It is my contention that stocks have been sold indiscriminately in recent weeks and now is the time to start looking for the values amidst the rubble. Toward that end, I want to take a look at a number of stocks reporting earnings this week in an attempt to look for opportunity.
Let’s start with pandemic darling Zoom (ZM) which reports Monday afternoon. ZM is paradigmatic of a class of stocks we can call early stage growth. The stock reached almost $600 in late 2020 before crater to a recent $89.74. From a fundamental perspective, ZM looks attractive. ZM is guiding current year EPS to $3.45-$3.51 for a 26x multiple on current earnings. And that doesn’t include that $5.4 billion of cash and short term investments on ZM’s balance sheet. From a purely fundamental perspective, ZM is a buy here.
However, given the current market environment for speculative tech stocks, I don’t want to buy ZM ahead of earnings. My plan is to be opportunistic and look to pick up shares should the stock selloff post earnings. The reason is that in this market environment, where the market hates everything tech, I think we can wait for terrific prices. It’s certainly possible that ZM bounces on earnings but I prefer to hold off until after earnings when a terrific bargain may be had.
Next let’s take a look at a very different kind of stock in Autozone (AZO) which reports earnings Tuesday morning. AZO is one of the leading auto parts retailers. With a shortage of auto parts and new cars, consumers are repairing their old cars and AZO is therefore in a sweetspot. Comps were +13.6% in the recent quarter and +13.8% in the prior quarter.
Therefore, unlike ZM, AZO shares have been in a steady uptrend before a recent nasty selloff. With the supply chain bottlenecks in new automotive production, I expect AZO to continue to hum along. Therefore, playing AZO strikes me as trickier than playing ZM. I want to get into AZO – though of course I want to get the best price. One strategy is to buy half your position before earnings and half after since I don’t have a good feel for how the stock will react to earnings.
Third, let’s take a look at $400 billion chip maker Nvidia (NVDA) which reports Wednesday afternoon. NVDA was one of the great stocks during the bull market but it’s been cut in half over the last 6 months. It trades at about 32x my 2022 EPS estimate of $5.25. From a fundamental perspective, NVDA is probably fairly valued right now. But, again, I don’t think you need to be a hero and put on a position before earnings. You may well get a nice opportunity to pick up shares if NVDA sells off after earnings and if it doesn’t there will be other opportunities down the road.
Fourth, let’s take a look at cloud data analytics company Snowflake (SNOW) which reports Wednesday afternoon. SNOW is a former darling whose shares have been hit hard in the last six months – but I’m not sure hard enough. Even with the nasty selloff, SNOW still trades at a very expensive 23x current year revenue guidance. Compare that to ZM which trades at 26x current year EPS guidance. That’s a very different valuation equation. As a result, I would absolutely stay away from SNOW pre-earnings. The only scenario under which I would touch SNOW is in the event of a post earnings meltdown. If the shares were to get taken to the woodshed to the tune of 20% or 30%, I may pick up shares for a swing trade.
Last, let’s take a look at consumer staples stalwart Costco (COST) which reports earnings Thursday afternoon. COST hung in longer than most stocks reaching new highs as recently as a month ago before being bludgeoned last week in the retail massacre catalyzed by Walmart (WMT) and Target’s (TGT) brutal quarters. While COST is a stock I want to own in the current environment, it is by no means a bargain. At 35x my estimate for 2022 EPS, it trades at a significant premium to WMT and TGT. While I am willing to pay up for it, perhaps not this much. Therefore, I would need to see further weakness to initiate a position.
In conclusion, I think the strategy in this environment is to wait and see if these stocks sell off after earnings and you can pick up bargains. With the market so pessimistic, there’s no reason to step in ahead of earnings as you may well get a better price after. The one difficult call is AZO – but even here I’m inclined to wait for the post earnings reaction.