Ticker Reports for July 8th
Don't Miss These Stock Picks for the Lumber Price Surge
Some stocks depend on commodity prices for their success – or failure – and the main ones that come to mind may be inside the energy sector. If Warren Buffett chooses to buy an oil company, as he did through a nine-day buying streak in shares of Occidental Petroleum Co. (NYSE: OXY), it may be because he sees a fundamental reason for oil prices to move higher and bring the company’s valuation up with it.
Today, investors can step outside the most commonly watched commodities, such as oil and precious metals. While gold makes a breakout, taking silver along for a ride, some mining stocks can become an excellent space to watch today. But note that today’s soon-to-be hot commodity is the least expected: lumber.
That’s right, lumber prices crashed after their stratospheric rallies in 2020 through 2022, raising the cost of building homes. Today, there are reasons to believe that lumber could make a comeback soon, backed by housing and economic fundamentals. Because of this, investors can have their top pick between stocks like West Fraser Timber Co. (NYSE: WFG), Weyerhaeuser (NYSE: WY), and even Lennar Co. (NYSE: LEN).
Why Analysts' Downgrade of Lennar Stock Might Be Wrong
Recently, analysts at Citigroup decided to lower their targets on Lennar stock from $174 a share to $164 a share, roughly a 6% decline in forecasted valuations. These analysts lowered their targets due to bearish expectations for the housing sector moving forward.
Weaker readings in the national building permits, roughly 7% down on the year and 3.5% on the month, can be attributed to these bearish views. Lower building permits may indicate weaker housing demand and financial situations among homebuilders and would-be homebuyers.
But that could be about to change. The Federal Reserve postponed interest rate cuts throughout 2024. Still, the CME’s FedWatch tool now sees over 60% probability for a rate cut as soon as September of this year. That could spark new housing demand as mortgage rates also come down.
Cheaper mortgages could spark new housing demand. Now that lumber prices are back to normal, margins for newly built homes could help Lennar see better treatment from Wall Street analysts. In fact, some in the construction sector may be already aware of these coming trends.
According to their second quarter 2024 earnings results, Lennar reports a 19% increase in new orders, bringing the total to 21,293 homes today.
The company’s backlog is now worth up to $8.2 billion, and according to the latest employment situation report (NFP), out of the total 206,000 jobs added to the economy, roughly 27,000 (or 13%) jobs went to the construction sector. New hands are needed to respond to the potential demand breakout if and when the Fed cuts rates in September.
The One Stock to Watch as Housing Demand Surges: West Fraser Timber
Of course, analysts could be wrong about lowering Lennar’s price targets, but investors shouldn’t risk their capital on ‘what ifs’; rather, they can take a safer view on stocks that provide homebuilders with the main commodity they need, which is lumber.
Because lumber prices are so low compared to their 2020-2022 peaks, the profit margin cycle is also lower for companies in the sector. Despite the cycle’s lows, analysts at TD Securities still see a price target of $118 a share for West Fraser Timber stock, daring it to rally by roughly 60% from where it trades today.
But West Fraser Timber isn’t the only lumber provider in the block. Weyerhaeuser is also an honorable mention, but here’s how that stock compares to West Fraser.
Wall Street analysts only forecast 17.2% earnings per share (EPS) growth for Weyerhaeuser in the next 12 months, where those covering West Fraser Timber see up to 72.7% EPS growth this year as well, backing up the upside set by price targets.
On a valuation basis, this upside spread is just as evident. Trading at a 9.2x forward P/E multiple today, West Fraser Timber offers a discount of 61% to Weyerhaeuser’s 23.7x forward P/E valuation. If price action can be taken as another gauge of market sentiment, here’s what it looks like for both stocks.
Weyerhaeuser stock traded down to 75% of its 52-week high price, showing investors some bearish momentum. On the other hand, West Fraser Timber stock has traded up to 83% of its 52-week high, spreading the two companies into bearish and bullish momentum separately.
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NVIDIA Stock Defies Skeptics, Earns Analyst Upgrade
NVIDIA Corporation (NASDAQ: NVDA) is one of the dominant forces in the artificial intelligence (AI) sector. The company continues to be a hot topic among investors and the semiconductor analyst community. The company's stock has been on a tear in 2024, boasting a year-to-date gain of approximately 154% and a one-year performance metric of 196%. This remarkable performance has sparked debate, with some of NVIDIA’s analysts suggesting the company’s bullish run might continue.
