The stock market fumbled in the first quarter of 2018. Dragged down by inflation concerns, trade war fears, and technology growth risks, the S&P 500 posted its first quarterly decline since the third quarter of 2015.
Q2 hasn’t gotten off to a great start either. The S&P 500 is up slightly in Q2. But not by much. Year-to-date, the S&P 500 is down about a percent.
Overall, then, stocks are largely down since the last earnings season. But this earnings season is expected to be really good. Earnings are expected to rise more than 17% year-over-year, the strongest growth rate in several years.
This is a favorable backdrop for buying stocks now. The market has gone essentially nowhere since last earnings season due to macro risks. But this earnings season is expected to be one of the best on record due to company-specific strength. Thus, earnings will shift market sentiment from macro risks to company-specific strengths. Stocks will then rise by a bunch since they haven’t gone anywhere for several months.
From this perspective, earnings could save this market.
But earnings could be an especially big savior for a few stocks that have struggled recently. Here’s a list of three stocks that could absolutely explode higher this earnings season.
Stocks to Watch This Earnings Season: iRobot Corporation (IRBT)
Consumer robotics company iRobot Corporation (NASDAQ:IRBT) could be an especially big winner this season because the stock has been butchered since the last earnings report, but the numbers and fundamentals remain very solid.
iRobot is the company behind the market-leading robotic vacuum, Roomba. The company also makes a variety of other cleaning robots, the sum of which have soared in popularity over the past several years. That has caused IRBT stock to be a big winner over the past five years.
Last earnings season, though, IRBT stock crashed from the mid-$90’s to below $60 after the company reported blowout fourth-quarter numbers. The problem? While the revenue guide for fiscal 2018 was strong, the earnings guide was not. The company plans to invest big in 2018 into marketing and product development, and that is expected to weigh on profit margins and earnings growth.
Investors freaked out, and IRBT stock dropped. Big time.
But at just 28-times forward earnings for a growth story with 20%-plus revenue growth potential and strong long-term margin drivers, IRBT stock seems appropriately priced for near-term margin compression headwinds. I think the fundamentals support a fair value on IRBT stock of above $90.
The catalyst, which could push IRBT stock back up to its fair value is this quarter’s earnings report. iRobot management has a tendency to under-promise and over-deliver, and as such, the company always blows analyst estimates out of the water. Assuming that trend persists this earnings season (there isn’t any reason it shouldn’t), then the sentiment on IRBT stock could rapidly flip from negative to positive with a strong earnings report.
At that point, IRBT stock could explode higher and make serious progress towards its $90 fair value.
Stocks to Watch This Earnings Season: Chipotle Mexican Grill, Inc. (CMG)
Those who follow the stock market know that shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) have struggled mightily ever since the company suffered from an E. Coli outbreak in late 2015. Since then, CMG stock has dropped from $750 to $250.
But CMG stock is acting like it has finally bottomed. After a brief and rapid sell-off down to $250 following the company’s last earnings report, Chipotle stock has just as rapidly bounced back on news that the company has tapped former Taco Bell boss, Brian Niccol, to be the new CEO.
Investors have good reason to be excited about this new hire. For starter’s, it goes almost without saying that Chipotle’s original turnaround plans under former CEO Steve Ells were hardly making any progress. Comparable sales growth trends remained sluggish and unimpressive, while margins remained under pressure. It became far too clear that the brand wasn’t doing enough to reinvent itself in the wake of health-related issues.
But Niccol is an expert in reinventing brands. He was the man responsible for turning Taco Bell around earlier this decade. He took that dying, cheap brand and made it a millennial hot-spot using targeted marketing and exciting menu innovations.
Investors are hopeful that he can do the same for Chipotle. But they aren’t that hopeful yet. Although CMG stock has bounced back from those $250 lows, it has essentially been sideways for the past two months in the $310 to $320 range.
Clearly, investors are waiting for the next earnings call, when they get to hear Niccol’s strategy for turning Chipotle around. I expect Niccol to deliver a convincing turnaround narrative on the conference call, and I further expect that convincing narrative to push CMG stock materially higher.
Stocks to Watch This Earnings Season: Shopify Inc (SHOP)
Shares of digital commerce solutions provider Shopify Inc (US) (NYSE:SHOP) have turned into a tug-of-war between famed short-seller Citron Research and continued strong earnings reports which underscore the company’s secular growth narrative.
At it’s core, Shopify provides cloud-hosted commerce solutions that enable e-retailers of all shapes and sizes to optimize their selling capability. This puts the company right in the overlap of the cloud and e-retail markets, both of which have secular growth prospects. The enabling component of Shopify — the “anyone can do it” aspect — also thrusts the company into the same crowd-sourced, sharing conversation as hyper-growth companies like Uber, Airbnb and Darkstore.
In other words, Shopify finds itself on the right side of the tracks when it comes to multiple secular transitions (on-premise to cloud, brick-and-mortar retail to e-retail and the few to the many).
Despite this, Citron Research has targeted Shopify stock multiple times now because he believes the company is a get-rich-quick scheme with a huge Facebook, Inc. (NASDAQ:FB) problem and a nonsensical valuation. His arguments don’t make much sense, and the stock should bounce back in the long-term (read here for a deeper look).
The last time a Citron short report knocked Shopify stock in September 2017, consecutive blowout earnings reports righted the ship and sent Shopify stock up more than 50% over the subsequent several months.
Investors won’t be so slow to catch on this time around. Yet again, Shopify stock is well off its recent highs due to a Citron short report, but it should only take one blowout earnings report to right the ship this time. We will likely get that blowout earnings report in the beginning of May.
As such, I’m a buyer on this weakness and into that report.
As of this writing, Luke Lango was long IRBT, CMG, SHOP and FB.
— The Option Specialist