- Bank sector turmoil, PCE inflation data, Fed speakers in focus this week.
- Lululemon stock is a buy amid strong results, better-than-feared guidance.
- Walgreens shares are a sell on big profit drop, sluggish guidance.
U.S. stocks closed higher on Friday to mark the end of a volatile and tumultuous week as investors continued to focus on the Federal Reserve’s monetary policy outlook and unfolding global banking crisis.
The major indexes all had a winning week, with the Dow Jones Industrial Average gaining 1.2%, while the S&P 500 and tech-heavy Nasdaq rose 1.4% and 1.6%, respectively. The small-cap Russell 2000 edged up 0.5%.
The week ahead is expected to be another eventful one as investors continue to gauge the outlook for interest rates, the economy and inflation. Bank crisis developments will also be in focus amid ongoing concern over the health of the global banking system.
On the economic calendar, most important will be Friday’s core personal consumption expenditures (PCE) price index, which is the Federal Reserve’s preferred inflation measure. As per Investing.com, analysts expect both the month-over-month (+0.4%) and year-over-year rates (+4.7%) to remain at elevated levels.
The economic data will be accompanied by a heavy slate of Federal Reserve speakers, which will surely add to the debate on the U.S. central bank’s next move.
Currently, markets overwhelmingly expect the Fed to pause its monetary tightening cycle at its next meeting in May, with odds for no action standing at about 83%, according to Investing.com’s Fed Rate Monitor Tool. Traders have also priced in several rate cuts by the end of the year to take the funds rate to about 3.9%.
Source: Investing.com
Regardless of which direction the market goes, below I highlight one stock likely to be in demand and another which could see further downside.
Remember though, my timeframe is just for the week ahead, March 27-31.
Stock To Buy: Lululemon Athletica
I believe Lululemon Athletica (NASDAQ:LULU) stock will outperform in the coming week as the yoga wear retailer’s fourth quarter earnings update will surprise to the upside in my view thanks to favorable consumer demand trends and an improving fundamental outlook.
The company is slated to release its latest financial results after the U.S. market closes on Tuesday, March 28. Despite a difficult environment for retailers, Lululemon has beaten Wall Street’s profit expectations in 19 out of the last 20 quarters, a testament to the strength of its underlying business, its loyal customer base, as well as strong execution across the company.
Source: Investing.com
Unsurprisingly, Lulu’s earnings estimates have been revised upward six times in the last 90 days, according to InvestingPro data, with analysts growing increasingly bullish on the leisure wear retailer’s future prospects. InvestingPro gives you faster stock analysis for better, data-driven decisions.
Consensus estimates call for the Canada-based athletic apparel maker - which operates over 550 retail locations across the world - to deliver earnings per share of $4.26, as per Investing.com, rising 26.4% from EPS of $3.37 in the year-ago period.
Meanwhile, sales are for the period are expected to increase 26.8% year-over-year to a record $2.7 billion as the athleisure maker enjoyed a strong holiday shopping season. If that is in fact confirmed, it would mark the fourth consecutive quarter of revenue growth above 25%, reflecting robust consumer demand for the company’s yoga gear and sportswear.
While investors are bracing for weaker guidance, it is my belief that Lululemon’s management will provide a better-than-feared outlook for the current fiscal year as it benefits from solid customer demand and an improving inventory approach.
Traders are pricing in a swing of around 7% in either direction for LULU stock following the report, as per moves in the options market.
LULU stock ended Friday’s session at $313.45, bouncing off its 2023 trough of $286.58 touched on March 15. At current levels, Lululemon has a market cap of around $40 billion, making it one of the most valuable athletic apparel companies in the world.
Year-to-date, shares are down 2.1%, underperforming the broader market over the same timeframe. It currently sits about 35% below its all-time peak of $485.83 touched in November 2021.
Stock to Sell: Walgreens Boots Alliance
I expect shares of Walgreens Boots Alliance (NASDAQ:WBA) to suffer a challenging week ahead, with a potential breakdown to new multi-month lows on the horizon, as the pharmacy store chain’s upcoming earnings report will likely reveal another sharp slowdown in both profit and sales growth.
WBA stock ended Friday’s session at $32.70, the lowest level since Oct. 13, earning the Dow Jones component a market valuation of $28.2 billion. Shares have lagged the year-to-date performance of the blue-chip index by a wide margin so far in 2023, falling 12.5% in contrast to the Dow’s 2.7% decline.
Market participants expect a sizable move in Walgreen’s stock following the update — which is due ahead of Tuesday’s opening bell — with a possible implied swing of 5.9% in either direction, according to the options market.
Underscoring several headwinds Walgreens faces amid the current backdrop, an InvestingPro survey of analyst earnings revisions points to mounting pessimism ahead of the results, with analysts cutting their EPS estimates 12 times in the past 90 days, compared to just one upward revision.
Consensus expectations call for the Deerfield, Illinois-based retail drugstore chain to post earnings per share of $1.11 for its fiscal second quarter, according to Investing.com, dropping 30.2% from EPS of $1.59 in the year-ago period.
Revenue is seen down about 1% year-over-year to $33.5 billion as its brick-and-mortar stores were hit by lower demand during the quarter.
Source: InvestingPro
That leads me to believe that there is a growing downside risk that Walgreens could cut its guidance for the year ahead to reflect higher cost pressures and lower gross margins as it continues to spend heavily on a transformation from a drugstore chain operator and pharmacy services provider into a full-service health care company.
If you’re looking for more actionable trade ideas to navigate the current volatility on Wall St., I’ll be hosting a free webinar on Wednesday, March 29 at 10:00AM ET highlighting where to invest right now using the advice of billionaire investor Warren Buffett.
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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR S&P 500 ETF (NYSE:SPY), and the Invesco QQQ Trust ETF (NASDAQ:QQQ). I am also long on the Technology Select Sector SPDR ETF (NYSE:XLK).
I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.