Analyst Actions Signal Confidence in NVIDIA
Recent upgrades from top industry analysts have injected further optimism into the NVIDIA narrative. The financial services firm UBS Group (NYSE: UBS) has increased its price target for NVIDIA stock to $150.00 from a previous target of $120.00, reaffirming its "Buy" rating. This bullish outlook implies a potential upside of 19.21% from NVIDIA's recent close, reflecting UBS Group's confidence in the company's ability to capitalize on the burgeoning AI market.
This upgrade from UBS Group is not an isolated incident. Other prominent firms have also adjusted their outlooks on NVIDIA. These adjusted outlooks convey varying degrees of optimism. While DZ Bank took a more cautious approach by downgrading NVIDIA to a "Hold" rating and setting a price target of $102.50, other firms like TD Cowen, Raymond James (NYSE: RJF), and Benchmark have all increased their price targets, reflecting a generally positive sentiment. For instance, TD Cowen raised its target to $140.00 while maintaining a "Buy" rating, and Raymond James boosted its price target and assigned a "Strong Buy" rating.
Adding to the recent wave of analyst updates, Morgan Stanley (NYSE: MS) and Bernstein issued new price targets for NVIDIA on July 1st. Morgan Stanley increased its target to $144.00, driven by positive sales channel checks in Taiwan and China, suggesting robust demand for NVIDIA's data center processors, particularly the Hopper series.
Despite these varying perspectives, the overall market sentiment towards NVIDIA remains predominately bullish. Most analysts covering the stock have assigned "Buy" or "Strong Buy" ratings. The consensus price target now hovers around $140, representing a modest 9% upside from current price levels. While this potential upside may seem small compared to NVIDIA's impressive year-to-date gains, it reflects a balanced perspective after a period of substantial growth.
NVIDIA's Financial Performance Underpins Market Optimism
NVIDIA's financial performance provides concrete evidence to support the bullish sentiment surrounding its stock. The company's latest quarterly earnings report, released on May 22nd, revealed impressive figures that exceeded analyst expectations. NVIDIA reported earnings per share (EPS) of $0.61 for the quarter, surpassing the consensus estimate of $0.51. Furthermore, the company generated revenue of $26.04 billion, exceeding analyst projections of $24.59 billion.
NVIDIA's remarkable revenue growth further underscores the company’s strong earnings beat. The company achieved a staggering 262% year-over-year increase in quarterly revenue, demonstrating its ability to capitalize on the increasing demand for its products in the AI, gaming, and data center markets.
Beyond these headline figures, NVIDIA's financial health is evident in its solid profitability metrics. The company boasts a net margin of 53.40% and a return on equity of 110.60%, indicating its efficient operations and ability to generate substantial returns for its investors. Additionally, NVIDIA maintains a healthy debt-to-equity ratio of 0.17, reflecting its prudent financial management.
In a move that further signals confidence in its prospects, NVIDIA’s dividend was recently increased to $0.10 per share, translating to an annualized dividend yield of 0.32%. This decision will likely attract income-seeking investors while reassuring existing shareholders about the company's long-term earning potential.
Institutional Confidence: Robust Interest in NVIDIA's Future
While analyst sentiment and financial performance provide a positive picture for NVIDIA’s stock, recent investor activity, particularly insider selling, presents a more complicated narrative. Several key figures, including the CFO and CEO, have sold significant amounts of NVIDIA stock in recent months. However, it's crucial to approach this information with context. Insider selling can occur for various reasons, including portfolio diversification or exercising stock options. It does not necessarily indicate a lack of faith in the company's future.
Despite the recent insider selling, NVIDIA’s institutional investors and hedge funds have shown robust interest in NVIDIA’s future. Prominent firms have acquired new positions or increased their existing holdings, demonstrating their confidence in the company's growth trajectory. Institutional investors and hedge funds own approximately 65% of NVIDIA's outstanding shares, further underscoring their belief in the company's long-term potential.
NVIDIA's dominance in the AI market, robust financial performance, and positive analyst sentiment suggest continued upward momentum for its stock. However, investors should remain aware of potential challenges, including the complexity of upcoming product transitions and the inherent volatility of the technology sector.
