Buy These 2 Stocks Before December Earnings?

Stocks bounced back on Monday following Friday’s big Omicron variant-focused selloff. The quick pullback was driven by real fears and lower holiday volume. Investors began pouring back into the markets to start the week as Wall Street appeared to determine that the new covid strain likely won’t have as significant of an impact as initially feared.

Covid and new strains are likely here to stay and investors and consumers have largely proven they are willing to focus on signs of progress in favor of fears. It is also worth constantly remembering that selling is a healthy aspect of all well-functioning markets, especially one that’s soared for over a year and a half.

Looking back, investors helped wash away all of the losses from the September and early October downturn in a matter of weeks. And the bulls appear to be in control, at least for now, with the S&P 500 and the Nasdaq both trading well above their 50-day moving averages despite Friday’s big drops.

There could certainly be more selling and profit-taking in December. Luckily, the positive backdrop for stocks remains in place even in the face of continued supply chain bottlenecks, rising prices, and difficulty filling millions of open jobs.

First off, interest rates will remain historically low for the foreseeable future no matter when the Fed starts to lift its core rate. Secondly, the S&P 500 earnings picture remains strong. And U.S. consumer spending was solid in October, which is a great sign for the entire pivotal holiday shopping period.

With this in mind, investors likely want to remain on the hunt for strong stocks as we enter the final month of 2021. Here are two modern retail stocks that investors might want to consider buying…

Image Source: Zacks Investment Research

Lululemon LULU– (Q3 Financial Results Due Out Thursday, December 9)

Lululemon has transformed from a small high-end yoga clothing maker 20 years ago into a global apparel powerhouse. The company currently sells an array of athletic apparel for women and men, alongside clothing that can be worn to work, dates, the golf course, and beyond. LULU has also rolled out self-care items, more outwear such as coats, and other accessory-style products.

The athletic retailer expanded beyond clothing and apparel last year when it bought digital-focused at-home fitness company Mirror. The purchase has already outperformed LULU’s expectations and it’s adding additional live and on-demand digital workout content and putting more Mirror ‘shop-in-shops’ within Lululemon locations—200 excepted by the holiday season.

Lululemon closed last quarter with 534 total company-operated stores, up from 506 in the prior-year period. LULU is focused on expanding in Asia and Europe, while continuing to improve its digital offerings. The company topped our Q2 estimates and raised its guidance, with e-commerce accounting for 42% of revenue.

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Looking ahead, Zacks estimates call for fiscal 2021 revenue to surge 42% to $6.26 billion, with FY22 projected to come in another 17% higher to hit $7.33 billion. This growth, which is driven in part by Mirror, follows 11% top-line expansion last year and FY19’s 21%. Meanwhile, its adjusted earnings are projected to soar 60% and 21%, respectively during this stretch.

Lululemon has beaten our EPS estimates by an average of 25% in the trailing four periods, including a 36% beat last quarter. The company’s consensus earnings estimates have climbed recently and its Most Accurate estimates (or the newest) are higher. This bottom-line positivity helps LULU land a Zacks Rank #2 (Buy) right now.

Plus, 15 of the 21 broker recommendations we have for Lululemon are “Strong Buys,” with none below a “Hold.” The athleisure firm also boasts a strong balance sheet and its Textile-Apparel space sits in the top 20% of over 250 Zacks industries.

LULU hit records in mid-November, with shares up 45% in the last six months. This run helped end an up-and-down stretch that saw the stock move roughly sideways for nearly a year. Longer-term, Lululemon stock has skyrocketed over 700% in the last five years to crush its industry’s 75% and the S&P 500’s 120%.

Despite sitting near its records, LULU trades at a 20% discount against its own year-long highs in terms of forward earnings and sales. And the recent market pullback has it near neutral RSI levels at 56, which could give it room to run if it’s able to impress Wall Street next week.

Chewy CHWY – (Q3 Financial Results Due Out Thursday, December 9)

Chewy is an e-commerce pet store that went public in 2019. The company has expanded rapidly as consumers gravitate toward convenience in the form of delivery and beyond. CHWY sells pet food, supplies, treats, medications, and more for a variety of animals. Chewy has found success by adding loyal pet owners to its ranks, with roughly 70% of sales coming from its Autoship business that allows people to have food and more delivered at regular intervals.

Chewy posted a banner year in 2020 on the back of the pandemic. The firm added 43% more users in 2020 to close the year with 19.2 million. The company, which has been in business for over a decade, has also moved far beyond food and toys. Its offerings include a telehealth service called Connect with a Vet and a beefed-up pet pharmacy platform.

Unfortunately for Chewy, the near-perfect backdrop to succeed in business and on Wall Street is over as people return to their normal lives. The firm fell short of revenue estimates last quarter—which it rarely does—and it reported a larger-than-projected quarterly loss. Chewy did close Q2 with 20.1 million customers, up 21% from the year-ago quarter and its revenue climbed 27%. But Wall Street has continued to dump the stock amid rising costs and slowing growth.

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Zacks estimates call for CHWY’s FY21 revenue to climb 25% to $8.95 billion and then pop 19% higher in 2022. These estimates would follow a 47% climb last year and 37% expansion in FY19. Meanwhile, its adjusted earnings are projected to slip 11% this year to $0.08 a share, with its FY22 figure expected to skyrocket 320% to $0.33 a share.

Chewy’s overall consensus earnings estimates have trended lower since its last report to help it grab a Zacks Rank #3 (Hold) at the moment. And it’s part of a group that’s in the bottom 11% of all Zacks industries. That said, nine of the 15 brokerage recommendations Zacks has are “Strong Buys” and it operates a business that isn’t going out of style anytime soon, even though its days of huge 40% growth might be over.

CHEWY shares dipped on Monday as the market climbed and it has now fallen over 20% this year, including a 23% drop since its Q2 release. Taking a step back, Chewy is still up 190% in the last two years and its current Zacks consensus price target of $98.33 a share represents 45% upside to Monday’s levels.

The pullback has Chewy trading at over a 50% discount to its own year-long highs at 2.8X forward 12-month sales. And the nearby chart shows CHWY attempting to return to its 50-day moving average. That said, some investors might want to wait for more signs of a comeback, especially given that Wall Street is currently betting somewhat heavily against the stock—short interest at roughly 20% of the float.

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