Stocks pulled back on Tuesday amid heightened fears that the global economic recovery might not come as fast as many assumed. Europe is currently struggling with the coronavirus vaccine rollout and some lockdown measures remain in place in many countries.
The S&P 500 sits about 1.8% below last week’s records, while the Dow is about 2.5% off the pace. Even though Wall Street might have gotten a tad ahead of itself in terms of the reopening trade, the overall picture remains bullish, especially in the U.S.
The $1.9 trillion stimulus plan should help boost the already-in-progress economic comeback that has economists projecting 6% GDP expansion this year. Plus, the Biden administration aims to make the vaccine available to every adult by May 1. And the corporate earnings picture for 2021 and beyond is strong.
This positivity has led to increased bond selling as Wall Street worries about the return of inflation. But Jerome Powell and the Fed remain committed to their easy money stance and Treasury yields remain historically low even though they are above pre-coronavirus levels. Therefore, investors will likely remain in stocks and the inflation fears seem a tad overdone.
With this as the backdrop, investors might want to consider buying a few stocks outside of the tech space right now, as the Nasdaq’s massive run slows and some funds are transferred to cyclical sectors and the non-tech trade.
D.R. Horton, Inc.
DHI
D.R. Horton boasts that it has been the largest homebuilder in the U.S. by volume since 2002 and it’s also the biggest by market cap at roughly $31 billion, right above Lennar
LEN
. The Texas-based firm operates in 90 markets across 29 states and it closed roughly 71,000 homes in the twelve-month period ended December 31. The firm topped our first quarter FY21 estimates in late January and raised its guidance as the American housing boom continues.
DHI’s homes closed jumped 45% to nearly 19,000, with net sales orders up 56% and 62% in value to $6.4 billion. Peeking ahead, Zacks estimates call for D.R. Horton’s FY21 revenue to climb 29% to reach $26.13 billion, with FY22 set to come in another 15% higher. This year’s estimate would mark its strongest growth since 2015 and extend its streak of double-digit sales expansion to over a decade.
Meanwhile, its adjusted earnings are projected to climb by 43% this year and another 12% in FY22. And its FY21 and FY22 EPS consensus estimates have popped by 15% and 13%, respectively since its strong Q1 report to help it grab a Zacks Rank #2 (Buy).
D.R. Horton lands “B” grades for Momentum and Value in our Style Score system. The stock has outpaced its highly-ranked Building Products-Home Builders (top 15% of over 250 Zacks industries) in the last year and over the past five years, up 190% vs. 120%. At around $85 a share, DHI trades just off its March 17 records, having jumped 23% in 2021 to double its industry and crush the S&P 500’s 5% climb.
Despite outpacing its industry and trading near its records, DHI trades in line with its peers in terms of forward earnings and at a 15% discount to its own year-long median at 8.7X. D.R. Horton also isn’t overbought when looking at RSI, sitting at 58. And 11 of the 16 broker recommendations Zacks has are “Strong Buys,” with two more at “Buys” and none below “Hold.” Plus, its 0.96% dividend yield roughly matches fellow homebuilding giant Lennar.
D.R. Horton has proven it can grow even during slow times in the housing market and its price points and offerings provide access to multiple levels of the housing market. The company and its portfolio of brands sell homes between $150,000 to over $1 million.
Last year, U.S. home sales hit their highest level since 2006 and inventory is shrinking, which is good news for home builders. On top of that, millennials are finally driving the home-buying market. And even though 30-Year mortgage rates have climbed off their lows of 2.65% in January, they are still below their pre-coronavirus levels at 3.09% and remain historically low.
The Estée Lauder Companies Inc.
EL
The Estée Lauder Companies Inc. is one of the world’s leading manufacturers and marketers of skin care, makeup, fragrance, and hair care products. EL’s brands include its namesake, as well as Aramis, Clinique, Lab Series, and many others for a total of over 25 different brands. The higher-end company that’s focused 100% on prestige beauty returned to sales growth last quarter (Q2 FY21), after three down quarters.