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3 Highly Profitable Companies Set for Double-Digit Upside
Most investors fail to realize that a stock price has nothing to do with the underlying company, as more than 90% of the time, there is a wide gap between value and price. How come businesses like PepsiCo Inc. (NASDAQ: PEP), which have a solid global presence with sales coming in almost auto-pilot mode, are trading at 5% over its 52-week low price? That’s the sort of gap savvy investors dream of catching with great businesses, as it is almost a sure profitable investment.
Investors can also take the example of Home Depot Inc. (NYSE: HD), one of the strongest home renovation brands in the United States. That company has fallen to trade within 23% of its 52-week low on an unjustified fear of weakness within the consumer discretionary sector. Even athleisure favorite Lululemon Athletica Inc. (NASDAQ: LULU) is now beaten to a new 52-week low, following the same fearful behavior that savvy investors can exploit today.
Of course, there is always a good reason why markets send stock crashes down, and often, these reasons are justified. But that’s not going to be the case today. Investors will find out why these stocks can be sensible watchlist additions today, especially when digging into the fundamentals, where the unwavering profitability of these companies stands the test of the market’s emotional swing.
Home Depot Is About to Give Investors a New Reason to Buy Stock
Notice that stocks like Zillow Group Inc. (NASDAQ: Z) have taken off in the past two months as markets leaned on the news that U.S. listings rose for the first time in a few quarters. With listings on the rise and building permits decreasing by 7% on the year and 3.5% on the month, the real estate sector is starting to look like a bottom in the making.
What this means for Home Depot is increased demand, as home improvement and renovation activity takes off for sellers getting their homes ready to hit the market or new home buyers looking to design their new homes just how they want them. More than that, investors now have a timetable that they can follow in anticipation of this event.
CME’s FedWatch tool now prices over a 60% probability of the Federal Reserve (the Fed) cutting interest rates as soon as September 2024. This would also lower mortgage rates, sparking housing demand. So, why pick Home Depot?
For starters, analysts at Evercore felt comfortable slapping a valuation of $420 a share for Home Depot stock, daring it to rally by as much as 24.1% from where it sits today. Second, the company’s financials have a few factors to add to the potentially bullish case.
Home Depot’s gross margins are above 33%, enabling more capital to reach the bottom line for management to generate more capital. How much is management generating? Return on invested capital (ROIC) rates of 32% show investors how Home Depot stock could be one of the best picks to compound their wealth at a discount.
Lululemon Stock Hits 7-Year Low Valuation, Attracting Institutional Investors
That’s right, shares of Lululemon are now trading at a P/E ratio of 23.8x today, a valuation not seen since 2017, making it a new 7-year low valuation that savvy investors can exploit today. But, as always, Wall Street beat Main Street to the curb.
The Vanguard Group decided to boost its stake in Lululemon stock by 1.6% as of May 2024. This boost increased the asset manager’s net investment to $3.9 billion, a vote of confidence that Lululemon is not in trouble.
Analysts at Robert W. Baird reiterated an ‘outperform’ rating on Lululemon stock, with a price target of $470 a share, or 57.8% from where the stock traded. Lululemon’s financials, particularly its profit margins, back Wall Street's confidence.
A 58.3% gross margin is high enough for Lululemon’s management to duplicate the ROIC rates achieved by those at the Home Depot. For Lululemon, ROIC stands under 30%, making it another excellent choice for investors to compound their wealth on a potential dip-buy.
Why Pepsi Stock's Dividend Makes the Dip Worth Watching
Inflation today is a concern slowing down the potential interest rate cuts that – as discussed – could come by September 2024. So, one thing investors can add to their filtering criteria is a high enough dividend yield to cushion this sticky inflation rate today.
PepsiCo stock fits that profile, as its $5.4 a share payout would translate into an annual dividend yield of 3.3%, roughly matching inflation but also beating the latest U.S. GDP growth rate, revised to 1.3% in the past quarter.
Analysts at Jefferies Financial Group slapped a $211 a share valuation for PepsiCo stock, and to prove them right, the stock needs to rally by 29.3% from where it trades today. Encouraging the stability of these dividends and the upgrades from Wall Street comes the company’s financials.
A 54% gross margin allows management to replicate what investors have seen in Lululemon and Home Depot, this time generating 17.3% ROIC rates for PepsiCo. DekaBank Deutsche, PepsiCo’s largest shareholder, used these factors to justify a 6.1% boost in its position, bringing its net investment in PepsiCo stock to $480.5 million.
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