Over the past few weeks, the effect of the COVID-19 coronavirus has been seen all over the market in what I like to call an “earthquake pattern.” This is when one central event causes market volatility to ramp up and, in the days and weeks that follow, the market experiences “aftershocks.”
Finally, we’ve gotten to the aftershocks phase – and while the coronavirus is still affecting the market, we are beginning to see some glimmers of hope in Wall Street. Two major retailers reported their earnings this week, and they were nicely higher than expected. At least, they may be surprising results for some people.
Let’s take a closer look, and you’ll see not only the signs that both were headed for an earnings beat – but also what makes them a “Buy” in the tool I use to find Breakthrough Stocks and my other growth plays.
First is Target Corporation (TGT), which reported earnings on Tuesday. While their revenue numbers fell slightly short for the first quarter, their earnings topped expectations. The revenue figure included poor holiday sales numbers, but with the positive earnings surprise, the stock spiked up on Tuesday.
Target reported adjusted earnings of $1.69 per share, beating the estimates of $1.65. So, the company posted a 2.4% earnings surprise. Revenue of $23.4 billion was in-line with Wall Street’s consensus estimate and compared to $23 billion in the year-ago quarter, a 1.8% gain. But the big story here was that, despite Target’s previous warning about its holiday sales, the company was still able to deliver the goods (so to speak) with earnings. The $1.69 per share was a 10.6% year-over-year gain.
Here’s TGT’s Report Card from my Portfolio Grader, where you can see the bigger earnings trend:
As you see, Target has a solid history of delivering positive earnings surprises, which is one of the things I’m looking for in a growth investment.
The Cash Flow grade of “D” may reflect the impact of all the investments Target has been making in its business. The company has renovated stores, improved its e-commerce business and launched several new prosperous apparel brands over the last quarter. Target’s digital sales were also up 20% for the quarter.
The other question going into the earnings announcement on Tuesday was the impact of the coronavirus. Target management said the only true impact the company has seen from the outbreak is a slightly heighted demand for household essentials, cleaning supplies, and food and beverage products.
That also seems to be the case for the other big box retailer, Costco (COST), that reported earnings yesterday, after the market close. Costco beat estimates with net sales of $38.3 billion, versus analyst expectations for $38.2 billion. Likewise, earnings per share was expected to be $2.06 and came in at $2.10.
That was also a nice gain from the year-ago quarter, in which Costco saw $2.01 earnings per share. But, in COST’s Report Card below, you’ll see that – even before Thursday’s report – the company had a history of both Earnings Growth and upward Analyst Earnings Revisions:
You always want to keep in mind that analyst estimates are not set in stone. They change over time – and you want to see these estimates increase, heading into the earnings report. Sure, it’s a higher bar to clear…but, in my experience, it actually tends to signal that the company is about to beat expectations.
Sure enough, Costco’s same-store sales beat analysts’ expectations by a particularly large margin. Analysts were expecting 6.4% growth, and COST reported 7.9% adjusted same-store sales growth. Costco, like Target, is experiencing a surge in traffic and sales from the coronavirus outbreak despite the chaos in the greater market.
The bottom line is that people are flocking to big box retailers to stock up their pantries…and investors are flocking to the high-quality stocks that can see them through tough times.
Wall Street likes to worry, but I believe that the U.S. remains an oasis. The United States economy is about 80% consumer-driven and even in times of volatility, like now, this is still clear. COST is still up nicely in 2020, despite the broad market decline, and it’s up roughly 39% in the past year, as is TGT:
It is no coincidence that these companies are doing so well – they have positioned themselves within the fabric of the economy to thrive even in harsh conditions. Stocks like TGT and COST are great examples of stocks that can weather the storm.
Now, if you want to invest early in the next Target, Costco, or Amazon (AMZN), you’ll want to apply the strategy I use in Breakthrough Stocks.
I have hand-selected stocks to outperform the market, and based on my weekly scan of nearly 5,000 stocks, they continue to be the best investments right now.
While many people think that small caps are “too risky” during a market decline, the opposite is actually true. Several of my Breakthrough Stocks actually hit 52-week highs even in the recent volatility! I’ve been doing this for 40 years, and the comparative strength of my Breakthrough Stocks speaks for itself. Click here to watch my recent Breakthrough Stocks Summit, where I discussed the “secret sauce” in my most successful stock picks.