Estée Lauder’s sales were negatively impacted by the coronavirus, but its outlook appears strong as the economy reopens. Zacks estimates call for its revenue to jump 11% to $15.9 billion, with FY22 set to climb another 11.5% to help it easily bounce back from a 4% drop in fiscal 2020. Its adjusted EPS figures are projected to soar 44% and 16%, respectively.
The beauty firm’s positive earnings revisions help it land a Zacks Rank #2 (Buy), alongside its “A” grade for Growth and “B” for Momentum. The company said when it released its Q2 results in early February that it planned to resume its stock buybacks in the second half of FY21, and its dividend is currently yielding 0.75%. On top of that, 10 of the 15 broker recommendations Zacks has for EL are “Strong Buys.”
.jpg)
EL shares have climbed 200% in the last five years to double the benchmark index and crush its Cosmetics industry’s 14%. More recently, the stock is up 80% off its March 2020 lows, and at $281 a share it trades 5% below its mid-Feb. records.
The recent downturn has pushed EL stock below neutral in terms of RSI at 47, which could give it plenty of room left to climb. And its valuation is hardly stretched, trading at a slight discount to its industry and its own year-long medians when it comes to both forward 12-month sales and earnings.
Estée Lauder, like all retailers, is committed to improving its e-commerce business at a time when people are shopping online more than ever before. The company also operates in a space that isn’t going out of style and it could see even more growth as people return to something closer to their normal lives.
Chewy
CHWY
Chewy is an e-commerce-focused pet store that offers relatively speedy delivery for pet food, supplies, treats, medications, and more for a wide variety of animals. The company that was founded in 2011 and went public in 2019 has carved out a niche within a crowded digital commerce world dominated by Amazon
AMZN
, Target
TGT
, Walmart
WMT
, and others.
Chewy’s offerings have proven to be compelling in our modern retail world. The firm added 5.1 million active customers during the first three quarters of its FY20 to end Q3 with 17.8 million. The company’s Q3 sales jumped 45% to $1.78 billion. Investors should note that its autoship business accounts for roughly 70% of its total revenue, which helps create consistent revenue streams among loyal pet owners.
CHWY in October launched its telehealth service, dubbed “Connect with a Vet.” The telehealth service, only available to autoship customers, is likely to be a hit in the age of Teladoc
TDOC
as people opt for convenience when they can. Along the same lines, the firm announced on November 12 that it was expanding its pharmacy unit to “offer compounded medications that are customized to the specific needs of pets.”
Zacks estimates call for CHWY’s full-year fiscal 2020 revenue to jump by 46% to come in at $7.1 billion, with FY21 projected to climb 26% higher to reach $8.9 billion. These would both come on top of FY19’s 37% revenue growth.
The company adjusted loss is projected to expand slightly to -$0.38 a share in FY20, before it’s projected to shrink to -$0.12 in FY21. Investors should note that Chewy is set to release its fourth quarter 2020 financial results on March 30.
.jpg)
CHWY currently lands a Zacks Rank #2 (Buy) and has blown away our EPS estimates in three out of the last four periods. The stock also grabs “A” grades for Growth and Momentum. Chewy shares have climbed 142% since their market debut and are up 165% in the past year.
The stock has been hammered since the Nasdaq began its slide on February 12. The stock closed regular hours Tuesday at around $85 a share, or 30% below the $120 it was trading at roughly six weeks ago.
The selloff coincides with the broad profit-taking from high-flying stocks such as Tesla
TSLA
and many others. Clearly, CHWY had been on a nice run, but the recent selling might be overdone considering that 70% of its sales come from autoship members who don’t seem likely to cut back on the convenience of automatic pet food and supply delivery once things open up.
The stock fell below oversold (underneath 30) RSI levels when the Nasdaq fell into a correction on March 8 and at 43 it still has room to go before it hits neutral levels. CHWY trades at 3.8X forward 12-months sales, or 40% below its own year-long highs. This also marks a huge discount to fellow niche e-commerce firm Etsy’s
ETSY
12.5X and not too far above Amazon.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it’s predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce “the world’s first trillionaires,” but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks’ 3 Best Stocks to Play This Trend >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report