfolio as part of a hedge or short strategy. Bulls will want to steer clear of an overvalued MELI until the situation shows major signs of improvement.
Additional content:
Bank of America Q2 Preview: Can Shares Find New Life?
The Zacks Banks – Major Regional Industry has struggled year-to-date, declining more than 23% in value and underperforming the general market. Throughout 2022, these double-digit declines have hit many industries.
A company residing in the industry, Bank of America, is slated to release quarterly results before the opening bell on Monday, July 18
th
. Bank of America is currently a Zacks Rank #3 (Hold) with an overall VGM Score of an F.
In Q1 2022, the market primarily reacted poorly to quarterly results, and red was widespread. Now that the second round of reports is at our doorstep, investors are more than eager to see how companies have navigated the rough economic waters we’ve found ourselves in.
Let’s look at BAC a little closer to see how the company shapes up heading into the quarterly report.
Share Performance & Valuation
Bank of America shares have tumbled year-to-date, losing more than 30% in value and underperforming the S&P 500 by a notable margin.
Over the last year, the story primarily remains the same; BAC shares have struggled to hold a healthy uptrend, declining more than 20% in value and underperforming the S&P 500 in this timeframe as well.
BAC sports an enticingly low 9.3X forward earnings multiple, well below its five-year median value of 12.4X. In addition, the value represents a steep 33% discount relative to its Zacks Sector.
Quarterly Performance & Share Reactions
BAC has primarily reported bottom-line results above expectations, exceeding bottom-line estimates in six consecutive quarters and eight of its last ten. Furthermore, the company recorded a 5.3% bottom-line beat in its latest quarter.
Quarterly sales have typically come in above estimates as well; BAC has exceeded quarterly revenue estimates in seven of its last ten quarters.
Recently, the market has not reacted well to the company’s bottom-line beats – out of its last six EPS beats, shares have moved upwards just twice following the reports.
Growth Estimates
For the quarter to be reported, the Zacks Consensus EPS Estimate resides at $0.77, penciling in a double-digit 25% decrease in quarterly earnings year-over-year. In addition, six analysts have lowered their quarterly outlook over the last 60 days, with the Consensus Estimate Trend slipping by 5%.
However, quarterly revenue estimates display top-line strength; the $23 billion quarterly revenue estimate notches a solid 7% growth in sales from the year-ago quarter.
Bottom Line
Quarterly earnings are forecasted to take a significant hit, but quarterly revenue is estimated to increase.
In addition, two other big banks – JPMorgan and Morgan Stanley – recently reported their quarterly results, and both missed on the bottom-line.
Pairing the recent results from other peers and the poor market reactions to BAC’s quarterly reports, it appears beneficial for investors to go into the quarterly report with a defense-first approach.
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